← Autodidact Archive · Original Dissent · Walter Yannis
Thread ID: 15786 | Posts: 3 | Started: 2004-11-26
2004-11-26 08:28 | User Profile
[URL=http://www.nytimes.com/2004/11/26/opinion/26roach.html?th]New York Times[/URL]
When Weakness Is a Strength By STEPHEN S. ROACH
Published: November 26, 2004
Suddenly all eyes are on a weakening dollar. In recent days, the American currency has fallen against the euro, the yen and most other currencies around the world. The renminbi is a notable exception; China has kept its currency firmly pegged to the dollar for a decade.
The fall of the dollar is not a surprise. It is the logical outgrowth of an unbalanced world economy, and America's gaping current account deficit - the difference between foreign trade and investment in the United States and American trade and investment abroad - is just the most visible manifestation of these imbalances. The deficit ran at a record annual rate of $665 billion, or 5.7 percent of gross domestic product, in the second quarter of 2004.
While a decline in the dollar is not a cure-all for what ails the world, it should go a long way toward bringing about a sorely needed rebalancing. With a weaker dollar, economic and even political tensions among nations would be relieved, helping to promote more sustainable growth in the global economy.
Still, a debate persists as to the wisdom of allowing the dollar to decline. The Bush administration seems to have given its tacit assent, and Alan Greenspan, chairman of the Federal Reserve, is finally on board. But outside the United States, where policymakers have long been vocal in their displeasure over America's deficits, officials are now objecting to America's cure. Europeans have referred to the dollar's recent decline as brutal. The Japanese have threatened to intervene again in foreign exchange markets. And Chinese officials have argued that global imbalances are "made in America."
In this blame game, it's always the other guy. Yet global imbalances are a shared responsibility. America is guilty of excess consumption, whereas the rest of the world suffers from insufficient consumption. Consumer demand in the United States grew at an average of 3.9 percent (in real terms) from 1995 to 2003, nearly double the 2.2 percent average elsewhere in the industrial world.
Meanwhile, Americans fail to save enough - whereas the rest of the world saves too much. American consumers have borrowed against the future by squandering their savings. The personal savings rate was just 0.2 percent of disposable personal income in September - down from 7.7 percent as recently as 1992. Moreover, large federal budget deficits mean the government's savings rate is negative.
Lacking in domestic savings, the United States must import foreign savings to finance the growth of its economy. And it runs huge current-account and trade deficits to attract such capital from overseas.
America's consumption binge has its mirror image in excess savings elsewhere in the world - especially in Asia and Europe. For now, America draws freely on this reservoir, absorbing about 80 percent of the world's surplus savings. Just as the United States has moved production and labor offshore in recent years, it is now outsourcing its savings.
This is a dangerous arrangement. The day could come when foreign investors demand better terms for financing America's spending spree (and savings shortfall). That is the day the dollar will collapse, interest rates will soar and the stock market will plunge. In such a crisis, a United States recession would be a near certainty. And the rest of an America-centric world would be quick to follow.
The only way to avoid this unhappy future is for the world's major central banks to carefully manage a gradual but significant depreciation of the dollar over the next several years. America, and the world, would gain in several ways.
First, there would be a gradual rise in interest rates in the United States - compensating foreign investors for financing the biggest debtor in the world. That would suppress growth in those sectors of the American economy that are most sensitive to interest rates, like housing, consumer durables like cars and appliances, and business capital spending. The result: a higher domestic savings rate and a reduced need for foreign capital - a classic current-account adjustment.
Second, when the dollar falls, other currencies rise. So far, the euro has borne a disproportionate share of the change. That puts increased pressure on Asian nations - including China - to share in the adjustment by allowing their currencies to strengthen. Most currencies in Asia are now rising, but the renminbi has remained conspicuously unmoved.
Third, as the currencies of Asia and Europe strengthen, their exports will become less attractive to American consumers. This will force Asia and Europe to work to stimulate domestic demand to compensate - resulting in a reduction of both excess savings and current-account surpluses. This is easier said than done, especially since it may require painful structural reforms, like a loosening of domestic labor markets, to unshackle internal demand.
Fourth, a weaker dollar might defuse global trade tensions. Dollar depreciation will support American exports, and higher interest rates should slow domestic demand and reduce imports. That means the United States trade deficit should narrow - tempering protectionist risks. And with Asian countries allowing their currencies to fluctuate, Europe gets some relief and may be less tempted to resort to protectionist remedies.
What's certain is that a lopsided world needs to be put back into balance. The dollar is the world's most widely used currency, but its fall affects more than just foreign-exchange rates. A weakening dollar is an encouraging sign that the world's relative price structure - essentially the value of one economy versus another - is becoming more sensible. If the world can manage the dollar's decline wisely, there is more reason for hope than despair.
Stephen S. Roach is chief economist for Morgan Stanley.
2004-11-28 19:58 | User Profile
[url]http://tbrnews.org/Archives/a1221.htm[/url]
US risks a downhill dollar disaster by Larry Elliott November 22, 2004 The Guardian
George Bush's foreign policy is simple: don't mess with America . The same, it appears, applies to economic policy as well. On Friday, the dollar fell sharply against the euro. That was unsurprising, since the downward lurch followed comments from Alan Greenspan which - by his own cryptic standards - were unambiguous.
"It seems persuasive that, given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said. This was hardly a novel statement for the Federal Reserve chairman but the timing was interesting. It came on the eve of a meeting of the G20 - a conclave of developed and developing nations - in Berlin at which the recent fall in the dollar was a hot topic.
Moreover, it came three days after John Snow, US treasury secretary, poured cold water on the idea that the world's central banks might get together to arrest the dollar's fall. The history of "efforts to impose non-market valuations on currencies is at best unrewarding and chequered", he said in London .
Alarmed
Europe got the message. Eurozone policymakers are growing increasingly alarmed about the fall in the value of the dollar, since it threatens to choke off exports - the one area of growth in the 12-nation single currency zone. They would like nothing more than to wade into the foreign exchanges in concert with the Fed and the central banks of Asia to put a floor under the greenback, but they know that Washington has no interest in such a move.
Joaquin Almunia, Europe 's monetary affairs commissioner, said last week: "The more the euro rises, the more voices will start asking for intervention. It has to be a coordinated effort but it seems that our friends across the Atlantic aren't interested."
That sums things up rather nicely. There are two reasons why the Bush administration is not willing to play ball with the Europeans. The first is that it sees a lower dollar as inevitable given that the US current account deficit is running at $50bn-plus a month. A lower dollar makes US exports cheaper and imports dearer.
According to this interpretation, the Americans are now simply bowing to the inevitable. Stephen Lewis, of Monument Securities, says the markets have finally lost patience with the laxity of Washington towards the twin trade and budget deficits, pumped up by cheap money and tax cuts. "The truth is that the US fiscal and monetary excesses, which have been essential to keeping the global economy afloat in recent years, are no longer tolerated in the foreign exchange markets," he said. "The status quo is not an option.
The only question is how the pain of adjustment will be apportioned."
The second reason is that the Bush administration has neither forgotten nor forgiven France and Germany for the stance they adopted over Iraq . Jacques Chirac and Gerhard Schröder weren't interested in helping the US to topple Saddam, and now it's payback time. If the European economies are suffering as a result of the weak dollar, why should the US care? What's happening in the currency markets is simply American unilateralism in a different guise.
In the short term, therefore, the dollar looks like a one-way bet. City analysts are already talking about it hitting $1.35 against the euro, and given the tendency of financial markets to overshoot, nobody would be that surprised if it fell to $1.40 over the coming months. A smooth and steady decline - which is what Snow is trying to finesse - would do little damage to the US economy, but it would hit Europe hard.
This might seem perverse, given all the fuss there was when the euro was falling against the dollar immediately after its launch. Then, however, the problem was one of credibility for a fledgling currency because the impact of a weak euro was to boost demand for European goods. With a strong euro, there will be a direct impact on European exporters. Given that the latest figures show that Germany and France both grew by only 0.1% in the third quarter, a sharp drop in exports could quite easily push the eurozone's biggest economies back into recession.
Growth forecasts for the eurozone - already modest - are likely to be scaled down over the next few months, and budget deficits are likely to get bigger. A fresh downturn could prove the death knell of the stability and growth pact, which would be no bad thing, and higher unemployment would intensify resistance among workers to structural reform of the eurozone economies.
Washington may have another reason - apart from getting its own back - for allowing the Europeans to suffer. The US is desperate for the Chinese to revalue the yuan, but has so far utterly failed to get Beijing to agree to abandon its dollar peg. The Chinese, for political as well as economic reasons, are determined to resist American pressure.
Europe - the French, in particular - have influence in China . As one analyst noted last week, China has never been censured by the United Nations security council - even over the massacre in Tiananmen Square - because Paris has always vetoed any such moves. France , so the theory goes, might have more success in persuading the Chinese to revalue than the Americans have had.
It has to be acknowledged, however, that you would be hard pressed to find a financial analyst who believes Snow is capable of this level of sophistication. After his performance in London last week, one said: "I would sell the currency of any country of which he was the finance minister." The likelihood is that even if the Americans were to use the Europeans as a proxy, the Chinese would still resist. Certainly, all the evidence is that China 's central bank is still intervening aggressively to keep its currency stable. Without that action, the dollar's fall in recent days would have been even more rapid.
Talking the dollar down is easy enough, but the strategy depends on a smooth descent that boosts US growth without scaring off the overseas investors who fund the twin deficits. Should it turn into a disorderly rout then there would inevitably be a spillover into other markets and into the real economy.
Washington , in other words, is relying on a soft landing for the dollar. History shows, however, that there is a better than even chance of this process ending in a full-scale crisis, as it did in the mid 1980s, when the weakness of the dollar culminated in the stock market crash of 1987. And that, of course, was at a time when the G7 was acting in concert. As Lewis said, the crisis could be triggered by a seemingly minor event, as when the Nigerians precipitated the run on the pound in 1976 by switching into dollars.
The US is happy to go it alone for now, since this is the forex equivalent of the quick push to Baghdad . Life is likely to get tougher later - and when it does, multilateralism will have its attractions.
Crisis towers over the dollar by W Joseph Stroupe Asia Times November 25, 2004
When analyzing such matters as the vulnerability of the US economy and the chances of its collapse, it is vital to avoid the two extremes of "calamity howling" on one hand and investing blind faith in the status quo on the other. Unforeseen and unexpected attack-induced collapses of grand proportions can and do occur. The sudden collapse of both towers of New York 's World Trade Center , for example, took everyone by surprise - who could have foreseen that the two towers, which survived the massive lateral impact of two huge planes, would, only minutes later, collapse vertically upon themselves, their own massive weight ensuring their demise?
Structurally, the two towers were impressive indeed. They had actually been designed to take a lateral and direct impact of a Boeing 747 jumbo jet and survive without collapsing. Nonetheless, certain fundamental structural vulnerabilities did exist in the towers. These were not entirely evident before September 11, 2001 , but were hidden beneath their massive and stable outward appearance. When those vulnerabilities were carefully targeted and exploited, down the massive towers came within mere minutes of the attack.
Do similar deep structural vulnerabilities exist within the US economy? Are these currently being exploited by the al-Qaeda and others to cause a US economic collapse? Are the apparent strength, stability and imposing size of the US economy deceptively masking an imminent collapse, as the Twin Towers did? Have the initial stages of an attack on the towering US economy, which might bring about a vertical collapse, already begun?
Faulty Towers
The collapse of the Twin Towers was a harsh lesson in the realities of the vulnerability of US infrastructure. In the case of the attack on the towers, the planes struck near the top of the structures. Had they struck nearer to the street level, there might have been a chance to extinguish the resulting fires before the primary steel structural beams weakened. Had they struck the top, the vertical collapses that ensued would have been highly unlikely as the primary steel structural beams wouldn't have been possible.
Fundamental vulnerabilities exist in the US economy too. But there also exists a widespread consensus that there is little real chance of a collapse, no matter what the attack might be. Even most contrarian experts dismiss the possibility of an actual collapse. They generally speak only of a prolonged "bear" period for the economy, not a collapse. The towers also enjoyed such widespread confidence before September 11. The previous targeting of the towers in 1993 and their survival only reinforced this misplaced confidence.
Vertical collapse
Just before September 11, 2001 , the US economy was also extremely unlikely to be susceptible to a sideways hit. It did show its resilience in the immediate aftermath of the attacks on its economic infrastructure. But the key to the success of the attacks, from al-Qaeda's perspective, was the igniting of the jet fuel and its impact on the primary steel support girders. Hence it was not the immediate result of the impact itself, but rather the delayed result of the fire that counted. The steel girders were the actual framework of the towers, around which the structures were constructed. When the flames softened the framework, the whole structure caved in.
The US economy is also constructed around a fundamental framework - its currency, the almighty dollar, and the apparently firm and virtually unbreakable international support it enjoys. Similar to the framework of the Twin Towers that supported their massive weight, the dollar supports a massive load of debt, now totaling well over US$7 trillion in the public sector alone. Much of this debt load is, in effect, tenuously suspended at the upper portions of the US economic structure, where it places an undue load upon the lower, traditionally more stable part of the economic framework. This is true for a number of reasons.
Federal Reserve Board and government policies over the past 20 years or so have been extremely shortsighted, leveraging the economy's future stability and strength by means of large and perpetual deficit spending. The US government, and its citizens as well, have acted as if there would never come a day of accounting for the immense debt being amassed, that somehow the amassing of such debt didn't matter. Nothing could be further from the truth. And since the economic slowdown of 2000, Fed and administrative policies have caused a pointed and massive ballooning of very risky forms of public and private debt, all built upon the structural framework we call the dollar. One such form of debt is the massive selling of treasury notes to foreign central banks - most notably to the big Asian economies. Another is the Fed policy of "prolonged monetary accommodation", meaning keeping interest rates at artificially low levels, printing new money at the rate of nearly $1.5 trillion per year and the massive creation of easy credit.
In the past three to four years, debt encouraged by such policies has mushroomed almost beyond imagination. So, in effect, there now exists a mountainous load of debt concentrated within the upper sections of the US economy, where it cannot easily be neutralized to the ground level in an orderly fashion. How much of such massive weight can the framework, the dollar, carry and support before the structure caves in?
Is there already a fire in the immediate vicinity of that framework and are the steel girders already beginning to soften? The traditional international support for the dollar and the US government's foreign and economic policies is beginning to waver. Why? Because al-Qaeda has lighted a fire of sorts in the vicinity of the dollar framework. It has succeeded in instigating the US to take economic and foreign policy measures that have resulted in a loosening of the firm "girders" of international support for dollar and US policies. Al-Qaeda has indirectly lit the fires of controversy over the rightfulness and permanence, and even the desirability, of continued US global dominance in the diplomatic, economic and military spheres.
Now that fire is raging, and ferociously eating into the girders. Controversial and ill-advised unilateral US economic and foreign policies since September 11 are only fueling that fire. In the immediate aftermath of the re-election of President George W Bush, international support for the dollar and for related US economic and foreign policies is noticeably weakening, at a time when it is most needed to support an unprecedented and mushrooming mountain load of debt. Recently, voices from within the government of Norway have called for a switch from the dollar toward the euro for international petro-transactions. The governor of the Bank of Japan has recently stated that having the dollar as the sole global currency is a marked disadvantage and danger, and recommended moving toward adopting the euro as a global currency alongside the dollar. The appetite of the big Asian economies to continue buying dollar assets is waning - last month the US barely achieved the $60 billion of foreign cash inflow required each month to keep it afloat. Hence the possibility of a Twin Towers-like vertical collapse of the US economy is becoming greater, not lesser.
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The following highlight the extent of the mounting debt and the risk involved:
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The total US public national debt now exceeds $7 trillion.
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When Social Security, Medicare, Medicaid, military and government pensions are added in, the total national debt exceeds $51 trillion, according to Fortune magazine - that's nearly five times the gross domestic product (GDP) .
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The current year's deficit alone approaches $1 trillion when you add the off-budget items.
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Derivatives (highly leveraged and enormously risky instruments such as interest-rate futures, options and swaps) now total $180 trillion, 17 times the GDP. Warren Buffet calls derivatives "instruments of mass destruction". Many financial institutions have become highly invested in derivatives. Government-sponsored enterprises such as Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp) use derivatives heavily. Because of the inherent nature of derivatives, these instruments and those using them are extremely sensitive even to small and moderate interest-rate increases.
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The total US consumer debt is more than $8 trillion.
The Japan Times recently stated, "Stephen Roach, Morgan Stanley's perceptive economist, drew attention to the fact that some of the numbers are nothing short of frightening. The US currently has $38 trillion in debts, and there is a $54 trillion federal funding gap - the difference between what the government is committed to pay out and what it will receive in tax revenues." The Fed has kept interest rates artificially low for long, thereby creating enormous amounts of cheap and easy money and has also pursued a policy of "monetary inflation" (declining the value of the dollar) by printing nearly $1.5 trillion a year. These prolonged policies have artificially created huge and growing (1) credit, (2) real-estate and other asset and (3) stock-market bubbles. However, with interest rates rising, the bubbles are about to burst. The price:earnings ratio is at historic highs - a sure sign of a general stock market bubble. "Smart Money" Warren Buffet has mostly pulled out of the US stock market because stocks are so greatly overpriced. What goes up must come down, and the US stock market is way up, far higher than can be justified by reason and facts. The troubled dollar Is international support for the dollar and for US policies eroding? Yes, it most certainly is. A powerful case can be made that it has been US policies and actions since September 11 that have resulted in a powerful upswing in terrorism worldwide along with an equally powerful elevation in Middle East instability resulting in sustained crude oil price hike and a resulting dollar decline, both of which are threatening to render serious damage to the big Asian economies. Firm international support for the dollar is certainly flagging. The largest Asian central banks have gone on record that they are curbing their purchases of US debt. And they are also diversifying their huge reserves, steadily moving away from the dollar. The risks have simply become too many and too serious. International fears of a disorderly, or possibly even a catastrophic, decline in the dollar have been pointedly heightened. Asian central banks are being forced by the varied and serious risks to hedge their bets, not wanting to be ill-prepared in the event of a disorderly decline in the dollar. Russia is also steadily decreasing the percentage of its reserves denominated in dollars, moving toward a level of 50:50 split between dollars and euros. Russia is the key player here, the one the entire world is intently watching. It alone can play the key role in either restoring the flagging international support for the dollar, or completely undermine its remaining support, precipitating a vertical collapse. President Vladimir Putin has stated both publicly and privately that invoicing Russia 's crude-oil and gas exports to the European Union in euros instead of in dollars makes very good sense for both Russia and the EU. Putin is known to have very close relations with "old Europe ", primarily Germany and France . His statements and those of German and French leaders have even on occasion drawn attention to the fact that US global dominance fundamentally rests on the fact that the dollar is the international currency, and that if an exit from the dollar were to occur in the sphere of global petro-transactions, the effect would be seriously to undermine that global dominance. Furthermore, a number of oil-exporting countries have already gone on public record as to their preference to make an exit from petro-dollars in favor of petro-euros. They have indicated that if Russia begins such a move to petro-euros, they will rapidly follow Russia 's lead. The net effect would be a rapid international abandonment of the dollar as the international currency, which would in turn "bring down the towers" of the heavily debt-ridden US economy. Al-Qaeda has recently mounted a second attack on the fundamental framework of the US economy. Its clear strategy of attacking oil-exporting infrastructure around the globe to tighten global supply and drive up crude-oil prices is a further act of instigating a raging fire in the immediate vicinity of the US economic girders. Al-Qaeda knows crude oil is the economic lifeblood of industrialized economies. And it also knows the fundamental fragility and deep imbalances that exist in the US economy in particular. It fully understands that international support for the dollar is weakening and that a sustained elevated crude-oil price is the key to producing a set of circumstances in which persistent inflation returns, requiring a set of interest-rate hikes, which in turn will act like a needle to burst the credit, real-estate and stock-market bubbles. The resulting decline of the dollar will be steep and persistent, undermining what is left of international support for dollar. However, one huge problem that has been noted on the subject of executing an exit from the dollar is the current enormous reserves held by the big Asian economies - those reserves are largely denominated in the US dollar. How can any of these Asian central banks or Russia , which still holds a percentage of its $112 billion in total reserves in dollar-denominated assets, execute an exit from the dollar without simultaneously wiping out the immense value of their own dollar reserves? On the surface, that problem seems virtually insurmountable. But is it really? If we look at Russia as an example, we learn that its central bank has been moving rapidly over the past 15 months from a 75% holding of dollars in its reserves to a 50% holding, significantly decreasing the proportion of its reserves denominated in dollar. Significantly, it is also well along in an effort to de-dollarize itself domestically in favor of the euro, buying up its domestic dollars with windfalls coming as a result of the elevated price of crude oil, and by that means it is progressing steadily toward its stated goal of "diversification" of its reserves away from the dollar. The rest of the world is forced to watch what Russia does in that regard. If Russia is perhaps positioning itself to make even a partial exit from the dollar in the pricing of its petro-transactions, then the Asian and other economies don't want to risk being left out in the cold, unprepared, seeing the value of their own huge dollar reserves undermined by a steep or chaotic decline in the value of the dollar. They cannot afford to ignore Russia 's moves. Hence as Russia moves to decrease the percentage of its own holdings of dollars, so are the big Asian economies, as well as many other economies around the globe. No one wants to get burned in the event Russia moves to the euro. Additionally, as the dollar continues to weaken and crude oil continues to rise in price, having the dollar as the preferred international currency for petro-transactions will become more of a liability, especially for the big Asian economies, which are heavy importers of crude oil. This fact will tend to further undermine Asian, as well as the rest of international support for the dollar. W Joseph Stroupe is editor in chief of Global Events Magazine, an online geopolitical magazine specializing in strategic analysis and forecasting.
2004-11-29 18:34 | User Profile
Anybody who believes that a cheapened American doller is good for the country or its people is either a liar or a fool. Yet one hears this crap bandied about by financial savants at every turn of the page in the rags that pass for newpapers in our land. If so, why not just cheapen the doller into something like the Romanian Lek and have prosperity come like never before.