[Please note that the views presented by individual contributors
are not necessarily representative of the views of ATCA, which is neutral.
ATCA conducts collective Socratic dialogue on global opportunities and
threats.]
We are grateful to:
. Prof Norbert Walter, Chief Economist, Deutsche Bank Group, & Head
of Deutsche Bank Research, based in Frankfurt, Germany, for "US
Problems rubbing off";
. Prof Avinash Persaud, Chairman, Intelligence Capital, based in London,
England, for "Is the Dollar decline to be welcomed or feared?";
. Dr Harald Malmgren, Chief Executive, Malmgren Global, based in Washington
DC, USA, for "Falling Dollar: Good news or Bad news?"; and
. Bill Emmott, former Editor-in-Chief, The Economist, based in London
and Somerset, England, for "The Falling Dollar is unequivocally
Good News"
for their response to the ATCA think piece, "The Weakening US Dollar
and the changing China & Japan Positions" and the more recent
update, "Sterling trading at 14 year record of nearly 2 Dollars."
Norbert Walter is Chief Economist of Deutsche Bank Group and Head of
Deutsche Bank Research. Before his current position he was Professor
and Director at the renowned Kiel Institute for World Economics and
was a John J McCloy Distinguished Research Fellow at the American Institute
for Contemporary Studies at the Johns Hopkins University in Washington,
DC (1986 - 1987). He holds a doctorate in economics from the Johann-Wolfgang-Goethe
University, Frankfurt-am-Main. As chief economist of Deutsche Bank Group
Norbert Walter is responsible for a globally integrated approach in
economic research. Deutsche Bank's think tank, Deutsche Bank Research,
covers a wide spectrum of issues ranging from economic forecasting to
country rating and sector analysis. Services are rendered to the Bank's
board, staff, customers and the general public. In addition to holding
these responsibilities at Deutsche Bank, Professor Walter is a member
of the Committee of Wise Men on the Regulation of European Securities
Markets ("Lamfalussy Group"). Norbert Walter loves debate,
and he will gladly hold forth on anything from deflation, the prospects
offered by the internet, the Euro's perspective or the role of the IMF.
Many know him -- as he says himself, he is like a cup of espresso: small,
dark and strong -- from watching the evening news bulletins. When it
is a question of explaining economic issues, editors of television news,
programmes, and newspaper and magazine editors, look to the 61-year
old based in Frankfurt for comment and explanation. He is old Europe's
economist, with a keen interest in a global perspective. He writes:
Dear DK and Colleagues
The global economy has been booming for years. Some countries are posting
annual growth rates of no less than 10%. China is one example and India
has recently followed suit. At the same time a number of imbalances
are reaching frightening proportions. Current account imbalances are
piling up. In Japan they are notorious and the result is the accumulation
of currency reserves totalling nearly USD 1 trillion. Since the year
2000 alone these reserves have grown by some USD 500 billion.
But Japan is not the only country awash with cash for investing internationally.
China's currency reserves have also recently breached the trillion dollar
threshold. This figure does not include the reserves held by Hong Kong
or Taiwan which have grown even faster. Greater China has boosted its
reserves by about USD 1 trillion since the year 2000. Since oil prices
have skyrocketed, commodity exporters have also booked huge increases
in revenues. Mostly it is the current account surpluses that have widened
dramatically, and along with this currency reserves and other forms
of foreign investment. Not only the Middle East, Russia and Kazakhstan,
but also Latin America have boosted their currency reserves and other
foreign assets by more than USD 750 billion over the last four years.
Since 2000 global currency reserves have increased from USD 2 trillion
to over USD 5 trillion.
Most of these investments have flowed into liquid dollar assets. Investment
has been concentrated in US treasury bonds. This explains to a major
degree the low capital market rates in the US despite years of above-potential
growth. Some international investments are focused on euro markets,
bonds and equities.
Two questions need to be addressed: firstly, has action been taken to
bring about a correction in current account imbalances? And secondly,
are investors becoming nervous about the concentration of their investment
risks in US dollars and the US bond market and are they seeking to diversify?
And if so, in which direction?
The easing of oil prices and the slowing down of the US economy are
undoubtedly developments that help to reduce current account imbalances
- especially between commodity-exporting nations and the US. But there
is a raft of other factors that are working to prolong the imbalances.
China's competitive strength has actually increased. Productivity growth
is of course not being offset by the minimal appreciation of the Yuan.
Japan's surplus position is also unlikely to undergo correction. The
Bank of Japan's extreme, low-interest-rate policy is keeping the yen
very weak. At the same time increases in nominal (!) wages are virtually
nonexistent in Japan. Germany's current account balance remains in surplus,
but German unit labour costs continue to fall in the negotiable sectors.
US foreign obligations will probably therefore see an annual net increase
of more than USD 500 billion for the coming years. And global currency
reserves will reach a figure of USD 7½ trillion in 2010, probably
still a conservative estimate.
As long as the countries running surpluses (China, Japan, Germany and
the commodity-exporting nations) largely invest their cash in US dollars
and to a large degree in US Treasuries, everything could remain just
as it is. I don't consider such a scenario to be realistic. I expect
diversification both in terms of currencies and asset classes. Since
the Bank of Japan will hardly have any justification for higher interest
rates I do not believe investors will look to buy into the yen. Since
the Chinese authorities want to buttress their growth, the likelihood
of a stronger Yuan appreciation appears minimal.
This leaves the euro as effectively the only alternative currency. It
looks as if the markets are beginning to play this game. For some time
now Indians, Chinese, Russians and the Gulf states have begun to show
interest in corporate investments in addition to US Treasuries. Their
endeavours have however not always been successful. The apologists for
the free movement of capital in the US are discovering protectionism.
By fomenting doubts about the dollar, they are undermining their own
position. The risk of a freefalling dollar and rising US capital market
rates is growing. And the euro area could lose competitiveness as a
result of the euro being too strong and also find itself dragged into
recession, just like the US.
Kind regards
Norbert Walter
[ENDS]
-----Original Message-----
From: Intelligence Unit
Sent: 04 December 2006 11:16
To: 'atca.members@mi2g.com'
Subject: Response: Prof Persaud - Is the Dollar decline to be welcomed
or feared?; Dr Malmgren - Falling Dollar: Good news or Bad news?; GBP
14 year record ~USD 2; Emmott - Falling Dollar Good News
Dear ATCA Colleagues
[Please note that the views presented by individual contributors are
not necessarily representative of the views of ATCA, which is neutral.
ATCA conducts collective Socratic dialogue on global opportunities and
threats.]
We are grateful to:
. Prof Avinash Persaud, based in London, England, for "Is the Dollar
decline to be welcomed or feared?";
. Dr Harald Malmgren presently touring the Far East having flown from
Seoul, South Korea, to Tokyo, Japan, and based in Washington DC, USA,
for "Falling Dollar: Good news or Bad news?"; and
. Bill Emmott, based in London and Somerset, England, for "The
Falling Dollar is unequivocally Good News"
for their response to the ATCA think piece, "The Weakening US Dollar
and the changing China & Japan Positions" and the more recent
update, "Sterling trading at 14 year record of nearly 2 Dollars."
Prof Avinash Persaud's career spans finance, public policy and academia.
He is currently Chairman of Intelligence Capital, a financial advisory
boutique specializing in the management of financial assets, risks and
liquidity. Previously, Persaud was Investment Director at GAM [owned
by UBS until Dec 2005 and now part of Julius Baer, Switzerland]; Managing
Director, State Street Corporation; Global Head of Currency and Commodity
Research at J P Morgan; and Director of fixed income research at UBS.
He was ranked in the top three of currency analysts in global institutional
investor surveys from 1989 to 1999. He is well known as the originator
of the EMU Calculator, Risk Appetite Index and Event Risk Indicator.
According to the Financial Times his work on investors' shifting appetite
for risk has entered the popular lexicon of analysts.
Persaud was Visiting Scholar at the European Central Bank (ECB) up until
recently and Visiting Scholar, International Monetary Fund (IMF). He
is Co-Chair of the OECD Emerging Markets Network, and a Trustee of the
Overseas Development Institute. He is a Member of the Euro 50. Persaud
is a Director of the Global Association of Risk Professionals and author
of what the FT has described as the Persaud Paradox of Modern Risk Management:
the observation of safety creates risk. Persaud is a Fellow of Gresham
College and formerly the Gresham Professor of Commerce. He is Visiting
Professor in Applied Finance at the University of Surrey, Visiting Fellow
at CERF, Judge Business School, Cambridge. He is a Member of Council
of the Royal Economics Society and a Governor and Member of Council
of the London School of Economics & Political Science. Persaud is
the author of a number of papers on risk, liquidity, regulation and
exchange rates. He has won both major awards for essays in international
finance: the Jacques de Larosiere in Global Finance from the Institute
of International Finance (First, 2000) and the Amex Bank Award (Bronze,
1994). He writes:
Dear DK and Colleagues
Re: Is the Dollar decline to be welcomed or feared?
If we were to forget the capital market side of the global economic
equation for the moment, the decline in the US dollar is the natural
and correct response to economic developments. Previously strong US
growth has prompted a tightening of US monetary policy, which has pricked
the US housing market bubble and has caused a moderation of activity
and concern of a greater slowdown to come. This in turn has led to a
decline in expected future interest rates, which is only consistent
with a dollar that rebounds in the future, after a decline today. The
current decline in the dollar and a slowdown in the US economy will
force the rest of the world to loosen monetary policy which will help
to rebalance global growth away from US consumption to rest-of-the-world
consumption.
All that would seem to me to be unambiguously good news as it turns
the world economy back on to a more sustainable and balanced path than
the one it was on. The problem is that this mix of real economy and
financial market adjustment occurs at different speeds. The danger is
that the currency depreciation can get stuck in a vicious cycle where
the more the currency is expected to fall, the more foreign investors
will decide to withdraw from the US bond market in favour of non-dollar
bond markets. And given the US bond market is dependent on foreign holders,
such a withdrawal would compound the short-term unattractiveness of
dollar-bonds. (Incidentally the European and Japanese bond markets have
the capacity to absorb such a switch. Indeed the Euro-denominated cash
government bond market is a third larger than the US, in terms of bonds
outstanding, though it is true to say that the market functioning of
cash government markets are not as smooth as in the US.)
The risk presented by the large "overhang" of foreign holders
and the faster pace of financial markets than goods markets, is that
a dollar slide can never be gradual and graceful but only grievous.
It is why the US Federal Reserve erred in allowing the scale of foreign-financed
over-spending that we have seen in the US in recent years. For all of
his focus on the balance of risks, (Sir) Alan Greenspan allowed the
largest risks to develop. For the rest of the world, a free-fall in
the world's reserve currency cannot, net-net, be a good thing and it
could lead to the perverse response of world-wide interest rates rising,
rather than falling. Let us hope we avoid that.
It is said that foreign central banks have too much at stake to allow
a rout in the dollar to develop. But this misses three important points.
First, most central banks do not own US dollars as an investment but
as liquidity insurance. They are less concerned about swings in the
value of foreign exchange as long as they still provide liquidity insurance.
Second, those central banks who do care, may consider that they are
part of a "game" where their losses are maximized if they
are the last one holding dollars and minimized if they get out first.
Third, it is important to remember the experience of the UK. In 1968
the Basle Agreements tried to get foreign holders of sterling to agree
to stop selling sterling and they did. But the markets viewed this whole
episode as a sure sign that sterling was on the way out as a reserve
currency and replaced central bank selling with private sector shorting
of sterling: a financial version of Ricardian equivalence. The Basle
Agreements marked a major turning point in sterling's fate and it wasn't
up. Even if central banks decided not to sell the US dollar (and Asia
and Europe entered into a central bank currency swap to soften the impact
of a dollar decline on the euro) the dollar would not be saved.
The best we can hope for is that our central bankers and policy makers
do not panic as they try to dig themselves out of a hole of their creation.
Perhaps they should let the foreign exchange market take as much of
the adjustment as possible while trying to provide some stability by
strongly resisting protectionist pressure and fixing monetary policy
onto long-term objectives of price-stability. I wish policy makers in
the US and the rest of the world the best of luck and fortitude in the
coming trying months!
Warm regards
Avinash
[ENDS]
-----Original Message-----
From: Intelligence Unit
Sent: 03 December 2006 11:37
To: 'atca.members@mi2g.com'
Subject: Response: Dr Harald Malmgren -- Falling Dollar: Good news or
Bad news? GBP trading at 14 year record of ~USD 2; Emmott - Falling
Dollar Good News; Weakening USD, China & Japan
Dear ATCA Colleagues
[Please note that the views presented by individual contributors are
not necessarily representative of the views of ATCA, which is neutral.
ATCA conducts collective Socratic dialogue on global opportunities and
threats.]
We are grateful to:
. Dr Harald Malmgren presently touring the Far East having flown from
Seoul, South Korea, to Tokyo, Japan, and based in Washington DC, USA,
for "Falling Dollar: Good news or Bad news?"; and
. Bill Emmott, based in London and Somerset, England, for "The
Falling Dollar is unequivocally Good News"
for their response to the ATCA think piece, "The Weakening US Dollar
and the changing China & Japan Positions" and the more recent
update, "Sterling trading at 14 year record of nearly 2 Dollars."
Dr Harald Malmgren is an internationally recognised expert on world
trade and investment flows who has worked for four US Presidents. His
extensive personal global network among governments, central banks,
financial institutions, and corporations provides a highly informed
basis for his assessments of global markets. At Yale University, he
was a Scholar of the House and Research Assistant to Nobel Laureate
Thomas Schelling, graduating BA summa cum laude in 1957. At Oxford University,
he studied under Nobel Laureate Sir John Hicks, and wrote several widely
referenced scholarly articles while earning a DPhil in Economics in
1961. His theoretical works on information theory and business organization
have continued to be cited by academics over the last 45 years. After
Oxford, he began his academic career in the Galen Stone Chair in Mathematical
Economics at Cornell University.
Dr Malmgren commenced his career in government service under President
John F Kennedy, working with the Pentagon in revamping the Defence Department's
military and procurement strategies. When President Lyndon B Johnson
took office, Dr Malmgren was asked to join the newly organised office
of the US Trade Representative in the President's staff, where he had
broad negotiating responsibility as the first Assistant US Trade Representative.
He left government service in 1969, to direct research at the Overseas
Development Council, and to act as trade adviser to the US Senate Finance
Committee. At that time, he authored International Economic Peacekeeping,
which many trade experts believe provided the blueprint for global trade
liberalisation in the Tokyo Round of the 1970s and the Uruguay Round
of the 1980s. In 1971-72 he also served as principal adviser to the
OECD Wise Men's Group on opening world markets, under the chairmanship
of Jean Rey, and he served as a senior adviser to President Richard
M Nixon on foreign economic policies. President Nixon then appointed
him to be the principal Deputy US Trade Representative, with the rank
of Ambassador. In this role he served Presidents Nixon and Ford as the
American government's chief trade negotiator in dealing with all nations.
While in USTR, he became known in Congress as the father of "fast
track" trade negotiating authority, which he first introduced into
the historically innovative Trade Act of 1974. He was the first official
of any government to call for global negotiations on liberalisation
of financial services, and he was the first US official to call for
the establishment of an Asian-Pacific Economic Cooperation arrangement,
known in more recent years as APEC.
In 1975 Malmgren left government service, and was appointed Woodrow
Wilson Fellow at the Smithsonian Institution. From the late 1970s he
managed an international consulting business, providing advice to many
corporations, banks, investment banks, and asset management institutions,
as well as to Finance Ministers and Prime Ministers of many governments
on financial markets, trade, and currencies. He has also been an adviser
to subsequent US Presidents, as well as to a number of prominent American
politicians of both parties. Over the years, he has continued writing
many publications both in economic theory and in public policy and markets.
He is Chief Executive of Malmgren Global and also currently the Chairman
of the Cordell Hull Institute in Washington, a private, not-for-profit
"think tank" which he co-founded with Lawrence Eagleburger,
former Secretary of State. He writes:
Dear DK and Colleagues
Re: Falling Dollar: Good news or Bad news?
The recent weakening of the dollar has been declared "good news"
by distinguished commentators within ATCA such as Bill Emmott and without.
While a weaker dollar might be good news for the US, it could be very
bad news for the rest of the world!
When the dollar falls, the flipside is that the valuations of other
currencies rise. A dollar decline would improve the competitiveness
of American exports in world markets while cutting the competitiveness
of exports of other nations. The US economy is primarily driven by domestic
consumption - but most of the other major economies around the world,
and almost all emerging market countries, are dependent on external
demand to maintain growth. The core economies of the Eurozone have tepid,
and in some cases, even negative domestic consumption. More than a third
of China's GDP is derived from exports. Although India has strong domestic
consumption, economic growth in the rest of the world's emerging markets
is primarily driven by foreign demand for their exports.
By itself, this might not be so troublesome. But the US economy is the
primary engine propelling global economic growth. Now, as a result of
the slumping US housing market and other domestic factors, the US economy
is slowing down, and in the next year it can be expected to slow even
more. Already, it is evident that this US slowdown is resulting in slowing
global economic growth. In 2007 we can expect a much slower pace of
global demand, and therefore slower growth in all of the export-dependent
economies of the world.
During the last few years of robust American economic growth the supposedly
buoyant economies in Continental Europe have only managed to eke out
an economic growth rate about half that of the US. This is because the
core economies of the Eurozone have not been politically able to address
structural reforms, and have remained dependent on external demand.
Now, as the US slows from an average rate of growth of GDP of 3.5 or
4.0 percent per year to a much slower 2.0 percent per year - or even
less - world economic growth will fall back. It is incorrect to evaluate
European export prospects in terms of exports to the US. European exports
to the whole world are likely to suffer as global growth slips. In a
context of slowing global growth, the Eurozone is likely to fall back
to stagnation, or possibly even stagflation.
Some economic analysts argue that the US economy is not the only engine
of global growth. They argue that China has become the "other engine."
But the momentum of China's economy is highly sensitive to export demand.
This is not simply a matter of exports to the US; it is a matter of
dependence on worldwide demand for Chinese exports. The Chinese government
and most Chinese business leaders have not yet considered the damage
that might be wrought by a global slowdown, but there can be little
doubt that the pace of growth in China will suffer shocks from weakened
external demand. The Chinese economy cannot remain an independent engine
of growth if the US economy slows - and now, the US economy is slowing.
As global economic growth slows, the growth of world trade will also
decelerate. If the dollar becomes markedly weaker, it is helpful to
the US economy, because US exporters can steal market share in competition
in a weakening world marketplace. But the US gain will be at the expense
of other nations like Germany, France, Italy, South Korea, and Japan.
Small wonder then that European finance ministers are already grumbling
about excessive strengthening of the Euro. They are fearful that the
Euro's continued rise will bring to a halt the recent improvements in
the economies of Continental Europe, and return the bigger economies
of the Eurozone to higher unemployment and stagnation. If the dollar
is to fall much further, the Euro correspondingly will have to rise
much more - to the breaking point, so far as Europe's hopes for continued
recovery are concerned.
In a context of global slowdown, central banks and private investors
alike will have to rethink where to park their financial assets during
times of economic trouble. There will likely be what financial analysts
call a "flight to quality." The safest parking place in times
of trouble is the US dollar. It is still the primary currency dominating
trade and investment transactions worldwide. It is the largest, most
liquid financial market in the world - easy to enter, easy to adjust
from one type of asset to another, easy to sell when you want to sell
- and US dollar assets are one of the most legally protected types of
assets available in the global marketplace.
Is there any alternative market or group of markets big enough to absorb
a massive flight from the dollar? The gold market is far too small.
Sterling and the Eurozone financial markets are simply not big enough
and especially not liquid enough to absorb a massive shift from dollars
- and European governments anyway would simply not allow the Euro to
rise sharply as a result of a big swing to the Eurozone. Some speculative
capital has sought refuge in commodities, or in real estate and other
assets. But all of the alternatives are less liquid than remaining in
dollar-denominated assets. In times of potential world economic trouble,
the safest parking place for capital is the biggest, most liquid market,
which is the dollar-based market.
In the context of slowing global growth, and potential recession in
some countries, there will eventually tend to be a return of foreign
capital to US Treasuries, or to US dollar-denominated debt instruments
like corporate bonds, mortgage-backed securities, and the explosively
growing array of other securitized assets and financial derivatives.
A dollar decline combined with global slump will bring about a rebound
in demand for the dollar eventually.
In the meantime, the Federal Reserve has essentially lost control of
US market rates of interest. The Fed can set short-term rates, but long-term
rates have already fallen below the Fed's target rate, signalling that
investors in the US and throughout the world believe that an economic
slowdown is under way and that the Fed will have to yield next year
and begin cutting US interest rates. The flow of capital into the US
debt market is growing, and this is driving down long-term interest
rates in the US, and reducing the spread between interest rates on private
debt and on US government debt
As for other major central banks, they are beginning to feel this economic
downdraft, as longer-term interest rates in their markets are falling
to, or even below, their short-term targets. The European Central Bank
(ECB) is still talking publicly about the need to be "vigilant"
about inflationary pressures, but its members are well aware that a
continued rise in ECB rates next year would plunge European economies
into recession, in a context of flagging global economic growth.
Many press and media commentators have expressed alarm that the governments
of China, Japan, the OPEC countries, and other major holders of US Treasuries
in their reserves might panic and sell of their dollar holdings as the
dollar declines. They repeatedly argue that present "global imbalances"
are unsustainable, and that a global currency meltdown lies ahead, perhaps
triggered by the dollar's decline.
Would central banks really sell of dollar holdings and rush to assets
denominated in Euros or other currencies? Consider China: The currency
reserves of the Chinese government now include dollar-denominated assets
totalling nearly one trillion US dollars. Some Chinese authorities recently
suggested that Chinese reserves need to be "diversified."
A common interpretation in the press has been that this means selling
off the dollar, but so far that has not happened. A massive sell off
of Chinese holdings of dollars would not only weaken the dollar, it
would cut the value of their remaining dollar holdings. The Chinese
government has too large a stake in dollar assets to allow an unwanted
reduction in the value of their reserves.
Chinese monetary authorities have actually been diversifying the composition
of their dollar-denominated holdings, but not by selling of dollar assets.
Instead, they have gradually been reducing the share of US Government
Treasuries held and increasing the share of other dollar-denominated
debt instruments. For example, there has been a huge increase in Chinese
official demand for higher-yielding US private, mortgage-backed securities.
From the Chinese point of view, this is an appropriate risk management
practice, to seek assets with a higher return to offset potential moderate
dollar weakening.
Stepping back from the technicalities of Chinese management of the composition
of their national reserves, it is evident that Chinese government policy
has strongly resisted significant strengthening of the value of their
own currency. US and European financial authorities have pounded the
Chinese government about the need for a significant appreciation of
the Yuan, but the Chinese have defiantly refused to comply. They have
allowed a very small adjustment, and made vague promises about additional,
gradual adjustments in the future, essentially ignoring foreign pressures.
This stubborn resistance to appreciation of the Chinese Yuan is primarily
motivated by domestic politics in China. The Chinese national leadership
is finding itself in a predicament. The leadership wants to maintain
its political power over the nation, but it is rapidly losing its grip
on an economy which is increasingly managed locally, by local governments
and local businesses which are unresponsive to Beijing's demands. The
Chinese economy is evolving into wild-west capitalism, functioning under
the Golden Rule: Those who have the gold make the rules. Disparities
in incomes and disparities between the rich coastal provinces and the
interior are growing dramatically. Local governments, operating in corrupt
relationships with local businesses, are increasingly exploiting local
populations and confiscating their land. Incidents of public violence
at the local level now occur throughout China at a rate of several a
day - though the scope and intensity of this violence is little reported
in world press and media.
In this volatile Chinese political situation, currency policy is decided
by the Standing Committee of the Politburo of the Communist Party, not
by the central bank or the ministry of finance. The Politburo leadership
knows that a weak currency helps to keep unemployment from exploding.
A stronger Yuan would severely hurt inland farmers and rural business
and banks, generating far more violence and a river of people flowing
from the interior to the coastal cities in search of jobs. For the Politburo,
a major change in the relationship of the Yuan to the US dollar could
mean the collapse of the central government leadership. I have often
said about China that it is a country with one flag but many governments.
A severe shock generated by a big currency swing could potentially threaten
the survival of the current Communist leadership, and even bring about
a China with more than one flag. This is too big a risk for the current
members of the Politburo. In essence, the political leadership does
not want the dollar to decline significantly. Selling off US Treasuries
or the dollar is inconceivable in this volatile political context.
What about Japan's vast holdings of US Treasuries? The Japanese government
has not intervened in currency markets for a very long time. The current
weakness of the Yen is not the result of currency intervention, but
rather the result of the low domestic interest rate policy of the Bank
of Japan and the government. For example, speculative investors throughout
the world continue to borrow funds in Japan at absurdly low interest
rates and then sell the Yen proceeds in order to buy other currencies
to be used for investment in assets in many other markets. Japanese
households increasingly seek to invest in foreign-denominated assets
which provide much higher yields than the miniscule interest on Japanese
savings accounts or Japanese government bonds.
Japan's domestic interest rate policy thus results in a weak currency.
If world financial market forces brought about a modest increase in
the value of the Yen, the Japanese government would not resist. But
the Japanese central bank and government are not about to jack up domestic
interest rates sharply in response to pressures from General Motors
for a stronger Yen - Japan's newly emerging economic recovery is far
too delicate to sustain a big increase in domestic borrowing costs.
Japanese authorities are preoccupied with keeping a tentative, modest
economic recovery alive, especially now before next July's Upper House
elections. A big interest rate hike is politically out of the question.
I expect Japanese interest rates to rise, but only very, very gradually,
over years, not months.
Some central banks, like those in the Arab OPEC countries, assert a
dislike of dollars, but if we look closely, the vast surpluses generated
by rising oil revenues tend to be managed by professional money managers
in various financial centers around the world, and they in turn place
a dominant share of these surpluses into dollar-denominated assets.
They, too, see no alternative. The OPEC producers will also not panic
and sell off all their dollar holdings.
Some analysts say the answer to all this confusion and the dangers of
continued "global imbalances" must lie in an official realignment
of currencies. This has been talked about for years, but the major governments
around the world want no part of it. Politicians in Europe and Asia
do not want to be seen to be responsible for allowing a big rise in
the value of their currencies, especially since it would cripple their
economies. An official realignment is not politically possible, especially
now, in the context of a global economic slowdown.
For the US, as I have said, a moderately falling dollar could be beneficial
for US exporters. Even more beneficial has been the strong flow of domestic
and international capital into the US public and private debt market,
because this is bringing long-term interest rates down in the US economy.
Mortgage rates are consequently falling, gradually putting in place
a shock-absorber under the US housing market. But it must be recognized
that the housing slump is not over. Only recently, former Federal Reserve
Chairman Greenspan pronounced the housing downturn to have hit bottom.
No one directly involved in the housing market agrees. Most builders
foresee many more months of weakening demand and falling valuations
of homes, before the bottom is found. About one-third of all new jobs
created in the US are directly or indirectly generated by home construction,
so we can expect continued downward pressures on the US economy. Households
will gradually feel growing pain as the values of their homes appear
to fall. Employment figures will look increasingly weak. Household consumption
will become increasingly cautious. The most likely result of all these
forces, together with falling US interest rates, will be a slowdown,
but not a recession. However, we cannot rule out an American recession.
It is too early to tell where the bottom lies.
For the rest of the world, the 2007-08 outlook is gloomy. A continued
weakening of the dollar in this context is good news for the US, but
bad news for everyone else.
Harald Malmgren
[ENDS]
-----Original Message-----
From: Intelligence Unit
Sent: 01 December 2006 11:58
To: 'atca.members@mi2g.com'
Subject: ATCA: Sterling trading at 14 year record of nearly 2 Dollars;
Emmott -- The Falling Dollar is unequivocally Good News; The Weakening
US Dollar and the changing China & Japan Positions
Dear ATCA Colleagues
[Please note that the views presented by individual contributors are
not necessarily representative of the views of ATCA, which is neutral.
ATCA conducts collective Socratic dialogue on global opportunities and
threats.]
Re: Sterling trading at 14 year record of nearly 2 Dollars
The British Pound (GBP) remained close to its highest level against
the US Dollar since Sterling left the Exchange Rate Mechanism (ERM)
in 1992, despite positive economic news from the United States. Sterling
strengthened to USD 1.9670 moving towards USD 2.0 by end-of-December
according to Forex forecasters as fears over the US economy persisted
in the face of better-than-expected growth figures in the US.
The dollar has been struggling since late last week over fears that
the Federal Reserve will cut interest rates in a bid to boost the ailing
economy. The strong pound is good news for Britons heading to New York
for their Christmas shopping with tourists getting as much as 1.93 US
dollars for every pound at high street exchanges. It also benefits firms
importing goods from overseas as they get more for their money, although
it is bad news for British businesses reliant on exports as it makes
their goods more expensive to buy.
The dollar managed to recover slightly against the euro, however, as
European officials warned about the Euro's recent surge. The euro softened
from its 20-month peak of 1.3218 US dollars to 1.3170 US dollars after
French Prime Minister Dominique de Villepin said the Euro's rise was
weighing on competitiveness. French finance minister Thierry Breton
also warned that strong movements in currencies are never good.
It came as the US Commerce Department said US gross domestic product
increased at a 2.2% annual rate in the third quarter - well above the
1.6% initially expected. The figures bolstered views that the US Federal
Reserve can hold off a cut in interest rates which could undermine the
dollar further. It fell sharply yesterday as a spate of disappointing
US economic news added further weight to the view interest rates will
be cut.
[ENDS]
We look forward to your further thoughts, observations and views. Thank
you.
Best wishes
For and on behalf of DK Matai, Chairman, Asymmetric Threats Contingency
Alliance (ATCA)
-----Original Message-----
From: Intelligence Unit
Sent: 29 November 2006 12:21
To: 'atca.members@mi2g.com'
Subject: Response: Bill Emmott -- The Falling Dollar is unequivocally
Good News; ATCA: The Weakening US Dollar and the changing China &
Japan Positions
Dear ATCA Colleagues
[Please note that the views presented by individual contributors are
not necessarily representative of the views of ATCA, which is neutral.
ATCA conducts collective Socratic dialogue on global opportunities and
threats.]
We are grateful to Bill Emmott, based in London and Somerset, England,
for his response, "The Falling Dollar is unequivocally Good News"
to the ATCA think piece, "The Weakening US Dollar and the changing
China & Japan Positions."
Bill Emmott was the Editor-in-Chief of The Economist, the world's leading
weekly magazine on current affairs and business, from 1993 until March
31st 2006. He is now an independent writer, speaker and consultant.
After studying politics, philosophy and economics at Magdalen College,
Oxford, he moved to Nuffield College to do postgraduate research into
the French Communist party's spell in government in 1944-47. Bill has
written four books on Japan -- The Sun Also Sets: the limits to Japan's
economic power, Japan's Global Reach: the influence, strategies and
weaknesses of Japan's multinational corporations, both of which were
best-sellers, and Kanryo no Taizai (The bureaucrats' deadly sins), published
only in Japanese. Most recently, he wrote a book version of an extended
essay, published in The Economist in October 2005 and called "The
Sun also Rises" to echo his 1989 book. This longer, book version
was published in Japanese translation under that same title (Hiwa Mata
Noboru) by Soshisha in January 2006. In February 2003 he published a
book about the global issues of our times called "20:21 Vision
- 20th century lessons for the 21st century". Bill writes a column
on international affairs for a Japanese monthly magazine, Ushio. He
is currently working on a new book, about the rivalry between Japan,
China and India.
Bill Emmott is a member of the executive committee of the Trilateral
Commission, a member of the BBC World Service Governors' Consultative
Committee, a director of Development Consultants International, a Dublin-based
company, a member of the Swiss Re Chairman's Advisory Panel, a director
of the UK-Japan 21st Century Group, and co-chairman (with The Hon Roy
MacLaren) of the Canada-Europe Roundtable for Business. He was a director
of The Economist Group from 1993 until 2006. He has honorary degrees
from Warwick and City Universities, and is an honorary fellow of Magdalen
College, Oxford. He writes:
Dear DK and Colleagues
Re: The Falling Dollar is unequivocally Good News
The fall of the dollar is unequivocally good news, both for America
and for the rest of the world. Everyone has known for years that America's
economic path could not continue in the same direction for ever: economic
growth financed by ever-increasing borrowing from abroad and by a reduction
in households' saving rate, that has boosted consumption, was not in
itself either bad or wrong, but it was simply unsustainable. We cannot
know in advance whether this drop in the dollar truly signals an end
to that (long) phase of development or not, but if it does it would
be healthy. These huge capital imbalances are best thought of through
the metaphor of avalanche risk at a ski resort: resorts need snow just
as economies need capital, but if too much accumulates then there is
a risk of a sudden adjustment, as in an avalanche. It is better if the
adjustment can be managed more steadily.
Can it be? Like Alan Greenspan, I would place some faith in the flexibility
of the American economy. Falling house prices will hurt those who have
borrowed excessively on the collateral of homes and will depress consumption
more widely. The falling dollar will begin (slowly) to compensate for
that by helping American exporters. Monetary policy is likely either
to be left unchanged or to be loosened as growth slows, so that may
act as some support too. There is some fear of inflation, but if America's
economy really does slow substantially or even go into recession, then
the resulting drop in demand for oil and gas in the world's largest
energy consumer is, other things equal, likely to bring about a further
fall in energy prices worldwide, somewhat easing the inflationary pressure.
Of course, other things may not be equal: supply disruptions caused
by terrorism or other conflict could intervene. But although such factors
are unpredictable, at least I would say that the likelihood of American
military attacks on Iran, which have been the subject of some speculation,
must now be extremely low. If all the aforementioned speculation proves
correct, then we could reasonably expect America's flexibility in the
allocation of resources to produce what might be called a "fast
in, fast out" recession.
Some people worry that the dollar's collapse could be so rapid as to
force the Fed to raise interest rates sharply, worsening the recession;
or so rapid as to produce a big jump in bond yields, raising the cost
of corporate borrowing and worsening the recession in that manner. One
cannot rule such an outcome out altogether, but I take some comfort
from the fact that overseas dollar holdings, in the form of US Treasury
bonds, have been so concentrated in the hands of central banks in China,
Japan and the Gulf. Such authorities are less likely to rush headlong
for the exit doors than are private investors. In both political and
financial terms, they know that a dollar collapse would not be in their
interest. If anyone can manage this adjustment in a steady, careful
way, it would be them.
Best wishes
Bill Emmott
[ENDS]
-----Original Message-----
From: Intelligence Unit
Sent: 28 November 2006 23:19
To: 'atca.members@mi2g.com'
Subject: ATCA: The Weakening US Dollar and the changing China &
Japan Positions
Dear ATCA Colleagues
[Please note that the views presented by individual contributors are
not necessarily representative of the views of ATCA, which is neutral.
ATCA conducts collective Socratic dialogue on global opportunities and
threats.]
Re: The Weakening US Dollar and the changing China & Japan Positions
The US Dollar (USD) extended its declines on Tuesday, sending the Euro
above USD 1.32 for the first time since March 2005, as US data supported
expectations the US central bank -- The Federal Reserve -- may cut interest
rates early next year. The USD fell to a new 20-month low against the
Euro on Tuesday, as a spate of disappointing US economic data further
dimmed the prospect of higher interest rates in the world's largest
economy. A long-term factor behind the weakening Dollar is the widening
US current account deficit and many market watchers say that the Dollar
is just beginning to catch up with the fact that the United States is
deep in debt, a significant chunk of which is held by China and Japan.
Both the Asian powers are beginning to review their entrenched positions
in regard to the value of their own currencies and the mix of their
foreign reserves and holdings.
China's foreign reserves are thought to have exceeded USD 1 trillion
after officially hitting USD 987.9 billion by late September. To keep
its own exports cheap, China has been artificially controlling the value
of the Yuan, which is significantly undervalued in terms of real market
rates. The country's central bank on Monday bumped up the Yuan's official
level to 7.8402, and the currency traded at a record high versus the
US Dollar. Still, daily movements are limited at 0.3 percent above or
below the official level -- a trading system set up in July 2005. China's
central bank, the People's Bank of China, refused to comment Tuesday
on rumours that Beijing is shifting its foreign reserve holdings away
from US Treasuries. Speaking in Beijing Friday, the bank's Vice Governor,
Wu Xiaoling, allegedly noted the risks arising from the US Dollar's
decline for East Asian holders, triggering further Dollar selling.
Earlier this month, the US Treasury Department said foreigners sold
more Treasuries than they bought in September for the first time in
three-and-a-half years. However, the selling was led by Japan, the largest
holder of US Treasuries. Japan's holdings fell in September to USD 639.2
billion from USD 644.3 billion in August. China, the second-largest
holder of US Treasuries, boosted its stake to USD 342.1 billion in September
from USD 339.1 billion the prior month.
A US government report showed October orders for long-lasting goods
and equipment fell 8.3 percent, the biggest decline since July 2000,
ie, more than six years. The median home price saw its largest year-over-year
decrease ever, and consumer confidence fell to its lowest reading since
August. The reports -- which suggest to investors that the slowing US
economy may not be able to withstand a rate hike -- were enough to overshadow
comments from US Federal Reserve Chairman Ben Bernanke that inflation
is 'uncomfortably high.' Higher interest rates, a weapon against inflation,
tend to strengthen a currency by making investments in that denomination
more attractive and vice-versa.
Since the US Dollar began to weaken last Wednesday, the Euro has strengthened
by more than 2 percent, taking its gains for the year to around 11 percent.
Another report on Tuesday showed sales of existing US homes rose in
October for the first time since February. That caused the Dollar to
pare its losses, although traders cautioned against reading too much
into the one-month move. A weakening Dollar can be a double-edged sword
for the US economy; it decreases Americans' purchasing power, but it
makes US goods cheaper for foreigners, and therefore more competitive
in the global market.
Former Federal Reserve Chairman Alan Greenspan, speaking at an investor
conference Tuesday, said concerns over the US Dollar were unnecessary
if the US economy stays flexible. He added that forecasts about the
Dollar's direction are about as reliable as a coin toss: "Everyone
has an opinion on which way the Dollar will go ... and half of them
will be right.
[ENDS]
