>From: [EMAIL PROTECTED] >Reply-To: [EMAIL PROTECTED] >Subject: [CrashList] The bubble that has to be burst > >[Wall Street's Bear Market promises to be a long, slow deflation, or >is this just Greenspan's Dreamtime? Since the underlying disbalances >remain, the bubble may still burst. > >Two things come out of the Bank for International Settlements annual >report (the BIS is the 'Bankers' Bank): first that the much-hyped US >New Economy isn't so hot anyway:'Even during the last four years, >average [US] growth only just reached that of the expansion of the >Eighties and remained well short of the Sixties.' > >Second that when the US bubble bursts it may not release the stalled >German/Japanese locos they way some argue: 'a fall in US equity >markets, coupled with a weakening dollar, could potentially exert a >deflationary influence on the rest of the world'. > >'The biggest policy challenge could be coping with a sudden reversal >in the fortunes of the dollar.' Mark] > > > >Bankers' bank is worried about optimism, says William Keegan > >Sunday June 11, 2000 > >The instability of the world's foreign exchange and stock markets is >a major theme of the annual report of the Bank for International >Settlements. The BIS warns that 'ironically, as history has >repeatedly shown, even well-founded optimism has the insidious >tendency to transform itself into excess'. >Known as 'the central bankers' bank', the Basle-based BIS was one of >the few official institutions that sounded the alert about a possible >East Asian crisis in 1997. It now says the unexpectedly speedy >recovery may reduce the sense of urgency for economic reform in Asia - > 'short-term optimism', it says, may tend 'to undermine the very >foundations necessary for longer-term optimism'. > >But its biggest worry is the continuing euphoria about the US >economy, and the dangers of a hard landing via a collapse of Wall >Street and the dollar. The bank has little difficulty accounting for >the weakness of the euro during most of the past 18 months. While the >euro-zone has run a current account balance of payments surplus, it >has exported masses of capital to the US and Japan, which depressed >the exchange rate. > >'What is indisputable,' says the BIS, 'is that there were large >recorded outflows of longer-term capital from Europe into both the US >and Japan, primarily into high-tech sectors promising attractive >rates of return. In a sense the newly created euro may have proved >too successful. Larger and more liquid markets, with relatively low >interest rates, encouraged the issue of euro-denominated bonds whose >proceeds could then be exchanged and used to finance investment >elsewhere.' > >The capital flows meant that 'despite the further rise in the US >current account deficit, the US dollar was largely stable in >effective terms.' > >The BIS puts the US expansion that attracted so much capital into >historical perspective. 'Even during the last four years, average >[US] growth only just reached that of the expansion of the Eighties >and remained well short of the Sixties,' it points out. > >The BIS believes that in the US 'equity prices and the financial >wealth of households have increased by more than can be justified by >the rise in potential growth to about 3.25 per cent, implying that >the demand-side effects of higher productivity growth have outpaced >the supply-side effects.' The equity and investment boom has >coincided with a squeeze on profit margins and higher corporate debt. > >The bank warns that 'a fall in US equity markets, coupled with a >weakening dollar, could potentially exert a deflationary influence on >the rest of the world'. On the other hand it concludes that 'The >relationship between exchange rate movements and stock market returns >is weak.' > >While sharing the general view that the dollar is overvalued and the >euro undervalued, the BIS points out that 'taking a "synthetic" euro >as the benchmark, the euro touched a 13-year low against the dollar >in March 2000, but was still trading well above its all-time low >reached in the mid-Eighties'. > >The BIS estimates that the euro last year was only 4 per cent below >its Nineties average. > >'The biggest policy challenge,' it says, 'could be coping with a >sudden reversal in the fortunes of the dollar. The additional >disinflationary impact on Japan would clearly be unwelcome, although >much less so in Europe, where inflationary concerns have mounted.' > >Nevertheless, deflationary problems could arise 'if a rebound of the >euro went too far and too fast'. > >As an illustration of just how volatile the foreign exchange markets >can be, the BIS notes that 'from its lows in 1998 to its highs in >early 2000, the yen posted an almost 45 per cent gain against the >dollar, and a 65 per cent appreciation against the euro'. > >It says both the strength of the yen and the weakness of the euro >have been inconsistent with domestic policy objectives, and wonders >what might be done. 'The current answer appears to be, not much. One >reason might be concerns in Europe that intervention would be misread >as signalling a dilution of the commitment of the newly created >central bank to price stability. > >'And as for multilateral intervention involving the US, concerns have >been expressed that this might be interpreted as a harbinger of a >managed global exchange-rate system, for which there currently seems >to be little official enthusiasm.' > >The BIS, while greatly concerned about asset price bubbles, concludes >that they are difficult to deflate 'gently'. Slight policy tightening >by central banks can renew the market's confidence in the boom. > >'Policymakers can arguably only eliminate perceived bubbles by >tightening aggressively,' it concludes. In any case, certainty that >there is a bubble may only emerge well into the cycle, when 'it may >be too late for policymakers to insulate the economy from the >consequences of an asset price adjustment'. > >In other words the central banks may find that the only way to >deflate the bubble is to burst it. > > >The Observer 11-06-00 > > > >------------------------------------------------------------------------ >LOW RATE, NO WAIT! >Get a NextCard Visa, in 30 seconds! Get rates >as low as 2.9% Intro or 9.9% Fixed APR and no hidden fees. >http://click.egroups.com/1/5196/4/_/_/_/960710307/ >------------------------------------------------------------------------ > >To unsubscribe send email to: [EMAIL PROTECTED] >Website: http://website.lineone.net/~resource_base >CrashList home page: http://www.egroups.com/group/CrashList >CrashList-talk homepage: http://www.egroups.com/group/CrashList-talk > > > > __________________________________ KOMINFORM P.O. 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