Why the Dollar is Falling

[FaGal]

Why the Dollar is Falling
www.mises.org - By Antony P. Mueller - March 8, 2005



When confronted with complaints about the falling value of the dollar, the U.S. official is said to have responded to his European visitors: "The dollar is our currency, but it's your problem." That was in 1971. The politician to whom this statement is attributed was John Connally, who at that time served as the secretary of the U.S. Treasury. His boss was Richard Nixon, the same President who used a word for the Italian lira which politeness prohibits repeating. Nevertheless, Connally and Nixon made clear how matters were.

In the meantime, the Italian lira no longer exists. It has merged into the euro, when the single European currency was established in 1999. The endeavors to create a common currency had begun in the early 1970s, when the Europeans began to construct their own currency systems based on stable exchange rates and off the dollar standard.

The Bretton Woods System (named after the resort where the conference took place in New Hampshire in 1944) bestowed a singular privilege to the U.S. when the dollar became the point of reference for the new currency system. With the other member countries fixing their currencies to the U.S. dollar, and the U.S. dollar officially fixed to gold at 35 dollars per troy fine ounce, it seemed as if an ideal combination had been found to avoid international monetary disruptions.

The gold anchor was meant to curb an excessive production of U.S. dollars. When foreign countries had a trade surplus, they theoretically could have used the excess dollars and asked the U.S. to exchange them for gold. With a fixed parity between dollar and gold, this would have restricted dollar creation. However, France was one of the only countries that took the agreement literally and demanded that the U.S. exchange the earned dollars for gold instead of accumulating them as international reserves like other countries did which had persistent current account surpluses such as Japan and Germany.

The system as it evolved in the 1960s provided a free ride for the United States, and it did not take long for the U.S. to abuse this privilege. Pursuing the goal of expanding the welfare state along with ever more active foreign military involvements, the U.S. could no longer fulfill the agreement of making foreign currencies exchangeable into gold. The gold shortage of the late 1940s and of the 1950s had turned into a dollar glut. World inflation began its rise.

Under the transformed system, the need for adaptation was unilaterally transferred to foreign currencies. The system, which had once foreseen the change of currency parities as the exemption rather than the rule, entered into a phase of high instability when fixing and re-fixing of foreign currencies to the dollar became increasingly necessary.

In 1971, with the so-called "Smithsonian agreement," a final attempt was made to save the old system when the U.S. devalued its currency against gold and a series of other currencies, but soon it became clear that the Bretton Woods System was no longer viable. In 1973, with the adoption of the new rule that each country could choose its own currency arrangement, the Bretton Woods System had come to an end.

Since then, the international monetary system is more like a "non-system" than a "system," or, more precisely, the international monetary system consists of a multitude of different currency arrangements ranging from currency unions and currency blocs to freely floating exchange rates with many other schemes in between such as unilateral fixed parities, managed floating or currency boards, and currency baskets.

As early as 1970, the members of the European Economic Community, which later transformed into an expanded European Union decided to prepare for the establishment of a common currency. In 1999, the euro as a common currency was instituted, first for banking transactions and then, on January 1, 2002, as the sole legal tender in the member countries of the euro area. Currently, twelve European countries take part in the European Monetary Union.

In terms of absolute valuation, the euro is not very much of a better currency than the U.S. dollar. In economic decision-making, however, things happen on the margin and decisions are taken based on relative valuations. Given similar degrees of liquidity and financial market sophistication, the euro has become increasingly attractive for currency diversification, particularly due to the favorable foreign investment position of the euro area compared to that of the United States.

After some initial weakness—probably due to fears that the new arrangement might fail—the euro has gained markedly in value against the U.S. dollar over the past three years. The American currency is facing a rival. An increasing number of central banks announced plans to shift part of their international reserves into the European currency. The dollar is still the currency of the U.S., but a sinking dollar is no longer just a problem for foreigners, it is also a problem for the United States.

In the past, the United States could count on having the monopoly of issuing the currency with the highest degree of liquidity and financial market integration. Although there were stronger currencies than the U.S. dollar, such as the Swiss currency or the Japanese yen and the German mark, these currencies could not rival the U.S. dollar because of their limited market share.

The existence of the euro has changed this constellation. As to its market size, the euro area is up to the U.S. dollar with the tendency of further augmenting this position when new members of the European Union will adopt the single currency, some non-EU countries will peg their exchange rates to that of the European monetary union or when oil producers will change to euros when pricing their exports.

For a while in the 1990s, it appeared as if the U.S. dollar could regain its unique position. The 1990s saw Japan—the apparent commercial threat to the U.S. in the 1980s—sink into a prolonged stagnation. Germany, the other major player in the international trade arena, began to entangle itself in the morass of a costly and economically ill-conceived unification process.

After the fall of the Soviet Union and the dissolution of the Soviet Empire, the United States had emerged as the sole global military might, and, so it seemed, also as the undisputed economic and political power with global influence and far-reaching dominance. On this basis, the role of the dollar as the major reserve currency and the main currency for international transactions experienced a second spring.

In the 1990s, the new global constellation could be interpreted as the replay of the endings of World War I and World War II with the United States emerging for a third time on top of the world. In the 1990s, the triad of global dominance seemed well in place of the United States: an unrivalled military might, a booming and innovative economy and the only issuer of a global currency.

Since the turn to the 21stcentury, however, these factors of dominance have increasingly come under challenge. The mania of the New Economy has ended. The U.S. economy still registers high growth rates due to unrelenting consumption spending, but regarding its productive capacity, it is in a precarious state, as it is indicated by the persistence of high trade deficits. The military power of the United States in its present form is largely inefficient with respect to the relation between financial costs and political outcome. Finally, and probably most important, the dollar no longer holds the monopoly of being the only available international reserve currency.

While after 1919 and after 1945, the United States emerged as the largest international creditor, the U.S. became the world's largest debtor nation in the course of the 1990s. Also in contrast to the earlier world wars, the economies of Russia, Western Europe, and South East Asia were not devastated when the Cold War ended. As to their productive capacity and financial resources, these regions are on an even footing with the United States or even are superior—at least concerning their foreign investment position.

The performance of the U.S. economy in the past century owes much to the role of the U.S. dollar in the international monetary system, and a large part of attaining this role was the result of the political and military supremacy that the United States had gained since 1919. In the 20th century, the position of the U.S. dollar in the world represented a major underpinning of the prosperity at home, which in turn fed back positively on the dollar's foreign role.

As long as fiat money rules, currencies, particularly the standing of the dollar and the euro, also reflect their value as a "political currency." They represent the degree of global political and financial power and in turn they provide the basis for attaining supremacy. They are tools in the hands of governments in the struggle for dominance.

With the dollar privilege passing, the U.S. confronts a radically different situation than in the past, and a tormenting process of changing the accustomed world-view is on the horizon. However, even as of now, the role of the euro as a rival to the U.S. dollar is rarely a subject of concern in the United States. It is the same with additional power shifts that are going on, all of them potentially reducing or even eliminating the dominant role of the U.S. currency in the world economy.

New alliances are emerging that neither politically nor militarily may be benign to the United States. Also, older powers have maintained their might. The Soviet Union has disappeared, but Russia remains a military power matching the nuclear overkill capacity of the United States. China is beyond any immediate control or persuasion by the United States.

The current U.S. President identified an "axis of evil", composed of countries with relatively modest economic, financial, and military clout—and situated far away from the shores of North America. But how about the other axis that is being formed, right at the U.S. border and stretching down the South American continent. The alliance between Fidel Castro of Cuba, Hugo Chavez of Venezuela, and Lula da Silva of Brazil? What about the constant rumors that Brazil strives to become a nuclear power? What about the deals that are being made between Latin American countries and China with the perspective of forming an economic symbiosis between China's need for food and oil, and this region's abundance of natural resources?

Then there is another axis that has come into existence in the past few years: the fraternization between the leaders of France, Germany and Russia. This entente covers the Euro-Asian continent, the geo-strategic heart of the world. It represents an alliance that is ready and capable of challenging U.S. influence in almost any aspect. What do these constellations imply for the role of the U.S. dollar?

Anytime soon one may expect that countries like Russia or Venezuela and other oil producers will turn to the euro as the currency for their oil exports. The move to the euro as a currency for international transactions and reserves during the past couple of years may represent only the initial stage of long-lasting process. Currency shifts of such proportions start slowly but over time they will gain more momentum. By now, the euro may have passed the threshold that had limited its global use. Once a means of payment is widely accepted, it becomes increasingly more attractive for a wider use.

There is a consensus currently among the major players in international finance, particularly among the relevant governments and central banks, that an abrupt fall of the dollar should be avoided. Japan, the largest foreign holder of U.S. assets, depends on U.S. protection in the face of the growing muscle of China in its region. China itself most likely would also like to avoid a dollar crash at least as long as it has not yet spent a considerable part of its dollar reserves in the effort to secure future supplies of food and oil around the world. The Europeans do not want a much weaker dollar because as of now it is mainly exports that are booming in the major economies of this region.

In contrast to the wishes, however, the fundamental geo-strategic trends call for a reduced global role of the dollar. While the temporary interests of the major global players are directed at maintaining dollar stability and thus avoiding a rapid demise of the dollar's role as a global currency, these desires are not congruent with the longer-term aspirations of the foreign players themselves.

The international monetary system has entered a stage when it becomes more difficult to manage a conflict that is getting out of control the longer it lasts. Inexorably, the constellation moves to a point where the potential loss will outweigh perceived benefits—not only for the holders of U.S. dollar reserves, but also for the United States itself.

Under such conditions, economic and financial decisions in the private sector are prone to be made under false premises. One must not forget that three of the most essential prices in the modern monetary economy are politically determined or manipulated prices: the oil price, interest rates, and the exchange rates. Taking away the interventions, the price that the U.S. pays for imported oil, and the price for money and credit should already be much higher than they currently are. At their present levels, they reflect a position of the U.S. dollar in the global system that can hardly be maintained.

Given the importance of these three prices for the economy and their potential direction, it is not difficult to assess the prospect for asset prices, particularly those of stocks, bonds, and real estate which all must come down when the fall of the dollar continues.

 

[FaGal]

Weak Dollar Getting Pummeled
www.reuters.com - March 10, 2005 - By Jamie McGeever


NEW YORK - The dollar weakened on Thursday against most currencies on concerns over global central bank reserve diversification, a widening U.S. trade deficit and tumbling bond prices.

"We're just in a general dollar downtrend right now," said Sophia Drossos, currency strategist at Morgan Stanley in New York.

Having slumped to multi-month lows against its major counterparts on Wednesday, the dollar suffered another blow on Thursday after Japanese Prime Minister Junichiro Koizumi told parliament that, generally speaking, diversity in foreign exchange reserves was a good thing.

The Ministry of Finance, which manages the world's largest foreign reserve holding of $840.6 billion, quickly clarified that it has no plans to shift funds out of the dollars.

But the specter of diversification was raised again, putting pressure on the dollar again, much like had happened after South Korea's central bank mentioned the subject in a report last month.

"Although MoF quickly suggested that they had no plans to change now, the suspicion lingers that more Asian central bank diversifiers are to appear," wrote Goldman Sachs analysts in a research note on Thursday.

Early morning in New York, the euro was up at $1.3414 and sterling was a touch stronger at $1.9253 .

The dollar was down 0.4 percent at 1.1542 Swiss francs and largely flat at 103.98 yen .

The yen came under some selling pressure after weak Japanese core machinery orders. The euro rose to 140.00 yen earlier in the session for the first time this year.

Sterling managed to take the Bank of England's decision to kept interest rates unchanged at 4.75 percent largely in its stride.

"The 'diversification' word really spooked the market ... but the bond market selloff is weighing on the dollar big time," said Samarjit Shankar, director of global strategy at Mellon Bank in Boston. "The bond market is really adding that extra piece of weight on the dollar right now."

The price of U.S. Treasuries have fallen steeply this week, pushing the yield on the 10-year note up to 4.57 percent, its highest level since July last year.

They're now down at around 4.487 percent on Thursday, but have convincingly broken up through key technical levels that were intact for several months.

TRADE DATA IN FOCUS

The rise in bond yields is sometimes seen as a supportive factor for a currency, as it offers investors a higher rate of return relative to other fixed income markets.

But not in this instance. Dross at Morgan Stanley suggests the market is worried about incipient inflation pressures, and although the Federal Reserve will certainly act to keep them from building, it might not act quick enough.

"It's not a scare, but it's a concern. Inflation is never good for a currency," she said.

The massive U.S. current account deficit hasn't been particularly good for the dollar either in recent years, and a reminder of this may come on Friday morning when the Commerce Department releases January's data.

The figures are expected to show a deficit of $56.5 billion, slightly wider than the previous month and what would be the second widest on record.

Data released on Thursday from two of the U.S.'s biggest trading partners suggest its deficit won't be narrowing significantly any time soon.

Germany, the euro zone's largest economy, appears to be coping with a strong currency, as it posted a trade surplus of 12.9 billion euros in January on record exports.

And China posted a surplus of $11 billion in the first two months of the year.

Meanwhile, U.S. weekly jobless claims, which rose an unexpectedly high 17,00 last week, kept the dollar under pressure too, analysts said. Economists had expected no change on the week.

 

[FaGal]

Dollar catching Asian flu
www.atimes.com - By Alan Boyd - March 11, 2005



SYDNEY - They may be telling a different story to money markets, but Asian central banks have been quietly switching their dollar holdings to regional currencies for at least three years, confirm global banking data. In a further, and so far the biggest, setback for the greenback's status as the undisputed reserve currency, Japan on Thursday said it might diversify its holdings, though monetary chiefs later sought to play down the prospect. South Korea rattled currency traders with a similar announcement late last month, followed by a similar backtrack.

China, India, Thailand, Indonesia, Taiwan, the Philippines and Hong Kong have already started a sell-off, despite a diplomatic show of solidarity for the greenback that is prudently designed to prevent a crisis of confidence in exchange systems. The likelihood is that much of this outflow will never return to US dollars as economic interdependence within East Asia and the widening shadow cast by China's trading conglomerates are slowly transforming the traditional market structure.

The Bank of International Settlements (BIS), which acts as a bank for the world's central banks, has just released a study showing that the ratio of dollar deposits held in Asian offshore reserves declined to 67% in September, down from 81% in the third quarter of 2001. India was the biggest seller, reducing its dollar assets from 68% of total reserves to just 43%. China, which directly links the yuan to the dollar and is under US pressure to allow a freer movement of its currency, trimmed the dollar share from 83% to 68%.

This shift conforms with global trends as central banks seek a buffer from the burgeoning US trade and budget deficits. A separate survey by European-based Central Banking Publications found that 29 of 65 nations surveyed were cutting back on the dollar and 39 were buying more euros. America's annual budget deficit of US$500 billion is largely funded by Asian purchases of US government bonds, mostly from China and Japan. The US trade and current account deficits are in a similar plight: it took $530 billion of foreign capital to finance US imports in 2003 and $650 billion last year. Projections for 2005 range up to $800 billion.

Export-led Asian central banks have been accumulating dollars for two decades or more to keep their own currencies competitive. Japan alone has stockpiled $841 billion of reserves to stop the yen from over-valuing as it searches for an economic stimulus. If the central banks pull out, the US may find it hard to borrow the cash it needs to keep the wheels of government turning. The conventional wisdom is that Asia is in too deep to quit, as to do so would invite huge exchange losses.

But some monetary chiefs have already decided there are greater risks in staying in bond markets as rock-bottom US interest rates - still only moderately above the 45-year low reached last year - have dragged yields to unappealing levels. China became a net seller of US government bonds in 2002, shifting much of its reserves to euros, Australian and Canadian dollars. Taiwan left the securities market in the same year and Hong Kong sharply reduced its exposure.

Currency market trading has also had a shift of emphasis, with China's yuan emerging as a potential regional substitute, albeit in the distant future. While this reflects the changing structure of East Asian trade, it is also an indicator of the increasing maturity of Asian exchange activity. According to the BIS data, turnover of the yuan in Asia has surged by 530% since the third quarter of 2001, compared with more restrained growth of 48% by the dollar, 49% by the euro and 93% by the pound sterling.

Trading in India's rupee grew by 114% in the same period and the yen registered 35% growth. The big losers were the Hong Kong dollar (21%) and the Singapore dollar (32%), reflecting the declining economic fundamentals of the two trading hubs. It is a similar picture with foreign exchange derivatives. Trading in yuan derivatives has soared by a staggering 272,355% in the past three years; next best was the Thai baht, with a growth of 2,858%. Dollar trading in derivatives rose by a mere 94% in this time, with euro trading up by 95%, pound trading by 126% and the yen trading by 58%.

The yuan data were calculated from a very low base in previous years and the BIS cautioned that the Chinese currency still had a miniscule influence on trade, due to tight domestic curbs on portfolio funds: it comprises only about 1% of the overall ratio of forex turnover to gross trade flows.

Movements in the dollar/yen spot rate remain the prime influence on Asian currencies and more than 90% of all external trade is still conducted directly in dollars. Only about 12% of holdings are believed to be in euros. Nonetheless, the yuan is converging with the yen and the Korean won and already exerts a strong pull on spot rates for the Hong Kong and Taiwan currencies, possibly hinting at a significant unrecorded trade in the Chinese currency.

While Asian currencies were expected to align themselves with US currency after the 1997-98 regional financial crisis in a de facto dollar bloc, the BIS said there is little evidence that this has occurred, despite the dollar links adopted by China and Malaysia. Rather, it appears that Asian currencies have become more elastic and their central bankers increasingly determined to pursue an independent course as financial markets gain greater depth and begin to more accurately mirror the region's importance to world trade.

However, it remains to be seen how much leash they will be given before being reined in by the nervous US Federal Reserve. The Bank of Korea, which has $200 billion of reserves and $69 billion of US Treasury debt, tentatively announced last month that some might be switched to other currencies, then quickly backtracked when the won surged to a seven-year high in global currency markets. The bank said the proposal, first floated in a parliamentary debate, was not a statement of intent.

Japanese Prime Minister Junichiro Koizumi triggered a similar frenzy after suggesting on Thursday that his country "in general" might need to make an "overall judgment" on diversifying its foreign reserves. The dollar had fallen to a nine-week low against the euro by the time a Finance Ministry official came out with a "clarification". It was merely a topic for discussion, not policy intent, he said. "We are taking a very cautious stance on how to manage foreign reserves, because the impact would be big," Finance Minister Sadakazu Tanigaki told reporters.

Big, indeed, as Japan has the largest dollar reserves in the world. Almost all Asian currencies surged vis-a-vis the dollar following Koizumi's unexpected statement. The Indian rupee rose to 43.56 in late morning deals, sharply higher than Wednesday's close of 43.64. The dollar went down against the Indonesian rupiah by 17 points at 12 noon on Thursday from Wednesday's closing value of 9,375.00, while the South Korean won went up by 0.1% against the dollar, provoking the Ministry of Finance and Economy to say that it was contemplating to intervene in the foreign exchange market.

 

[FaGal]

Talk in Japan Shakes Dollar and Treasuries
By JONATHAN FUERBRINGER
New York times

The dollar fell and Treasury yields rose yesterday after the Japanese prime minister made remarks that suggested the country's central bank could be shifting some of its huge reserves out of dollars and Treasury securities.

Japan's Ministry of Finance quickly denied there was any change, a statement that limited the fall of the dollar and bolstered Treasury prices. But the volatile reactions in the markets underscore that the dollar, already under pressure from the drag of the United States' record current-account deficit, has another issue that could weigh on it in the future.

"There is a heightened sensitivity to anything that smacks of reserve reallocation," said Robert Sinche, global head of currency strategy at Bank of America.

Indeed, the comments from the prime minister, Junichiro Koizumi, came less than a month after reports, later denied, that the central bank of South Korea was planning to move some of its reserve holdings out of dollars and into other currencies. Even after the denial, those reports roiled the currency markets, and the dollar fell 1.5 percent against the euro and 1.4 percent against the yen on Feb. 22.

Yesterday, the dollar slipped as much as 0.4 percent against the euro and 0.1 percent against the yen. Late in trading, the euro was valued at $1.3424, with the dollar down 0.1 percent, and the dollar was up 0.2 percent against the yen, at 104.02 yen. The yield on the 10-year Treasury note, which jumped to 4.56 percent, finished the day at 4.50 percent, down from 4.52 percent on Wednesday.

The suggestion of diversification from dollars has put the focus on the role of Asian central banks in the performance of the dollar and Treasury securities.

China, Japan, Hong Kong, South Korea and Taiwan together hold 56 percent of the Treasury securities owned by foreigners. Many of those securities are held by their central banks. So any significant shift of their reserves out of dollars could spell trouble for both the American currency and the bond market.

Steven Englander, chief foreign exchange strategist for the Americas at Barclays Capital, said he did not expect such a shift "in a dramatic way" by these Asian central banks. But, he said, "everyone is thinking about it and that will weigh on the foreign exchange and bond markets."

Alan Greenspan, the chairman of the Federal Reserve, has said a shift out of dollars by foreign central banks and foreign private investors should be expected at some time, although he has not said it would necessarily be disruptive.

In a speech to the Council on Foreign Relations yesterday, Mr. Greenspan said that official and private foreign investors "will at some point choose greater balance in their asset accumulation."

Another emerging issue is what happens when China, which is being pressured by the United States and other countries to allow its currency to trade freely, moves away from pegging the yuan to the dollar.

To maintain the present peg, China has to sell yuan for dollars as the American currency weakens, building up huge dollar reserves, most of which are invested in Treasuries. Other Asian countries, including Japan and South Korea, have done the same so that their currencies stay competitive with the yuan.

Many analysts expect a small move toward delinking in the next 12 months that would allow for an increase of 3 percent to 5 percent in the value of the yuan. This could mean that China and other Asian countries would have less need to build up dollar reserves and, therefore, less need to invest in United States Treasury securities.

If this led to lower dollar reserves and a decline in central bank investments in the Treasury market, some analysts argue that the impact on the American market would depend on how attractive it would be at that time to invest in the United States.

If inflation was contained, economic growth was steady and the current-account and federal budget deficits were improving, attracting private money to replace a slowdown in investment by central banks would not be difficult. That would reduce any downward pressure on the dollar and upward pressure on Treasury yields.

Mr. Englander said that "a lot depends on how China delinks."

"The odds are it's going to be a mini-delink, rather than a maxi-delink," he said, which would minimize the impact on the dollar and the Treasury market.

Others argue that central banks would not want to do anything precipitous because that would be bad for global financial markets and could hurt the competitiveness of their own currencies.

"They don't want to disrupt the markets," said William Davison, head of the Hartford's fixed-income mutual funds.

Mr. Sinche at Bank of America said it was in China's interest to move slowly in ending the yuan's link to the dollar, and that would mean that any other central banks in Asia that want to shift reserves out of the dollar would have to move slowly.

Mr. Sinche also played down Mr. Koizumi's remarks as an indication of a new plan for reserves.

He said the comments, which were made before a parliamentary committee, were not an answer to a question on whether central bank reserves should be shifted, but regarded what should be done about the unrealized loss Japan's central bank has on its reserves. Since the loss is a result of a decline in the value of the dollar, an obvious political answer is to mention moving reserves out of dollars.

Mr. Koizumi told Japanese lawmakers that as a general rule "it's necessary to diversify the investment destinations," according to Bloomberg News. He added that he also believed it was important to consider "what's profitable and what's stable" when deciding where to hold foreign reserves.

Finance Ministry officials responded quickly to counter Mr. Koizumi's remarks, saying they had no plans to shift the reserves into other currencies. "At present, we have no plans to change the currency makeup" of Japan's foreign exchange reserves, Koichi Hosokawa, a vice minister of finance, told reporters.

Kamal Sharma, senior currency strategist at Dresdner Kleinwort Wasserstein in London, said, "I personally don't believe we'll ever get to a point where Asian central banks will not hold the dollar as the major international reserve currency."

Todd Zaun contributed reporting from Tokyo for this article.

 

[FaGal]

China, Greenspan rub salt in dollar wound
www.atimes.com - March 12, 2005



The US dollar was struggling near a two-month low against the euro on Friday as the market braced for fresh trade data that were likely to show a further widening of the trade gap. As if this weren't trouble enough for the besieged greenback, US Federal Reserve chairman Alan Greenspan stirred up the market Thursday night saying foreign investors would reduce their US asset holdings at some point, while new findings came to light that China is indeed doing so.

Saying he is not "overly" concerned about the record US trade gap or heavy consumer debt, Greenspan said the budget deficit gives him the shivers. The US current account deficit widened to a record US$164.7 billion from July through September, the most recent figures available, equivalent to 5.6% of gross domestic product (GDP). "Our current account deficit and household debt burdens do not strike me as overly worrisome, but that is certainly not the case for our fiscal deficit," Greenspan told the Council on Foreign Relations in New York. "Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability, because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances."

According to the high priest of finance, international investors have only modestly shifted their portfolios away from dollar assets so far. But he warned that they might at some point decide their portfolios are too dollar-centric, ominously adding that if the dollar keeps dropping, foreign exporters may start looking elsewhere.

Greenspan's comments came close on the heels of Japanese Prime Minister Junichiro Koizumi's startling remark on Thursday that Japan needs to diversify its foreign-exchange reserves, reviving fears of Asian central banks cutting their giant dollar reserves. Any move by Japan, which has the largest foreign-exchange reserve in the world ($840 billion), to reduce its dollar holdings could be disastrous for the greenback. The dollar has already been dropping against the yen for four straight weeks now. Koizumi's statement, though later qualified by his finance minister, will only prolong the agony.

US dollars accounted for 63.8% of the world's currency reserves at the end of 2003, down from 66.9% two years earlier, according to International Monetary Fund (IMF) figures released last April. A survey this January commissioned by the Royal Bank of Scotland Plc and conducted by London-based Central Banking Publications Ltd showed that central banks across the world were boosting euro holdings. Almost 70% of the 56 central banks surveyed said they had increased exposure to the euro.

Citing a more recent finding, Asia Times Online reported on Thursday (Dollar catching Asian flu) that Asian central banks have been quietly switching their dollar holdings to regional currencies for at least three years now. A study by the Bank of International Settlements (BIS), which acts as a bank for the world's central banks, shows that the ratio of dollar deposits held in Asian offshore reserves declined to 67% in September, down from 81% in the third quarter of 2001. India was the biggest seller, reducing its dollar assets from 68% of total reserves to just 43%. China, which directly links the yuan to the dollar and is under US pressure to allow a freer movement of its currency, trimmed the dollar share from 83% to 68% over the same period.

Bloomberg reported on Friday that according to an estimate by Lehman Brothers Holdings Inc, China's central bank has been cutting the share of its currency reserves held in dollars and replenishing them with euros. Some 76% of China's reserves were in dollars last year, down from 82% in 2003, said Lehman, the fifth-largest US securities firm.

There has been debate in China on whether it at all needs such a huge foreign-exchange reserve. China's forex chief, Guo Shuqing, a member of the National Committee of the China Political Consultative Conference (CPCC) and director general of the State Administration for Foreign Exchange Management (SAFEM), said that as an item of international payments, the growth of the foreign-exchange reserve is the result of the macroeconomic operation, but not the objective China is particularly pursuing. An adequate foreign-exchange reserve is favorable for payment abilities, comprehensive national power and creditworthiness, reducing risks of reform and safeguarding financial security, he said.

Guo pointed out, however, that excessive growth could be detrimental. In a rare and stern warning against the inflow of speculative funds, or "hot money", in the name of investment, he told local governments not to lure foreign investment "haphazardly". Regulators have been playing down the amount and impact of hot money over the past year, but Guo said China might see "no end of trouble in the future" unless local governments are acutely aware of risk mitigation in soaking in foreign funds.

"China pays great attention to speculative funds," Guo said in an interview with Xinhua on the sidelines of the annual session of the National Committee of the Chinese People's Political Consultative Conference, China's top advisory body. "Foreign-exchange administration departments and other macroeconomic departments are investigating the issue and will punish illegal activities severely."

China's foreign-exchange reserve added as much as $206.7 billion last year alone. Guo said the overall inflow of capital is "normal and legal" and reflects the "market scenario", but there are also some "worrisome" problems. "Fake foreign investment" is actually being used to purchase yuan-denominated assets and commercial housing on speculative purpose, he noted. Hot money has pushed housing prices to a very high level, making cities look "prosperous" but doing no good to the investment climate, as it leads to higher living and business costs. Typically, this means great risks for local financial institutions, enterprises and even individuals. When the real-estate bubble bursts, they will suffer from huge losses, Guo said. Hot money has also sneaked into China under capital accounts or based on no real trade, he claimed.

Guo said China's foreign-exchange reserve, second only to Japan's, is quite enough to pay the country's debts. But its debts in foreign currency may snowball to an amount that engenders "systematic risks". He revealed that newly added foreign-exchange reserves last year include $60.6 billion in foreign direct investment, $32 billion in trade surplus, $30 billion from foreign-exchange clearing under the account of imports and exports by enterprises, $35 billion in foreign debts, more than $10 billion in service trade surplus, $30 billion in individual asset transfer and earnings being brought about, and more than $10 billion in securities investment, among others.

Mountains of foreign-exchange reserves have long been an excuse used by some countries, especially the United States, to demand appreciation of the yuan, which now floats against the US dollar within a narrow band. But Premier Wen Jiabao reiterated in his government work report last week that China would keep the yuan "basically stable".

 

[FaGal]

March 12, 2005
Trade Gap Widens on Record Imports
By ELIZABETH BECKER

WASHINGTON, March 11 - America's appetite for foreign imports broke all records in January, reaching $159.1 billion and contributing to a monthly trade deficit that is the second highest on record. The $58.3 billion trade deficit defied predictions that a weakened dollar and lower oil prices would narrow the United States' trade gap.

Instead, the Commerce Department said on Friday that American consumers continued to buy foreign-made goods at an avid pace, raising the trade deficit 4.5 percent from $55.7 billion in December. January's trade figures included a 75 percent surge in Chinese textile and apparel shipments, reflecting the end to global quotas and the beginning of what some experts see as a future of China supplying as much as 70 percent of the United States textile and apparel market.

The Bush administration said on Friday that the latest trade figures should be seen as testimony to the strength of the American economy and its role as an engine of global growth.

"We view these figures as an affirmation that we're growing faster than our trading partners by as much as 2 percent, and we need them to take steps so they can grow and buy our products," Rob Nichols, the spokesman for Treasury Secretary John W. Snow, said in an interview.

But Representative Benjamin L. Cardin of Maryland, the ranking Democrat on the trade subcommittee of the House Ways and Means Committee, was far less sanguine. He said he would push for immediate action in Congress, beginning with safeguards to limit imports of textile goods from China. The limits, which had been approved by the administration, were blocked by a court injunction.

"We are obviously in a free fall here, with deficit after deficit, and it just cries out for action," Mr. Cardin said in an interview.

China, however, is also pushing along the global economy, spurring growth especially in Asia.

Yet while most other industrialized countries enjoy a trade surplus with China, the United States had a deficit of $15.3 billion in January, the largest with a single country on record. China accounted for a fourth of the trade shortfall in January. Among other major trading partners, the United States had a $6.2 billion deficit with Japan and $6.1 billion with Canada.

The imbalance with China has led to increasingly loud accusations that Beijing engages in unfair trading practices, from hidden subsidies to undervaluing its currency.

Representative Clay Shaw, the Republican from Florida who heads the trade subcommittee of the House Ways and Means Committee, said he planned to hold hearings on the trading practices of China.

As bad as the trade figures were for January, some analysts say the imbalance will grow.

"Most ominously, matters should get worse because of the jump in oil prices in February," said Ashraf Laidi, the chief currency analyst at the M. G. Financial Group in New York, who predicted that next month's deficit could hit $62 billion.

Analysts had hoped that a drop in the price of imported oil in January would help diminish the trade imbalance. The Commerce Department said the average price of imported oil was $35.35 a barrel in January, the lowest since July.

The weakened dollar was also expected to spur export growth, which it did by 0.4 percent, but not enough to offset the import growth of 1.9 percent.

The dollar continued to weaken on Friday, initially falling against the euro and the yen after the January trade figures were announced. It later recovered, and the dollar closed down 0.2 percent with the euro valued at $1.3453, compared with $1.3424 Thursday. Against the yen, the dollar was off 0.1 percent for the day, at 103.88 yen.

News of the deficit also weighed on the bond markets, where investors are worried that a weaker dollar might discourage foreign investment in Treasury securities. The yield on the Treasury's 10-year note rose to 4.54 percent, from 4.47 percent Thursday. That is the highest yield since July. The price of the 10-year note, which moves in the opposite direction, fell 19/32, to 95 22/32.

Joel L. Naroff, president of Naroff Economic Advisers, said there were several reasons the export figures were disappointing. Like the administration, he cited the fact that Europe and Japan were buying fewer goods because of slow economic growth. But Mr. Naroff said American companies seemed to be raising the prices of their goods for exports rather than taking advantage of the weaker dollar to make their products more attractive to foreign buyers.

With no relief in sight, some analysts are suggesting there are deeper problems behind the trade deficit.

Thea M. Lea, the senior trade adviser for the A.F.L.-C.I.O., said that the administration should develop policies that encourage and reward companies for producing in the United States, as does China, Japan, and European nations.

"To be a cutting-edge nation in this global economy," Ms. Lea said, "we need to take steps to shape taxes, improve research, examine trade policy and improve education to make it possible for our companies and our workers to succeed in the global marketplace."

 

[FaGal]

The world turns the US dollar down to the benefit of the euro
english.pravda.ru - March 12, 2005



Central banks in several Asian states considerably reduced the dollar constituent of their reserves


The US currency has been balancing on the verge of disaster these days. Several countries have announced their intention to diversify their dollar reserves this week. Central banks have decided to add some euro cash to their financial sources.

Another stage of the American currency decline touched upon Russia as well. The dollar value has been declining against the Russian ruble since February 9th, 2005. The US dollar costs 27.46 rubles at the moment in Russia in comparison with 28.18 rubles per dollar just a month ago.

This is the result of another wave of the anti-dollar hysteria. The story started with a message from the Basel-based Bank for International Settlements. It was said that central banks in several Asian states considerably reduced the dollar constituent of their reserves over the recent several years. Banks of China and India, for example, were rather emphatic about such a decision of theirs. The dollar funds of those banks, BIS said, made up 81 percent of their total reserves in 2001. The dollar index dropped to 67 percent by September of 2004. The most considerable reduction of dollar reserves was registered in India: they dropped from 68 to 43 percent from 2001 to 2004.

Market specialists realized that the dollar dependence of the dynamic Asian region was exaggerated. The new concept later resulted in a very active promotion of the European currency. The European Central Bank said that it was going to raise its basic rate (2.25 percent currently) to create "the image of the euro" as a more attractive and reliable world currency. The statement from the bank gave an additional incentive to the growth of the euro.

The dollar started plummeting. The slide was intensified even further after the statement from the Japanese Prime Minister Koizumi. The minister told the national parliament that it was necessary to consider the issue regarding the diversification of Japanese currency reserves. Spokespeople for the Finance Ministry of Japan assured the troubled market a bit later that Japan would not be enlarging its euro-assets: the dollar demise was suspended. Nevertheless, the dollar rate has already stepped over the psychologically important level of 1.34 dollars per euro.

The future of the American currency can hardly be viewed as promising, though. The USA is to publish the balance of trade data in the near future. Specialists believe that they can hardly be better than the previous ones. "The liquidation of the dual American deficit - of the balance of trade and payment - is a matter of distant future. Oil prices are growing, and they have nothing to cut deficit on," FIBO analyst, Rushan Zeinetdinov said.

Europe and Japan taught a good lesson to the States. The US Federal Reserve System is taking measures to stabilize the national currency. European and Asian specialists, however, believe that those measures are not sufficient. Raising the FRS rate by only 0.25 percent cannot stop the ongoing decline of the US dollar. Europe is apparently tired of the never-ending financial fight with the USA and decided to play the game of the strong euro, although it is definitely not good for European exporters. The strong euro might eventually undermine the global reputation of the dollar as the major world currency.

Specialists believe that the information of the Bank for International Settlements can be considered as another proof of the general trend to turn the dollar down as the key currency for saving deposits in.

 

[FaGal]

New York Times
March 12, 2005
Trade Gap Widens on Record Imports
By ELIZABETH BECKER

WASHINGTON, March 11 - America's appetite for foreign imports broke all records in January, reaching $159.1 billion and contributing to a monthly trade deficit that is the second highest on record. The $58.3 billion trade deficit defied predictions that a weakened dollar and lower oil prices would narrow the United States' trade gap.

Instead, the Commerce Department said on Friday that American consumers continued to buy foreign-made goods at an avid pace, raising the trade deficit 4.5 percent from $55.7 billion in December. January's trade figures included a 75 percent surge in Chinese textile and apparel shipments, reflecting the end to global quotas and the beginning of what some experts see as a future of China supplying as much as 70 percent of the United States textile and apparel market.

The Bush administration said on Friday that the latest trade figures should be seen as testimony to the strength of the American economy and its role as an engine of global growth.

"We view these figures as an affirmation that we're growing faster than our trading partners by as much as 2 percent, and we need them to take steps so they can grow and buy our products," Rob Nichols, the spokesman for Treasury Secretary John W. Snow, said in an interview.

But Representative Benjamin L. Cardin of Maryland, the ranking Democrat on the trade subcommittee of the House Ways and Means Committee, was far less sanguine. He said he would push for immediate action in Congress, beginning with safeguards to limit imports of textile goods from China. The limits, which had been approved by the administration, were blocked by a court injunction.

"We are obviously in a free fall here, with deficit after deficit, and it just cries out for action," Mr. Cardin said in an interview.

China, however, is also pushing along the global economy, spurring growth especially in Asia.

Yet while most other industrialized countries enjoy a trade surplus with China, the United States had a deficit of $15.3 billion in January, the largest with a single country on record. China accounted for a fourth of the trade shortfall in January. Among other major trading partners, the United States had a $6.2 billion deficit with Japan and $6.1 billion with Canada.

The imbalance with China has led to increasingly loud accusations that Beijing engages in unfair trading practices, from hidden subsidies to undervaluing its currency.

Representative Clay Shaw, the Republican from Florida who heads the trade subcommittee of the House Ways and Means Committee, said he planned to hold hearings on the trading practices of China.

As bad as the trade figures were for January, some analysts say the imbalance will grow.

"Most ominously, matters should get worse because of the jump in oil prices in February," said Ashraf Laidi, the chief currency analyst at the M. G. Financial Group in New York, who predicted that next month's deficit could hit $62 billion.

Analysts had hoped that a drop in the price of imported oil in January would help diminish the trade imbalance. The Commerce Department said the average price of imported oil was $35.35 a barrel in January, the lowest since July.

The weakened dollar was also expected to spur export growth, which it did by 0.4 percent, but not enough to offset the import growth of 1.9 percent.

The dollar continued to weaken on Friday, initially falling against the euro and the yen after the January trade figures were announced. It later recovered, and the dollar closed down 0.2 percent with the euro valued at $1.3453, compared with $1.3424 Thursday. Against the yen, the dollar was off 0.1 percent for the day, at 103.88 yen.

News of the deficit also weighed on the bond markets, where investors are worried that a weaker dollar might discourage foreign investment in Treasury securities. The yield on the Treasury's 10-year note rose to 4.54 percent, from 4.47 percent Thursday. That is the highest yield since July. The price of the 10-year note, which moves in the opposite direction, fell 19/32, to 95 22/32.

Joel L. Naroff, president of Naroff Economic Advisers, said there were several reasons the export figures were disappointing. Like the administration, he cited the fact that Europe and Japan were buying fewer goods because of slow economic growth. But Mr. Naroff said American companies seemed to be raising the prices of their goods for exports rather than taking advantage of the weaker dollar to make their products more attractive to foreign buyers.

With no relief in sight, some analysts are suggesting there are deeper problems behind the trade deficit.

Thea M. Lea, the senior trade adviser for the A.F.L.-C.I.O., said that the administration should develop policies that encourage and reward companies for producing in the United States, as does China, Japan, and European nations.

"To be a cutting-edge nation in this global economy," Ms. Lea said, "we need to take steps to shape taxes, improve research, examine trade policy and improve education to make it possible for our companies and our workers to succeed in the global marketplace."

 

[FaGal]

New York Times
March 12, 2005
EDITORIAL
Harbingers of Harder Times

At $58.3 billion, the United States' trade deficit for January exceeded everyone's worst expectations. The huge mismatch reported yesterday between imports and exports just missed breaking the monthly record, set last November, and is all the more remarkable for occurring in a month when the price of oil actually declined.

The trade deficit is the single most important factor in measuring the extent to which the nation lives beyond its means. As such, it should force us to own up to the dangers of rampant deficit spending. But the White House is showing no sign of action, as if doing nothing might make the problem smaller.

In response to yesterday's trade deficit figure, the dollar weakened against the euro and the yen, and traders predicted further declines in the weeks and months ahead. That, in turn, contributed to a drop in stock and bond prices. Such gyrations are certainly not unprecedented. The dollar has been on a downward trajectory for three straight years and was going into a fresh skid even before the latest trade deficit figure was released.

That slump was largely in response to recent reports, some later denied, that Asian central bankers may begin moving their huge dollar holdings into other currencies. That would mean higher interest rates in the United States because the government would need to sweeten Treasury yields, and higher interest rates imply further declines in stock and bond prices. A declining dollar also risks higher inflation; more expensive imports give domestic producers an excuse to raise prices.

There may be more trouble to come. Next week, the government will release figures showing how much capital flowed into the United States from abroad in January. Those numbers were down by nearly one-third in December. If next week's report is disappointing, the logical response from the currency markets would be to sell dollars - again raising the threat of all the possible side effects.

Since the trade deficit is intimately connected to the federal budget deficit, the best way to reduce the trade imbalance is to reduce the budget gap. But President Bush is calling for more tax cuts, politically implausible spending cuts and costly Social Security privatization. Both parties in Congress must address the twin trade and budget deficits - or risk being forced to do so by events beyond their control.

 

[FaGal]

New York Times
March 13, 2005
Savings: Lots of Talk, but Few Dollars
By EDMUND L. ANDREWS

WASHINGTON

THERE are moments when a particular word acquires such a compelling grip on the political imagination that it can be used as cover for all kinds of agendas.

The big word is not "bust" or "bankrupt," even though President Bush utters them often as he barnstorms the country to whip up a sense of crisis about Social Security. The word that is really catching on in Washington is "savings." Democrats say that Mr. Bush has greatly depleted national savings with his tax cuts and soaring fiscal deficits. Mr. Bush invokes the need for savings to justify more tax incentives as well as his plan to overhaul Social Security.

Without a doubt, the dearth of savings poses serious concerns. Economic growth requires investment, and investment requires savings. Because Americans consume far more than they produce, the country is now borrowing more than $600 billion a year from foreigners - almost 6 percent of the gross domestic product. Put another way, the United States is tapping the savings of almost every other part of the world - including relatively poor countries. At some point, those bills will come due and constrain growth for many years.

Another big concern is that millions of aging baby boomers may not have stashed away enough for their retirements. Only about half of all workers participate in a pension plan with their current employer, according to the Center for Retirement Research at Boston College. Less than one-quarter of workers are covered by a traditional defined-benefit retirement plan. And savings through individual retirement accounts and 401(k) plans have been meager: in 2001, the average worker in the 55-to-64 age group had a balance of only $42,000.

But if the problem is clear, the proposed solutions are not.

Start with President Bush's plan to overhaul Social Security by letting workers divert some of their payroll taxes to personal retirement accounts. Treasury Secretary John W. Snow says in his stump speech that the accounts would not only enable younger workers to "build a nest egg," but would also help the nation "create a larger pool of savings."

But at least for the next few decades, that last assertion would not be true. For every dollar a person contributed to his nest egg, the government would reduce at least a dollar in traditional Social Security benefits. At best, savings would simply be transferred from government to individual accounts.

More likely, the government would have to borrow trillions of dollars over the next several decades to pay full benefits to retirees who earned them under today's system.

"Moving to a forced savings account technically does not materially affect net national savings," Alan Greenspan, chairman of the Federal Reserve, said last month. "It merely moves savings from the government account to a private account." Mr. Greenspan is a supporter of personal accounts.

Savings are also at the heart of the battle over tax cuts.

For the third year in a row, Mr. Bush is proposing a big expansion of tax incentives for savings accounts. The most controversial idea is to create "lifetime savings accounts," into which individuals could contribute up to $5,000 a year and earn tax-free investment income.

The twist of these accounts is that people would not have to wait until retirement to withdraw money. They could do so at any time and for any reason. But economists are divided over whether tax-advantaged savings accounts - even traditional retirement accounts - actually increase national savings.

Personal savings have declined fairly steadily for more than two decades, even as tax incentives for savings have proliferated. According to a recent analysis by Elizabeth Bell, Adam Carasso and C. Eugene Steuerle at the Urban Institute, the federal government now spends more on tax breaks for retirement savings than Americans actually save.

Tax breaks for retirement programs cost $112 billion in 2004, according to the Office of Management and Budget. Personal savings - for any purpose - totaled only $100.8 billion, according to estimates by the Federal Reserve.

The issue isn't whether tax incentives prompt people to put money into 401(k) plans - the answer is clearly yes. The question is whether people actually save more, or whether they simply shelter income they were going to save anyway.

"The government does not really subsidize saving," wrote Mr. Steuerle and his colleagues in a paper published in the journal Tax Notes. "It subsidizes deposits, which can then be borrowed for consumption."

By contrast, one of the hottest ideas in Washington grows out of new research on the behavior of savers. Recent studies by researchers at the Wharton School of Business and Harvard showed that employee contributions to 401(k) plans soared at companies that automatically enrolled employees and gave them a chance to opt out.

Representative Rob Portman, Republican of Ohio and a senior member of the House Ways and Means Committee, is expected to introduce a bill next week with Representative Benjamin L. Cardin, Democrat of Maryland, that would call for automatic enrollment of workers in 401(k) plans.

But there is an even more curious turn to the politics of savings. A growing number of thoughtful analysts, Democrat and Republican alike, contend that today's tax incentives are misdirected at those who already have a strong propensity to save: people with high incomes who can spare the money.

Yet the tax incentive for savings that the Bush administration would scrap happens to be the one aimed precisely at low-income families.

Peter Orszag and William G. Gale of the Brookings Institution note that tax deductions for contributions to a retirement account provide a 35 percent deduction for people in the top tax brackets but only a 10 percent deduction for those in the lowest bracket. For tens of millions of low-income families, who owe no federal income tax at all, the tax benefit is zero.

To address that issue, Mr. Bush's 2001 tax cuts included a "saver's credit" aimed at low-income families. A family with an adjusted gross income below $30,000 is entitled to a 50 percent tax credit for retirement contributions of up to $2,000 a year.

A $1,000 credit would reduce a family's tax bill by $1,000. By contrast, a $1,000 deduction against income would save a person in the 10 percent bracket $100 at most.

Mr. Portman is so enthusiastic about the saver's credit that he wants to make it refundable, so families who don't owe any federal taxes could still get a check from the Internal Revenue Service.

But for reasons that are unclear, the Bush administration apparently wants to scrap the saver's credit entirely. Even as it pushes Congress to make almost all its other tax cuts permanent, the administration is not proposing to renew the credit when it expires in 2006. Treasury Department officials gave little explanation of why they did not propose a continuation of the credit, saying only that they had "pared down" their list of tax proposals while waiting for recommendations from President Bush's advisory panel on tax reform.

"The core of the president's priorities are in there, but a lot of other things aren't," said Taylor Griffin, a spokesman for the department. "We wanted to give the tax panel as much flexibility as possible."

The credit's fate can't be a matter of cost: it costs $1.2 billion a year. That isn't even a rounding error in Mr. Bush's agenda to permanently extend all his tax cuts for a total of $1.5 trillion over 10 years.

Maybe it's time to increase savings without spending so much money.

 

[FaGal]

This article appears in the March 18, 2005 issue of Executive Intelligence Review.
Soaring Commodity Prices
Show Threat to Dollar System
by Lothar Komp

More than three decades after President Nixon dismantled the Bretton Woods monetary order, global financial markets are in an untenable situation. At the heart of the issue is the U.S. dollar, still the most important reserve currency in the world. The dollar is the currency upon which the interest rates of hundreds of billions of dollars worth of loans, mortgage credits, and financial derivatives are pegged, and with which practically all raw material purchases are transacted.

The transformation of the United States from a prominent industrial nation, into a consumer society dependent on foreign manufacturers, has triggered an unprecedented flood of U.S. currency into Asian central banks. As a result of the enormous quantities of American debt holdings which accumulated in foreign countries, by virtue of export surpluses and foreign exchange market interventions abroad, merely a press release expressing market fears, by an official in Japan, South Korea, or China, is enough to make the dollar's tumble continue.

Additional turbulence results from the highly inflationary blow-up in the raw materials markets. Over the course of time, these markets have fallen almost completely under the control of private, speculative interests. As a result of central banks pumping liquidity into the financial system, and the control of raw commodity prices by futures exchanges in London and New York, the prices for a wide spectrum of raw materials—from crude oil to copper and iron ore—have been forced to stratospheric levels.

On March 8, the Reuters CRB index (Commodity Research Bureau), which covers 17 of the most important raw materials, stood at its highest level in more than 24 years. In February alone, the index rose around 7.1%, more than in any other month in the last 21 years. The copper prices at the London Metal Exchange (LME) shot to a 19-year high on March 8. On the same day, the price of oil, which only six years ago stood at $10 per barrel, again broke through $55-mark. Simultaneously, the currencies of raw-material-rich countries such as Australia, Canada, and South Africa rose to several-year highs in relation to the U.S. dollar. A good measure of the disintegration of dollar's worth is the price of gold, which on March 8 rose $6, to $440 per fine ounce. Two days later, the former Australian prime minister Paul Keating warned of preparing for a "catastrophic crash" of the dollar and the outbreak of a "panic."

The disintegration of the global financial system has already progressed too far for any quick fix to correct it. The only solution exists in the New Bretton Woods, which would not only re-establish currency regulations, as demanded by LaRouche, but in addition, introduce bankruptcy procedures for existing financial commitments, and align financial markets in accordance with the principle of the general welfare. The longer this one promising solution is postponed, the larger the damage to the economies of the world. As a result of the effects of the raw materials price hikes this now becomes clear.
Commodity Prices Explode

The steel industry world-wide is groaning under the load of the prices for iron ore, coking coal, and scrap iron, each of which have risen dramatically. The delivery prices for coking coal quadrupled in the last two years. Formerly prominent coke producers, such as Germany, recently eliminated their own capacities, because the steel enterprises believed they could supply themselves in the future with cheaper imported coal. There is no actual physical scarcity of iron ore. The well-known ore sites in Australia, South Africa, Latin America, and Russia are enormous and have sufficient supply to last for many decades. However, already in the last year the ore prices rose significantly. On February 23, the two controlling iron ore producers—the Brazilian Companhia Vale DO Rio Doce (CVRD) and the British-Australian group of mining industries of Rio Tinto—delivered a shock with the announcement of a 71.5% price increase for their ore supplies to the large steel enterprises of Japan, South Korea, and China. The steel companies were forced to accept the hike. These agreements serve as a guide for all future contracts over ore supplies world-wide.

This year, steel enterprises will be forced to raise their prices again by approximately 50%. Again the automobile sector and many other industrial sectors, including machine-tool production, are under pressure. As a result, the Federal Association of German industry (BDI) organized a raw materials crisis summit in Berlin on March 8. Hundreds of thousands of industrial-sector jobs are at stake. Even the German chancellor showed up at the event, but could offer no convincing solutions.

Several other raw materials besides iron ore are urgently needed by the physical economy, but like iron ore, these world-wide resources in each case are controlled by a small group of powerful trusts. Approximately 10 years ago, EIR published an investigation, which pointed out in detail that more than 50% of the production of nearly all raw materials was in the hand of enterprises, all of whom had settled in the territory of the former British Empire. Since then only a few have changed. The three largest mining industry companies in the world today are: the British-South African group of Anglo-American,the British-Australian BHP Billiton, and the British-Australian Rio Tinto. All three enterprises have dozens of holdings in an assortment of mining industry projects around the globe. Rio Tinto, for example, is the second-largest producer of iron ore and coal, the third-biggest uranium and diamond producer, the fourth-largest copper producer, and the sixth-largest manufacturer of aluminum in the world.

Anglo American, which was founded by the Oppenheimer family of South African in 1917, first specialized in the production of gold, platinum, diamonds, and copper in southern Africa. However, since the mid-1990s, Anglo American has additionally expanded outside of Africa, and currently maintains, among other things, nickel and zinc mining industry in Venezuela, copper mining industry in Chile, and coal mines in Colombia. In 2001, Anglo American, together with the Oppenheimer family, seized the majority stockholdings (60%) in the diamond company De Beers.

In the same year the Australian mining industry group, BHP, purchased the British firm Billiton. Today, the world-wide activities of BHP Billiton cover the following raw material sectors: Copper in Argentina, Peru, Chile, and the U.S.A.; Aluminum in South Africa, Mozambique, Surinam, and Australia; Gold in Argentina; Lead in Australia, Canada, and South Africa; Coal in Colombia, the U.S.A., Australia, Indonesia, and South Africa; Nickel in Colombia, Indonesia, and Australia; Iron ore in Australia and Brazil; Bauxite in Australia, Brazil, and Surinam; Manganese in Australia and South Africa; Chrome in South Africa; Diamonds in Canada; Cobalt in Australia and Colombia; Zinc in Australia, Canada, and South Africa. On March 7, BHP Billiton issued a takeover bid for the Australian mining industry enterprise WMC Resources. WMC controls enormous reserves of raw materials in the Olympic Dam mine. It's common knowledge that this mine contains a third of the world's uranium reserves. In addition, WMC owned the fourth-largest reserves of copper and gold, and is the fifth-largest nickel producer world-wide.

Control of the physical production of raw materials by a small number of private financial conglomerates is a troubling development. However, raising of the price of industrial consumption to excessively high levels, requires another element: the creation of futures exchanges, with which banks, speculative funds, and other financial investors determine the price of commodities in a very obscure manner. For example, the price of two-thirds of the world's available crude oil is determined by the speculative bets placed on the International Petroleum Exchange in London, and a handful of other so-called spot markets whose activities make entirely no sense to outsiders. The only oil, which comes in the proximity of the so-called market, is the British North Sea oil, Brent Crude. And because British North Sea oil is on the decline, the volume it delivers amounts only to an extremely small portion of total world-wide oil production.
Governments Must Act

As long as private financial interests can arbitrarily manipulate the prices for industrial raw materials of all kinds, the long-term development of national economies remains threatened in a fundamental way. This applies particularly to densely populated countries such as China and India, with their potentially enormous demand for industrial goods. China has long been the largest steel producer of the world, and currently consumes a third of world-wide iron ore production. But the per-capita consumption of steel in China amounts to only 200 kilograms per year, compared with 600 kg in Japan and 1,000 kg in South Korea.

No less important is long-term raw material security for advanced industrialized countries such as Germany.

In his published 50-year-plan for the development of the planet, and through an EIR seminar in Berlin in the middle of January, Lyndon LaRouche stressed that governments must use their power, in order to prevent control of raw materials by private financial interests: "Therefore, we need an agreement between nations, which states that it is in the interest of the whole earth, with regard to the use of our natural resources, that the needs of the general welfare come before those of private interest. Private interests are permitted, but must be subject to regulations. These regulations must guarantee that each country receives sufficient access to raw materials, which are necessary for its people and their development."

http://www.larouchepub.com/other/2005/3211commodities.html

 

[FaGal]

La crisi del dollaro

"Siamo ormai sull'orlo di un crollo del dollaro" ha affermato Lyndon LaRouche il 9 marzo. Lo sfascio della moneta USA trascinerebbe con sé l'intero sistema di tassi fluttuanti subentrato a quello di Bretton Woods. Pertanto, sia il governo degli Stati Uniti che i governi europei dovrebbero intervenire decisamente per ribaltare la folle politica economica a cui si è ricorso sempre di più negli ultimi trent'anni e varare una riorganizzazione globale, una Nuova Bretton Woods. "La situazione è molto fluida e fenomeni imprevedibili possono prendere piede molto rapidamente", ha spiegato LaRouche.
Si sono ripetute, nella seconda settimana di marzo, le voci sulla presunta intenzione di alcuni governi asiatici di "diversificare" i propri investimenti all'estero, voci che hanno provocato una nuova caduta del dollaro rispetto a tutte le altre monete, in particolare quelle dei paesi esportatori di materie prime, e il concomitante rialzo dell'oro. Contemporaneamente esplodono nuovi scandali finanziari come quello della banca israeliana Hapoalim e l'assassinio del finanziere francese Eduard Stern, genero di David Weill della Lazard Freres.
Negli Stati Uniti la General Motors continua a rischiare di vedersi relegare i titoli tra i "junk bonds" e di scivolare quindi nella bancarotta completa. Il deficit commerciale USA ha accumulato a gennaio 58,3 miliardi di dollari, sebbene il petrolio non fosse in risalita come oggi. In Europa entra nella fase decisiva lo scontro per la revisione del "patto di stabilità", un fattore essenziale che impedisce di affrontare i problemi economici di fondo come la disoccupazione.
Mentre negli USA la marcia dello schiacciasassi della privatizzazione delle pensioni per il momento subisce una battuta d'arresto, i democratici faticano a rendersi conto che essa è la conseguenza della politica dello sfascio economico deliberatamente voluta dagli ambienti di Greenspan e George Shultz, e che non va considerata una battaglia isolata, bensì deve essere inquadrata nel contesto del crollo del dollaro. "In breve, la diga sta per crollare. Caduta del dollaro, speculazione sulle materie prime e depressione dell'economia reale negli USA ed in Europa sono fattori che, presi nel loro complesso, mostrano come si sta arrivando al punto di rottura. Anche se l'esplosione non si verificasse subito, è come se la benzina avesse ormai allagato tutto il pavimento" ha spiegato LaRouche.

 

[FaGal]

Fed hikes rates, worries about inflation

CBS MarketWatch via NewsEdge Corporation :

WASHINGTON (MarketWatch) - The Federal Reserve raised interest rates as expected Tuesday and said it is getting more worried about inflation.

For the seventh straight meeting, the Federal Open Market Committee increased its target for overnight interest rates by a quarter-percentage point, this time to 2.75 percent.

But the big news was in the language of the statement.

"Though longer-term inflationary expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident," the FOMC said. Read the statement.

"The rise in energy prices, however, has not notably fed through to consumer prices," the statement continued.

Economists said the warning on inflation shows the Fed is a long ways from done in adjusting interest rates.

"The FOMC believes that it still has a considerable ways to go before reaching a neutral or modestly restrictive level," said Josh Shapiro, chief economist at MFR Inc.

Drew Matus, economist at Lehman Bros., said he was still expecting the Fed will move rates up to 3.75 percent by the end of the year, but "on the margin, this (statement) increases the risk of a higher Fed funds rate before year end."

The warning about inflation sent Treasury prices down, boosting the yield on the benchmark 10-year to 4.63 percent. The stock indexes fell further. The U.S. dollar improved against both the euro and the yen. See Market Snapshot.

In the Fed's last statement on Feb. 2, the FOMC said both inflation and long-term inflation expectations "remain well contained."

In its statement released Tuesday, the FOMC repeated language that its monetary policy stance was "accommodative" and that this "accommodation" could be removed "at a pace that is likely to be measured." Most of the pre-meeting chatter focused on possible changes in these sentences.

The committee also tweaked its bias statement, saying that "with appropriate monetary policy action" risks "should be kept roughly equal." The change implied that risks are equal only if the Fed keeps up a steady diet of rate hikes.

"The shift in bias is glaring," said Sherry Cooper, chief economist for BMO Nesbitt Burns.

In its assessment of the economy, the FOMC said output was rising at a solid pace "despite the rise in energy prices." It also said that labor markets continue to improve "gradually." In February, the committee said output was rising at a moderate pace.

Despite the clear warning on inflation, the FOMC is still not expected to move to a more aggressive pace of tightening of half-point increases. While higher energy prices could lead to higher inflation, they could also act as a drag on the economy.

"It has become increasingly clear that the U.S. economy has entered another oil-induced soft patch," said Rich Yamarone, chief of research for Argus Research. "We question why the Fed would wish to accelerate the size of its rate increases amid such deteriorating conditions."

The vote of the 12-member FOMC to tighten policy and change the wording of the statement was unanimous.

The minutes of Tuesday's meeting will be released on April 12.

Since the modern era of the Fed began in the late 1980s, the FOMC had never before raised rates at seven straight meetings.

In a related action, the Fed policymakers voted to increase the discount rate to 3.75 percent from 3.5 percent.

The FOMC has now raised rates by 175 basis points, which matches the total tightening in the last cycle from June 1999 to May 2000. A basis point is one-hundredth of a percentage point.

The Fed raised rates by a total of 300 basis points in 1994-1995.

Economists are growing concerned that inflation is creeping higher.

The February PPI data showed that core inflation is up 2.8 percent in the past year, the fastest gain in more than nine years. See full story.

 

[FaGal]

Buckle Up for the Dollar's Ride
By DANIEL ALTMAN

IS the writing on the wall for the dollar? Researchers at one big fund manager say it is, but the markets haven't read along just yet.

Since the start of March, Bridgewater Associates, a manager of more than $100 billion of institutional and hedge fund money in Westport, Conn., has been issuing warnings in its daily reports. One on March 11, titled "The Breakdown of the Dollar System," said, "As we often say, we've seen this movie many times and we know the ending."

There is indeed a volatile blend of risks surrounding the dollar. President Bush's new budget proposal would substantially expand the government's debt burden in the next decade, potentially raising doubts about the desirability of its i.o.u.'s. Some Asian central banks have declared that they will diversify their reserves away from dollar-denominated assets. If China decouples the yuan from the dollar, it will not need as many dollar-denominated assets to keep its currency from gaining value, nor will its competitors for export markets. In recent times, long-term interest rates have stayed stubbornly low, making it difficult for American companies to attract new investment from abroad.

These ingredients may just be waiting for the right catalyst. If enough people start thinking like those at Bridgewater Associates, the dollar will lose value rapidly. There's no point trading dollars today, after all, if everyone thinks that they will be worth less in the near future. Fundamental economic factors need not worsen any further; in currency crises, perception very quickly becomes reality.

Bridgewater says it believes that the dollar is already beyond the point of no return. To keep the currency at its current value, private investors will have to buy more American securities as central banks desert them, said Robert P. Prince, the firm's co-chief investment officer. Before private investors will act, they need to see a higher return from American assets, relative to assets carrying similar risks abroad.

Mr. Prince said that those higher returns had begun to arrive through lower prices for assets. If an asset comes with a fixed interest payment, say 4 percent, buying it at a lower price will offer a relatively higher return. But these higher returns could cause problems for the economy. Borrowers in the competitive market for credit will have to offer higher returns, too, and interest rates may rise. "The Fed doesn't want that, because too much of a rise in interest rates will choke off the economy," Mr. Prince said.

The alternative is for the assets' prices to remain the same while the dollar loses value. That way, foreigners will be able to buy assets at a discount, yielding a higher return, but without putting too much upward pressure on American interest rates. (The implicit assumption here is that the assets' future returns will not be harmed too much by today's lower dollar.)

So, instead of allowing the economy to adjust purely through higher interest rates, perhaps causing another recession, Alan Greenspan and his colleagues at the Federal Reserve will have the luxury of allowing the dollar to do some of the heavy lifting. The numbers? Bridgewater predicts a further decline in the dollar of 30 percent, especially against Asian currencies, and a rise in American long-term rates of one-half to one full percentage point.

Not everyone thinks that events will play out this way. "It's really too extreme to be talking about potential crises in the dollar," said Martin D. D. Evans, a professor of economics at Georgetown University in Washington. "Yes, we have seen a large movement in the dollar versus the euro in particular, but to say we're sort of on the edge of a precipice isn't really merited by the facts. The premise here, thinking that it's impossible for the dollar to come back, I also don't buy."

Professor Evans said the Fed's hand would be forced by the rising tide of inflation. "The Federal Reserve cares about inflation," he said, "and they're going to be very reluctant if they start seeing the inflationary effects of the decline in the dollar to just sit by and say, 'But we need low interest rates to support exports.' " He predicted that the Fed would put the clamps on credit, leading to interest rates high enough to attract foreign capital: "We are going to see quite a sharp tightening in the United States, perhaps tighter than people are expecting."

Drastic predictions for the government's fiscal position may not come true, either, even though the White House's budget would raise the debt-to-G.D.P. ratio in 2015 to 37 percent, versus 29 percent under current law. "I don't think it's big enough to warrant the attention it's gotten," Douglas J. Holtz-Eakin, director of the Congressional Budget Office, said of the nation's fiscal erosion. "A lot of the dollar's future will in fact be driven by the other determinants."

That does not mean the budget can be ignored. Mr. Holtz-Eakin said he expected that the government would eventually have to steer clear of a dip into the red. "It is unavoidable that we will rein in our spending," he said, "because we are unlikely to be able to tax enough to cover it."

Though action by the Fed and a clampdown on federal spending could spare the dollar's blushes, they would both be bad news for the economy. A cutback in federal spending will, at least in the short term, create slack in labor and product markets. And one of the surest forecasters of recession is a tightening of short-term credit by the Fed.

Congress and the White House have shown no sign that they are serious about controlling spending, but the Fed's policy-making committee may already be proving Professor Evans right. After the committee opted to raise short-term rates another quarter of a percentage point last week, its statement acknowledged that "pressures on inflation have picked up in recent months" and asserted its willingness to act forcefully if necessary.

Whichever way you cut it, we're in for a bumpy ride.
http://www.nytimes.com/2005/03/27/b...ew.html?th=&emc=th&pagewanted=print&position=

 

[FaGal]

The Daily Reckoning PRESENTS: For anyone living in the 20th century, the rising cost of living is nothing new. Since the creation of the Federal Reserve, the dollar has lost about 95% of its purchasing power. Chris Mayer explores our other options for making sound investments...

THE DECAY OF PAPER CURRENCY
by Chris Mayer

Inflation, as it is commonly known, has not always been the normal state of affairs. As James Grant, editor of Grant's Interest Rate Observer, has pointed out, "From George Washington to the A-bomb, prices alternately rose and fell... As Alan Greenspan himself has pointed out, the American price level registered little net change between 1800 and 1929."

The basic nature of our money assures it will lose value over time. It can be created nearly at will and it is left in the hands of government officials, who routinely spend more than they have. In such a state, a nation's paper money has a shelf life like a fresh egg or a jar of mayonnaise. It doesn't last forever. Unlike these foodstuffs, paper money has no printed expiration date.

According to economist Felix Somary, who experienced firsthand the devastating monetary inflations that destroyed the German mark in the 1920s, it took Rome four centuries to destroy its currency. Germany and Austria reached that point in just nine years, ending in the famous hyperinflations of the 1920s, and before that, Russia managed it in only five years. Everyone's experience is different, but our collective experiments in paper money have not created a currency that increases in value over time.

The life and value of a monetary unit has less to do with the wealth of a country than with the simple facts of supply and demand. As the great Austrian economist Ludwig von Mises noted, "Even the richest country can have a bad currency and the poorest country a good one."

For some interesting insights into the flight of the dollar, I want to share some thoughts I recently read from Justin Mamis, author of several investment books and a longtime market adviser. Mamis was born during one of the great turning moments in stock market history - 1929.

Mamis talks about the experience of the dollar's immediate predecessor as cock of the walk, the old British pound. The pound, the currency of choice for a long stretch of time before the American dollar, was the product of the British Empire. Imperial ambition and sound money, though, never mix, and the pound probably peaked somewhere before World War I. After World War II, Mamis notes, "The Empire peeled off like an onion into a grab bag of different independent countries... the Bretton Woods Agreement of July 1944 signaled the end of the British pound as the world's reserve currency."

The British pound continued to weaken against the dollar over the ensuing years. Mamis notes: "Weakness, in a long-term sense, begets weakness, like the flaws in an incestuous genetic pool."

The dollar has been the world's reserve currency, or currency of choice, since at least Bretton Woods. From this short collection of historical vignettes, we can make one safe assumption. As Mamis puts it, the status of being a "reserve currency is not a permanent appointment."

To pinpoint when the dollar's status as the world's currency of choice will end is an impossible task. These things tend to unfold over many years, and there does not appear to be any immediate contender ready to ascend to the throne. But that should not deter the investor from making the basic assumption that the dollar of a decade hence will buy less than a dollar of today.

I'll include one last quote from Mamis, who advises us not to expect long-term trends to always be immediately apparent or obvious. "We must warn not to turn the next century's global changes into something that has to be evident in its entirety all at once - or else denied. Nor will our concerns be proven instantly 'wrong' because the dollar finally has its oversold rebound." Well said.

This situation - the whittling away of the dollar - creates the need for sound investing. Basically, investors look to survive the ravages of inflation (and taxes - of which inflation is a most insidious type). Like the biting winds of nature that sculpt rock and carve stone, inflation and taxes will grind the greatest piles of fortune to dust over time. Preserving it, making it grow - essentially investing well - is the investor's difficult art.

So should you put your money in euros, perhaps, or some other foreign currency? The euro may strengthen against the dollar, but I think the dollar and the euro share the same fate, like the passenger pigeon and the Carolina parakeet. The road to extinction may be of indeterminable length, but the final destination of that road is not in doubt. The same can be said of all our paper currencies, be they yen or pounds, pesos or ringgit. All of them are on the same slide.

But there are other ways to beat the decaying paper currencies that make up so much of our financial wealth. The idea of tangible asset investing, investing in stuff that has survived and prospered in a variety of conditions, should meet the challenge in the years ahead.

Often, I've looked at some great fortunes and drawn insights and lessons from those experiences. Recently, I came across an old book, originally published in 1907 and written by Gustavus Myers, called History of the Great American Fortunes.

It is a mammoth study of American wealth over the previous 200 years and deals with fortunes in shipping, land, fisheries, railroads, trusts, banks and other industries. I've only read a couple of the opening chapters, which happen to cover the shipping and land fortunes. But some of Myers' observations got me thinking about the durability of some forms of investment over others. Shipping and land offer interesting contrasts.

Myers writes about the great fortunes of the shippers. "Enormous as were the profits of the shipping business, they were immediate only. In the contest for wealth, it was inevitable that the shipper should fall behind. Their business was one of peculiar uncertainties. The hazards of the sea, the fluctuations and vicissitudes of trade, the severe competition of the times exposed their traffic to many mutations." In other words, shippers' fortunes came and went, like the late-1990s boom in tech stocks, the 1960s conglomerate boom or any number of investment crazes of years gone by.

Many shippers were aware of the vicissitudes of their business and often invested some piece of their fortunes in land, banks, factories, turnpikes, insurance companies and railroads. Those that didn't didn't last.

Contrast this with Myers' observations on those fortunes built on land, primarily in commercial cities of importance:

Fortunes built on land in the cities were indued with a mathematical certainty and perpetuity. A lot of the tendencies and currents of the times favored the building up of an aristocracy based on the ownership of city property. With the progressing growth of commerce and population, with immigration continuing... every year witnessing a keener pressure for occupation of land, the value of this latter was certain to increase.

An investment in land was an investment in something that was real and often increased in value despite what its owners did with it. It could be titled and its ownership made certain - unable to be copied by a competitor.

One more quote from Myers, who draws this interesting conclusion:

A more formidable system for the foundation and amplification of lasting fortunes has not existed...And that it is pre-eminently so is seen in the fact that the large shipping fortunes of a century ago are now generally completely forgotten, as the methods then used are obsolete. But the land has remained land; and the fortunes then incubated have grown into mighty powers of great national, and some of considerable international, importance.

Now, I'm not concluding that land is a new surefire investment bound to make us all rich in time. But the best characteristics of land provide insight into what makes a resilient investment, able to hold its value in a variety of market conditions.

Land has some characteristics, such as its durability, relatively fixed supply and timeless qualities that have often made wonderful investments and formed the keystone to later fortunes.

To survive and prosper in the years ahead while the dollar crumbles, look for real assets that share these qualities.

Regards,

Chris Mayer
for The Daily Reckoning

Editor's Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is also the editor of the Fleet Street Letter.

 

[FaGal]

Bernanke the favorite to succeed Greenspan

Glenn Hubbard, Martin Feldstein also could land Fed's top spot

Reuters

Updated: 6:12 p.m. ET April 10, 2005

Source: MSNBC


WASHINGTON - Federal Reserve Governor Ben Bernanke has the edge in the latest betting over who will succeed Alan Greenspan as Federal Reserve chief, but sources close to the Bush administration say it is still early in the decision process.

President Bush's decision earlier this month to nominate Bernanke to head the White House Council of Economic Advisers prompted speculation that the top White House economics job may be an audition for Greenspan's post.

“Bernanke is a strong Washington player with good insights,” said William Beach, a scholar at the Heritage Foundation, a conservative think tank in Washington. “He's a nose ahead on this.”

Scott Reed, a Republican political consultant, called Bernanke “the favorite of the month.”

Many on Wall Street agree. A recent Lehman Brothers poll put him at the front of the pack, even before he was named to the top job at the Council of Economic Advisers.

Bernanke, along with Glenn Hubbard, a former CEA chairman, and Harvard economist Martin Feldstein have long been seen as the front-runners to replace the 79-year-old Greenspan, who must leave early next year when his Fed board term expires.

Bernanke associates say the Princeton University economist's interest in the council has more to do with wanting to try his hand at broad policy-making than with jockeying for the top Fed post.

Some analysts said the tight timing might be tricky for Bernanke, who still faces Senate confirmation for the CEA post and who will have logged less than a year in that job when Greenspan's position comes open.

Wall Street's respect a factor
Two sources with close administration ties played down the idea that any one candidate led the field, noting that the decision-making process appeared to be in the early stages.

Both said all three of the most cited candidates — Bernanke, Feldstein, and Hubbard — have a good shot.

One, a former administration official who spoke on condition of anonymity, said the White House could still turn to a prominent Wall Street figure, though it was likely to pick someone already in the mix.

“It's not like you're going to need to find some dark horse out of left field,” said the source, who added that the decision-making will be a closely guarded process involving senior players like White House chief of staff Andrew Card and Vice President Dick Cheney.

Greenspan also is sure to wield influence.

Bush faces the more immediate task of replacing Bernanke at the Fed. Several Republicans said Richard Clarida, a Columbia University economist and former U.S. Treasury official, fit the profile the administration is seeking and one source said he is indeed being considered.

If Bernanke wins Senate approval for the White House Council of Economic Advisers, he will join the other top contenders, along with Greenspan, in having CEA experience.

Greenspan was CEA chairman under President Gerald Ford. Feldstein led Ronald Reagan's CEA and Hubbard headed it for the first two years of the Bush administration.

Bernanke, one of the country's leading monetary policy economists, has become well-regarded on Wall Street since joining the Federal Reserve Board in 2002.

He also has developed a rapport with Greenspan, despite his long-standing advocacy for inflation targeting, a publicly stated inflation goal by a central bank, at the Fed — a move Greenspan has opposed.

The Heritage Foundation's Beach said Bernanke possesses one credential crucial for any Greenspan replacement: The ability to translate econo-speak into plain language.

“Bush is going to want to appoint someone who can sit down with him and speak in a language he understands,” Beach said.

Of the three candidates most mentioned, Hubbard — a public finance expert at Columbia University — has the closest White House ties from his years in the administration and his stint advising Bush's 2000 presidential campaign.

Feldstein, who also was an adviser to the 2000 Bush campaign, is said to visit Washington frequently.

"He's pretty well-connected," said the former U.S. official, who pointed out that Feldstein would bring strong managerial experience to the Fed from his long tenure as head of the National Bureau of Economic Research.

One question mark, though, is Feldstein's role as a director of American International Group Inc., an insurer whose accounting practices are under investigation by the U.S. Securities and Exchange Commission and New York Attorney General Eliot Spitzer.

Copyright 2005 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content is expressly prohibited without the prior written consent of Reuters.
© 2005 MSNBC.com

URL: http://www.msnbc.msn.com/id/7454675/

 

[overthecounter]

Bernanke the favorite to succeed Greenspan

Glenn Hubbard, Martin Feldstein also could land Fed's top spot

Reuters

Updated: 6:12 p.m. ET April 10, 2005

Source: MSNBC


WASHINGTON - Federal Reserve Governor Ben Bernanke has the edge in the latest betting over who will succeed Alan Greenspan as Federal Reserve chief, but sources close to the Bush administration say it is still early in the decision process.

...

Dalla padella alla brace. Volevo riportare un famoso discorso di questo genio dell'economia, per capire quale destino aspetta il dollaro:

But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

ed ancora:

If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

L'illusione monetarista è dura a morire ... forse il Giappone potrebbe insegnarli qualcosa ... Per spiegare il perdurare della deflazione giapponese infatti Berndake sostenne che gli interessi a zero non erano sufficienti, bisognava agire attraverso l'espansione diretta della massa monetaria (=stampare soldi): "We have the keys to the printing press, and we are not afraid to use them."

Ed è esattamente quello che la BOJ ha fatto negli ultimi anni: stampare yen e compare tutto il possibile: valute, titoli di stato, ecc. I risultati nulli che ne sono conseguiti hanno piantato l'ultimo chiodo nella tomba dell'illusione monetarista di controllare l'economia agendo sulla leva monetaria.

 

[FaGal]

L' uomo di Bush che studia da Greenspan
L' uomo di Bush che studia da Greenspan
Non teme inflazione e deficit Usa. Ed è per la trasparenza della Federal reserve. Dove potrebbe presto...
PRIMO PIANO chi è ben bernanke, il nuovo capo dei consiglieri economici della casa bianca
Le sue analisi su inflazione, politica monetaria, deficit pubblico e commerciale sono le più lette e discusse dai mercati, dopo quelle proverbialmente enigmatiche di Alan Greenspan. Che potrebbe lasciargli la poltrona di presidente della Federal reserve (Banca centrale Usa) il prossimo gennaio. Ma nel frattempo Ben Bernanke, uno dei maggiori economisti monetari americani, è stato chiamato alla Casa Bianca come presidente del Consiglio dei consulenti economici (Cea, Council of economic advisors) del presidente George W. Bush. Sarà questa solo una breve parentesi politica, prima di assumere l' eredità del maestro della Fed ? Oppure l' incarico nell' amministrazione Bush allontana la prospettiva di Bernanke di diventare numero uno alla Fed, dove è governatore dal 2002 ? La carica di presidente del Cea era stata ricoperta anche da Greenspan sotto l' amministrazione di Gerald Ford, prima di diventare presidente della Fed nel 1987; e presidente della Cea con Ronald Reagan è stato l' economista di Harvard Martin Feldstein, un altro dei candidati più in vista come successore di Greenspan. Bernanke sarà il terzo superconsigliere economico di Bush, dopo Glenn Hubbard, l' architetto dei tagli alle tasse, e dopo Gregory Mankiw. Era stato sempre Bush a nominarlo governatore della Fed tre anni fa e al presidente certamente piacciono i suoi discorsi che minimizzano i rischi dell' inflazione e la pericolosità del deficit commerciale Usa. A proposito dei prezzi, secondo Bernanke le spinte all' insù sono contenute e l' indice dei consumi personali di base sta aumentando al ritmo dell' 1 2% annuo, una fascia insomma "tranquilla". E quanto alle preoccupazioni sulla crescente dipendenza degli americani dagli investimenti stranieri, il buco fra entrate e uscite dipende per Bernanke in parte dal maggior tasso di risparmio all' estero e non da squilibri strutturali perniciosi. Esperto di politica monetaria, Bernanke non si è mai pronunciato pubblicamente sui due temi economici più caldi del secondo mandato Bush, cioè il tentativo di rendere permanenti i tagli alle tasse e l' ambizioso progetto di riformare l' Inps americana (Social security) creando i conti previdenziali individuali privati. Però Bernanke è un buon comunicatore e in questo senso potrebbe aiutare Bush a vendere meglio le sue proposte fiscali e previdenziali. La comunicazione ai mercati è stata anzi un chiodo fisso di Bernanke alla Fed, dove si è battuto per accelerare la pubblicizzazione delle analisi e discussioni della Banca centrale come il modo migliore per preparare il mercato ai cambiamenti e influenzare i tassi di lungo termine. Grazie a lui ora gli appunti delle riunioni del Comitato che fissa il costo del denaro sono noti appena tre settimane dopo le sessioni. Fosse per lui, la Fed avrebbe anche un obiettivo ufficiale di inflazione, che renderebbe la politica monetaria ancor più trasparente per gli investitori. Ma Greenspan si è finora opposto a questa idea, che toglierebbe flessibilità all' azione della Banca centrale. Dal Mit di Boston alla Casa Bianca Ben Bernanke, neo presidente del Consiglio dei consulenti economici della Casa Bianca, è uno dei maggiori economisti monetari americani È nato il 13 dicembre 1953 ad Augusta, Georgia Si è laureato in Economia alla Harvard university nel 1975; ha conseguito il dottorato in Economia a Boston, nel 1979 Dal 1979 al 1985 ha insegnato a Stanford. È docente di Economia a Princeton dal 1985 Dal 2002 è nel Comitato dei governatori della Federal reserve (Banca centrale Usa) Con la moglie Anna ha due figli
Il Mondo di oggi

 

[FaGal]

U.S. Boosts Pressure on China to Float Currency

By Paul Blustein
Washington Post Staff Writer
Friday, April 15, 2005; Page E01

The Bush administration yesterday stepped up its appeals for China to let its currency rise, as pressure mounted in Congress for tougher action on a host of Chinese practices that allegedly fuel the burgeoning U.S. trade deficit.

John B. Taylor, Treasury undersecretary for international affairs, urged China to let its currency, the yuan, rise according to market forces without further delay because it has taken enough preparatory measures to do so. "We have very much stressed that they can begin to have a flexible exchange rate right now," Taylor said.

Taylor's comments, which came at a briefing for reporters, ratcheted up the pressure a notch on Beijing to end its decade-long policy of keeping the Chinese yuan fixed at a rate of about 8.3 yuan per U.S. dollar. That policy has been attacked by many U.S. manufacturers, labor unions and economists as keeping the value of the yuan too low, thereby giving an unfair competitive edge to Chinese products in world markets. The issue was raised repeatedly at a congressional hearing yesterday during which lawmakers vented their frustration over the migration of U.S. jobs to China and the U.S. deficit with Beijing, which soared to $162 billion in 2004, about one-quarter of the total trade gap.

The administration has drawn sharp criticism for maintaining a strategy of "patient diplomacy" on the currency issue, which opponents contend is enabling Beijing to keep the yuan fixed for the foreseeable future. Taylor and other U.S. officials have exhorted China to move toward floating the yuan while expressing some sympathy for Beijing's concern that it must first shore up and modernize its fragile financial system lest a floating currency cause the system to destabilize.

By asserting that the necessary steps have been taken, Taylor conveyed a new sense of urgency on the matter. His comments came on the eve of a meeting of finance ministers and central bank governors from the Group of Seven major industrial nations, who at their past two gatherings were joined by their Chinese counterparts for a discussion of the yuan issue. The Chinese are not sending representatives to this weekend's meeting, which some experts have interpreted as a sign that Beijing is rejecting pressure from Washington and other capitals. But Taylor disputed that interpretation and said some Chinese policymakers share his view that the yuan could float, although he added, "I can't say that every person in China agrees with that."

Helping to prod the administration have been congressional demands for a more aggressive stance. A bill was introduced last week in the Senate to slap 27.5 percent duties on Chinese imports unless Beijing changes its currency policy, and similar legislation has been proposed by House members. The administration and other opponents object that such an approach would backfire with the Chinese and would violate World Trade Organization rules, but the bill survived an attempt to kill it, by a 67 to 33 procedural vote, forcing Senate leaders to pledge that the bill would be put to a vote in July.

The heat emanating from Capitol Hill was much in evidence at yesterday's hearing of the House Ways and Means Committee on China trade issues. Lawmakers clashed with officials of the administration and the nonpartisan Congressional Budget Office, who argued that many of the accusations hurled at Beijing are misplaced.

The case for a cooler approach to Beijing was advanced by Kristin J. Forbes, a member of the Council of Economic Advisers, who noted that China's rapidly growing market is the fifth-largest in the world for U.S. exports. Although shipments of goods from China to the United States far outstrip the flow in the other direction, Forbes contended that it is a mistake to blame many U.S. job losses on that factor.

Increased imports from China "largely reflect decreased imports of the same goods from other countries," Forbes said. "In fact, much of China's recent increase in U.S. import share has come largely at the expense of Japan," whose share of U.S. imports fell to 8.8 percent in 2004 from 12 percent in 2000, while China's share increased to 13.3 percent from 8.2 percent. Furthermore, she said, "employment in the United States has recovered over the past two years, at the same time that imports from China have continued to increase."

Another administration official, Assistant U.S. Trade Representative Charles W. Freeman III, cited recent steps the administration has taken, such as a move to limit imports of Chinese clothing, which surged in the first quarter of this year after the termination of a global system that regulated worldwide trade in textiles and apparel.

And Douglas Holtz-Eakin, director of the CBO, questioned whether raising the exchange rate of the yuan would do much good in changing trade patterns. That is because many imports identified as Chinese, such as electronic appliances, are only partly made in China, with many of the components and much of the design work produced elsewhere while low-cost Chinese workers perform the manual assembly.

"If the yuan appreciated relative to the dollar, it would directly increase the U.S. price of imports from China," Holtz-Eakin said. "However, those increases would probably be much less than the appreciation of the yuan itself." He noted that one study has estimated that 20 to 30 percent of the value of exported Chinese goods represents the value created in China.

Panel members from both parties derided those arguments as abstractions that do not temper the real-life horror stories they hear from businesses in their districts that have been driven to bankruptcy by Chinese competitors.

"We know [the fixed rate of the yuan] provides a discount for their products in our market," said Rep. Benjamin L. Cardin (D-Md.), the ranking minority member on the panel's trade subcommittee. "We need action. Those who have lost their jobs because of exchange rates or intellectual property piracy -- they can't just say, 'Everything's fine.' So I just want to express the frustration that many members feel."

Rep. Nancy L. Johnson (R-Conn.), who just returned from a trip to China, also blasted Beijing for rampant piracy of U.S. movies, music and software and noted that many U.S. goods face tariffs of 15 percent and more in the Chinese market. Those tariffs are "a crowning insult" to Americans who have lost their jobs due to Chinese practices, she said, and the administration ought to be pressing Beijing to lower them. "We've got to get far more aggressive," she said.

© 2005 The Washington Post Company

 

[FaGal]

The Paris Hilton Tax Cut

By E. J. Dionne Jr.

Tuesday, April 12, 2005; Page A21

The same people who insist that critics of Social Security privatization should offer reform proposals of their own are working feverishly to eliminate alternatives that might reduce the need for benefit cuts or payroll tax increases.

I refer to the fact that House Republican leaders have scheduled a vote this week to abolish the estate tax permanently. Under a wacky provision of the 2001 tax cut designed to disguise the law's full cost, Congress voted to make the estate tax go away in 2010, but come back in full force in 2011.

With so many other taxes around, it's hard to understand why this is the one Congress would repeal. It falls, in effect, on the heirs to the wealthiest Americans. Fewer than 1 percent of the people who died in 2004 paid an estate tax, and half the revenue from the tax came from estates valued at $10 million or more.

Yet, because the wealthy have gotten wealthier over the past three decades or so, the estate tax produces a lot of money. Counting both revenue losses and added interest costs, complete repeal of the estate tax would cost the government close to $1 trillion between 2012 and 2021, according to the Center on Budget and Policy Priorities.

And that is where Social Security comes in. You can reject outlandish claims that Social Security faces some sort of "crisis" and still acknowledge that it faces a gap in funding for the long haul. The estate tax should be part of the solution.

In a little-noticed estimate confirmed by his office yesterday, Stephen Goss, the highly respected Social Security actuary, has studied how much of the Social Security financing gap could be filled by a reformed estate tax. What would happen if, instead of repealing the tax, Congress left it in place at a 45 percent rate, and only on fortunes that exceeded $3.5 million -- which would be $7 million for couples? That, by the way, is well below where the estate tax stood when President Bush took office and would eliminate more than 99 percent of estates from the tax. It reflects the substantial reduction that would take effect in 2009 under Bush's tax plan.

According to Goss, a tax at that level would cover one-quarter of the 75-year Social Security shortfall. The Congressional Budget Office has a more modest estimate of the shortfall. Applying Goss's numbers means that if CBO is right, the reformed estate tax would cover one-half of the Social Security shortfall.

This is big news for the Social Security debate. Michael J. Graetz and Ian Shapiro, authors of a new book on the estate tax, "Death by a Thousand Cuts," have referred to its repeal as the "Paris Hilton Benefit Act." To pick up on the metaphor, why should Congress be more concerned about protecting Paris Hilton's inheritance than grandma's Social Security check? How can a member of Congress even think about raising payroll taxes while throwing away so much other revenue?

This also means that Democrats now talking about reaching a "compromise" with the Republicans on the estate tax should put the discussions on hold until the Social Security debate plays itself out. Most of the "compromises" being discussed would repeal 80 to 90 percent of the estate tax. At some point, it might be reasonable to agree to make the 2009 estate tax levels permanent. But if they agree to any steps beyond that, Democrats will, once again, be placing the concerns of wealthy donors over the interests of the people who actually vote for them.

The Friends of Paris Hilton realize that as federal deficits mount and rising Medicare costs loom, the case for the total repeal of the estate tax grows steadily weaker. That's why they're hoping they can sucker defenders of estate taxes into a so-called compromise that gives away the store -- the store, in this case, going to Neiman-Marcus shoppers, not to those who rely on Target.

This is an instructive moment. What we are having is not a real debate on the future of Social Security but a sham discussion in which the one issue that matters to the governing majority is how to keep cutting taxes on the wealthiest people in our country.

Those who vote to repeal the estate tax this week will be sending a clear message: They see the "crisis" in Social Security as serious enough to justify benefit cuts and private accounts. But it's not serious enough to warrant a minor inconvenience to those who plan to live on their parents' wealth.

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