The dollar will resume its three-year decline unless Fed policy makers signal after a meeting on
Feb. 2 that they will accelerate the pace of rate increases, said Anton Pil, global head of fixed income, currency and commodities
at JPMorgan Private Bank. Microsoft Corp. Chairman Bill Gates and billionaire investor George Soros, at a meeting of the World
Economic Forum in Davos, Switzerland, said they are counting on a weaker dollar.
"The U.S. dollar is no longer, in our opinion is no longer, (seen) as a stable currency
and is devaluating all the time, and that's putting troubles all the time,'' Fan said, speaking in English, at the World Economic
Forum in Davos, Switzerland. "So the real issue is how to change the regime from a U.S. dollar pegging to a more manageable
reference, say euros, yen, dollars -- those kind of more diversified systems.''
Proponents have been looking for ways the perceived benefits of an inflation-targeting approach, which usually
involves a commitment by the central bank to try to hit the target, could be gained without constraining policy makers ability
to respond as they see fit to shifts in the economy.
Top finance ministers from Europe and developing countries are likely to use the annual
World Economic Forum in Switzerland from Wednesday to assess the impact of massive US deficits on the health of the dollar
and prospects for global growth.
If you happened to glance at the NYTimes Book Review today, you might have noticed a book
on the best-seller list for the first time, in ninth place. The blurb tells us: “Confessions of an Economic Hit Man, by John Perkins. (Barrett-Koehler, $14.97.) A former employee of an international consulting firm denounces the American
global empire and its ‘corporatocracy.’”
The poll carried out by Central Banking Publications found 39 nations of the 65 surveyed
raising their euro holdings, with 29 cutting back on the US dollar.
It is unlikely that the Federal government and the Federal Reserve will soon mend their ways, but
it also is doubtful that foreign creditors will continue their support indefinitely. The U.S. dollar is bound to continue
to depreciate and gradually surrender its role as the world's primary reserve currency to a multiple reserve-currency system
resting on the euro, Japanese yen, Chinese renmenbi, and the American dollar. The multiple-standard system is likely to perform
more efficiently and equitably than the dollar standard.
Starting in August 2004, at which point it had absorbed a stratospheric seven hundred
and twenty-one billion of them, Japan seemed to lose its taste for buying more US dollars. Dollars were going down the Bank
of Japan's gullet poorly, just like soba noodles do on bread, or worse. Thankfully for the United States, new long-term buyers
for dollars have recently been rallied into action.
Some at America’s central bank, the Federal Reserve, think a little repression is now
needed in the United States. In the minutes of its December meeting, concerns were voiced about “potentially excessive risk-taking
in financial markets” and “speculative demands…in the markets for single-family homes and condominiums”. Americans are tempted
to live beyond their means because they blithely assume that gains in the value of the assets they hold—those houses and flats—will
make up the difference.
Yes, the dollar can rally in the short-term as the mouse clicking, fund managers attempt
to play a change in momentum. Their problem is that the global financial market has far more dollars to sell than funds have
the ability to buy. Supply is just a whole lot bigger than potential demand. So as the bobble heads mouth on about growth
in the U.S. economy, growth in Europe, the PPI and whatever other nonsense they want, you just keep buying Gold whenever the
opportunity presents itself.
Trade policy purists will cry "protectionism." But today's currency turmoil is telling
Americans something far more important: If they don't start cutting the trade deficit in ways they prefer, the falling dollar
and the resulting drop in U.S. purchasing power will restrict trade for them —in ways they probably won't prefer.
Even more eye-opening was a recent issue of the Journal of Commerce, which contained the
words "New World Order" on its front cover of Nov. 29, 2004 with a picture of a garment containing a "Made in China" tag.
Thus even the Journal of Commerce recognizes that the march toward a fully integrated global economy is all about China. We
might also add that the "Wal-Mart-ization" of the U.S. and other countries is the route through which China gains its competitive
advantage on the road to globalization.
It's pushed massive amounts of liquidity into developing- nation debt, property, commodities
and other assets here in Asia. The trend has been particularly acute thanks to a surge in investment into China, and it's
helping the global economy run at its fastest pace in two decades.
”The US economy is expected to grow at roughly the same pace as the global economy over
the next couple of years,” they said. “Given the larger import elasticities of the former, the exchange rate shift would have
to be rather large to avoid a widening trade deficit. The one event that could produce a sufficiently large multilateral dollar
depreciation is the floating of the Chinese yuan.”
"We must take care that policy expectations engendered
by communication do not unduly constrain policy action. Furthermore, we cannot allow transparency to limit discussion on the
committee out of concern about how its publication will affect markets and the economy," Kohn added.
The story in the financial markets had changed from a tragedy to a mystery. The collapsing
dollar should have brought down prices of the assets it measures – most notably, the prices of U.S. bonds, which are extremely
sensitive to changes in interest rates or currency movement. There are about $10 trillion of U.S. dollar assets in foreign
hands. Yet, bonds have not gone down – at least in dollar terms, which leads us to pose the Ten Trillion Dollar Question:
Why not?
All Ponzi schemes build a financial pyramid. Many who pay into them also live in a financial
world themselves, but others need to derive their in-payment through earnings from production in the real world. In today's
world of financial transactions that every day are a hundredfold more than all payments for real goods and services put together,
the financial ones put the real ones into the shadow behind their brilliance.
Uncle Sam has reneged and defaulted on up to 40% of its trillion-dollar foreign debt,
and nobody has said a word except for a line in The Economist. In plain English that means Uncle Sam runs a worldwide confidence
racket with his self-made dollar based on the confidence that he has elicited and received from others around the world, and
he is a also a deadbeat in that he does not honor and return the money he has received.
In other words, the Fed has engineered the largest one-way bet in history. The bet: long
rates will stay low as far as the eye can see. Risk and uncertainty don't enter into the equation when there's such "easy"
money to be made. What seems to be coming into focus is our "understanding how people on the scene" are "oblivious to what
lay wait for them".
The dollar has hit another record low against the euro. It is set for further falls
against major currencies in the coming year, even though American interest rates will rise.
If an exchange between two parties
is voluntary, it will not take place unless
both believe they will benefit from it. Most
economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.
If you ask me to name the proudest distinction
of Americans, I would choose- because it contains all the others . . . the fact that they were the people who created
the phrase "to make money." No other language or nation had ever used these words before; men had always thought of
wealth as a static quantity . . . to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were
the first to understand that wealth has to be created.
