I’ll play my december for the moment and start yet another OP based off of an opinion piece, this time Samuelson of the WP, although again Wolf in the Financial Times (and the Financial Times generally) has been calling attention to the dangerous imbalance in capital markets and the dollar slide.
I quote Samuelson:
The full column here: Bush’s Dollar Gamble http://www.washingtonpost.com/wp-dyn/articles/A17601-2003May20.html
Very well then, this really speaks for itself, but in some respects the outstanding questions are whether the Bush Administration has fully thought through its…… let me call it ‘unilateral’ dollar policy and the dangers involved, and whether they have the adequate grasp on how to handle issues as they emerge. In a larger picture of course, the readjustment is one that had to come, and the challenges, while perhaps not helped by Snow’s recent comments, are going to be the same regardless. It is a question, then of management.
A literal reading of this suggests that a danger faced by the economies whose currencies have appreciated against the dollar is that it might cause a depreciation!
My view (like that of most economists) is that the $US has been overvalued against most countries for some time, probably mainly due to the markets’ inflated opinion of investment prospects in the US. This has been good for raising capital in the US, good for import competing industries and bad for export industries. For places like my country, it has meant higher export prices, moderate inflationary pressure and less import competition.
That is now being unwound. The US’s substantial current account deficit will be reduced, and they will get a little reflation. There will be some painful transition costs, since the price is moving substantially. But there are good things and bad things about having a highly valued currency, both for the US and the rest of the world. I doubt that the falling dollar has much to do with the Bush administration’s policies and I don’t think they should do anything about it other than ensure that the market moves in a relatively orderly fashion. This is management on a daily scale - preventing the dollar’s value from changing by more than a couple of per cent in a day.
Far from signalling great disequilibrium, this represents a move back towards more sensible exchange rate relativities.
Yes, you’re right, there are some unfelicitious turns of phrase there, however my reading of the quote in question there is that unwinding dollar asset holdings to put a cap on losses stemming from dollar depreciation has the effect of appreciating their currencies and choking off exports and growth in Eurozone even more. While indeed we can look to this eventually having an exchange rate effect, what horizon that occurs on is an open question, as the long overdue dollar depreciation shows.
However, I believe either I read the op ed piece too quickly or you’ve missed the point:
(a) Our Man Snow has made some fundamentally unhelpful comments in re managing an orderly transition (e.g. his comments on the “strong dollar” which our friend Soros characterized rightly as a mistake) Given the larger picture of generalized tensions on the trade front with the Europeans and attendant economic issues, concern re managing an orderly decline in the dollar seems advised.
(b) The transition period is one of some important challenges, with notable ones regarding the financing of US fiscal deficits, and concomittant issues regarding the American financial markets.
In short, I believe the phrase disequilibruim is indeed correct here although not perhaps directly in the sense, obviously we are in a phase hopefully moving towards equilibruim – but that is indeed disequilibrium eh what?
So, as I read the op ed, it’s not about whether the readjustment is necessary or not (I believe everyone realizes it’s necessary) but that “transition period” you abstracted away from.
The risk is the economic equivalent of an autocatalytic reaction. I would have no faith in the concept of financial markets taking the ultruistic option of leaving their money in the US. That’s a game that gives maximum gains to those money managers who get out first. The safety is the lack of attractiveness of European stocks at the moment, except as a currency swap.
The key is, obviously enough, earnings. If they are solid then lower dollar makes the US market more attractive, though there is some way to go before fair value is established.
The economic position in Japan also has an overhang as there are two scenarios where significant repartiation of funds 1) a need to fund fundamental reform of their banking sector or 2) a recovery to the point of Japanese stocks offering more attractive returns than the US. The first is more likely than the second in the forseeable future.
The worse scenario is that the US exports a recession then goes protectionist. This administration has set some worrying precedents in this regard.
So to all you American consumers out there , get out there and spend til it hurts … the US economy needs you, and the rest of the world would sure appreciate it as well.
Certainly true, however, in the inevitable nature of markets, the adjustment will overshoot it’s mark. With US interest rates as low as they are, the Fed Reserve doesn’t have many cards to play to micromanage the readjustment and minimise the speed and extent of the overshoot.
Fair points Coll. It’s a tricky business though. Trying to make a return to more sensible exchange rate relativities more gradual is difficult: it opens you up to one-way bets and non-credible policy. woolly’s point about altruism is good - how is this going to happen? - are US banks going to be persuaded to take a position? If not, it’s just asking for the speculators to dine.
I hadn’t read Snow’s comments. I like them. Governments in countries with floating exchange rates should make no comment about the desired value of the currency, particularly if they’re moving to a more sustainable price. Soros’s comments are designed to make him a buck.
IMHO, whilst there is pain in any important price moving 20% in a short time, the case for stopping it so doing needs to be pretty damn strong before it becomes appealing. I’m not persuaded that it is in this case.
As ever, woolly’s remarks are interesting. I’m sure there is renewed focus on earnings in equity markets. My guess is that a lot of people feel foolish about their former assessments of US equity values. But in the current situation, a hunt for value in equity markets is going to take a lot of sound enterprises down an undeserved peg. That’s the nature of a bear.
Understatement. I’ve said for some years on this Board that Japan needs a depression to sort it out. They are vulnerable, they have made little progress in reforming their moribund financial sector, and this puts more pressure on. This development makes recovery wthout reform even more unlikely. They are in for some terrible times.
That’s exactly it. Unfortunately, I don’t think there’s a correct answer.
Emerging market countries, of course, face this kind of dilemma not infrequently – the currency needs to come down for whatever reason; is the “band-aid” approach (used here in the sense of one quick rip to shorten the period of pain, as opposed to “inadequate”) better than a gradual one? For those guys, the answer is almost always “no,” but those guys don’t have the luxury of our economy and they do have the spectre of inflation.
I think in the near term Snow’s comments were probably useful in the sense that he’s telegraphing that we don’t want to dictate Europe’s economic policies and that we’re not going to intervene on the dollar’s behalf.
In the longer run, though, it wouldn’t kill him to lobby the Europeans just a little bit (Dear Europe: You’re in recession or near one – a rate cut or two wouldn’t kill you. Love, John) or his boss a lot (Dear George: We were OK with the fiscal deficit going down. Love, John P.S. Can we revisit that steel thing sometime?).
The US is pretty powerless, IMHO, to “manage” much. Our real interest rates are perhaps negative at this point. How many rate adjustments does the Fed have left? None, essentially. What tool can the US/Fed use for the rest of this year to prop up the dollar if its continued slide get out of hand? Our stock market is still grossly overvalued. What’s the P/E on the S&P? 25/1 or 35/1? Where are the values?
The current run-up on gold, which parrallels the dollar’s fall against the Euro, shows you what the world truly thinks about the value of the dollar.
Which country in the world is gonna suck up the Chinese exports after the US dollar continues its slide?
I don’t believe I implied that at all, rather I’m drawing attention to issues regarding managing the transition, which contra samclem, can be done, if one intervenes strategically. (The Japanese do this right - precious little else, but in re their Yen goals…) Let it slide of course, it needs to and it’s good to see a dollar readjustment, however be aware too much too fast can provoke some
Indeed, but again, too much too fast and you get ugly effects. Sanguinely assuming it all sorts out in the end is not, IMO, advisable. Mind you, I am not arging a present case for interventions, I am arguing a present case for concern and preparation.
I can’t argue this.
On Manhattan’s comments:
Very good, see I am looking at Snow’s comments not just as Snow’s comments but in an overall framework that has begun to worry me in a real way, not just a whinging sort of way.
I’m not seeing much thought or effort on trade policy (maybe I’m missing it, can’t be up on everything I must admit), not much coordination going on. If all goes well, then fine, no worries.
However, there was this fine little french film, La Haine, had a funny little phrase, « c’est pas la chute, c’est l’atterrissage » [it’s not the fall, it’s the landing] in regards to a guy falling out of a building, who passes each floor saying « jusqu’à ici, toute va bien, jusqu’à ici, toute va bien ».
Now, I don’t want to be a chicken little - on the other hand there are a lot of pandora’s boxes open right now, a lot of things unanchored, and not that great communication between the key economic actors.
It’s been a few decades since my brief exposure to macroeconomics, but aren’t fiscally responsible policies (budgets more or less in balance, that is) supposed to strengthen currencies, and aren’t fiscally irresponsible policies supposed to weaken them?
Well … yes in the sense of price stability I suppose, but exchange rates are as well an expression of the relative desirability of assets denominated in that currency (as well as other reasons economic actors might want to hold a currency, e.g. iint’l trade reasons, but mostly the relative attractiveness of the assets.).
I believe you’re making a reference to the Bush Admin’s current fiscal policies.
That does enter into the current weakness - might be one of the triggers for the rather long overdue adjustment. With twin fiscal and current account deficits, and fairly large ones at that vis-a-vis rest of the world, there is a lot of pressure on the dollar. Double the offer, half the demand (well not really, but it sounded nice).
An interesting issue is the ability to sustain current policy.
(a) Asset price pressures: foreign investors who have been a significant source of capital in the US (given piss poor savings rates) are beginning to face real pain with the prospect of even more pain, and now it looks like a real structural readjustment. For investors’ w/o strategic reasons to be in the US markets, it’s high time to unwind.
(b) Unwinding by for. investors means further pressure on the dollar and also the likelihood that current US market rebounds are merely a up tick in a longer continued bear, which puts further pressure.
(d) Similarly overshoot is likely to induce (positively in part) price pressures as imports become more expensive. Only so much pain exporters to US can bear - and as Samclem notes, who absorbs excess Asian and esp. Chinese prod. capacity.
A nasty little transition period to get through during a less than ideal (but then when is it ideal?) political period, and perhaps not boding well for upcoming Doha talks. I’m going to provoke my interlocutors by opining that the Bush Admin has not to date proven to be highly adept in managing complex international politico-economic events and that some real degree of concern is warrented.
I’ve seen press that China’s currency is tied to the USD and that they’re actually benefitting from the current USD decline.
Is this true? If so, it would make the decline of the USD downright counterproductive in terms of making us even slightly more competitive against China, important since our largest trade deficit is currently with that country.
When oh when will governments learn that trying to intervene or “talk up/down a currency” is so much pissing in the wind and almost always counterproductive? The only thing the 800 pound gorilla like the US should do is make sure that any transition does not become a one way bet and overshoot.
As pointed out earlier, the Japanese (with US treasury help on occaision) have proven to be pretty good at intervening in the yen currency markets to keep speculators at bay. Although, 1994 and yen 80/dollar was not their shinning moment. [And I simply must point out, they really sucked in the equity markets and I watched those PKO moves from the trading floor of SBC in Tokyo in the early 90’s]. The last thing you want is another Bank of England debacle, which made Soros famous but he was far from being a major league player.
The key issue is where does the money go? Are European or other markets looking more attractive? Do they have the depth? Do Eurobonds have the same attractiveness and credit kwality as treasuries? With the way US fiscal irresponsibility is moving the answer could very well be yes.
The thing is that markets have become global and I say that as a very bad thing vis-a-vis diversification. Interest rates globally are more correlated now than even in the 80’s. Certainly the equity markets are much more correlated. It is difficult to hedge via diversification in the standard equity markets these days. Look back at the lessons of 94 when Greenback raised rates and all markets took it in the shorts, as they did with the tequila crisis, as they did in the Asian crisis and as they did when Russia bankrupted UBS…One can not easily diversify by investing in multiple geographic markets or via standard products .
Certainly the RMB is tied to the USD. If anyone cares there is no premium for USD cash on the black market, and hasn’t been since the B share market opened up in 2001. Not quite sure how China is thought to be benefitting from the current USD decline since they are tied. The RMB/USD has appreciated only marginally, but that just means Chinese goods become cheaper in Europe and FDI from Europe will buy more. Doesn’t have any net change with the US.
However, again, as I noted, Governments have little choice in a sense as traders can and will sieze on any given comment, and frankly a world with no interventions is … not going to happen.
Still, I agree, but the one way bet is a significant risk to keep in mind, watching one’s Ps and Qs in public commentary important.
May 31 (Bloomberg) – President George W. Bush said he supports a ``strong dollar,’’ and expects to see it rise in value as the U.S. economy grows.
The policy of my administration is for there to be a strong U.S. dollar,'' Bush said in a Washington interview Thursday with Russia's RTR TV that the White House released today, ahead of the president's arrival in St. Petersburg on the second leg of a trip to Europe and the Middle East. The market, at this point in time, has devalued the dollar, which is contrary to our policy.’’
The marketplace is making decisions as to whether the dollar should be strong or not,'' Bush said in the Russian television interview. Our policy is a strong dollar. And we believe that good fiscal and monetary policy will cause our economy to grow, and that the marketplace will see a growing economy and therefore strengthen the dollar.’’
Wonder if the dollar will pop on Monday from those remarks?
Anyway, first, thanks for the answer re the Chinese currency, China Guy, and second, in the articles I read they were making the contention that the fall in the dollar wasn’t doing much for our competitiveness in Asia, and was actually helping those Asian economies whose currencies are tied to the dollar by making their goods more competitive in Europe and Japan. Thus my remark about the fall in the dollar possibly being counterproductive as far as helping out U.S. exports.
Would I be correct in saying that this is a nearly inevitable result of a large long-term trade deficit?
As with RT, it’s been a hell of a long time since I’ve played this particular game (focusing instead on my own little corner of industry) but I would think that, with the focus on free trade and the movement of USD out of the United States things would certainly grow farther and farther out of balance until a correction occured.
Hell, even with the pain it might be possible for us to emerge from the crisis with a more globally balanced world market.
Good, someone in the Bush admin. realized a little fire fighting is useful for order. Funny phrasing though. I expect Monday will see a rebound on the $ as some hedge against intervention, followed by continued declines.
Oddly, BTW, China Guy, the Economist had a suggestion for Snow – learn to be as incomprehensible as Greenspan.
In any case, Chance, yes, the dollar depreciation is more or less inevitable given trade deficits and low savings in the US.
Jeez, this is embarrasing – Snow gives strong hints about a weaker dollar, which Bush then contradicts a week or so later.
We seem to have been here before (ref C02 emissions statements by CT Whitman, contradicted by Bush; Many conflicting Iraq pronouncements, etc etc). Could this administration look more disorganized and befuddled in it’s pronouncements?