Oil up, dollar down
Oil currently trades above $90.
It currently takes more than 1.43 dollars to buy a euro.
The dollar isn’t just at a record low against the euro either. It is weak against a host of currencies. Even though the dollar remains quite strong relative to two key Asian currencies, the broad real dollar index is back where it was in the early 1990s.
A hundred dollars bought about 5 barrels of oil at the end of 2001 (and around 110 euros). A hundred dollars now just buys a single barrel and change, and about 70 euros. Oil may be priced in dollars, buy anyone who set aside a bunch of dollars to assure their ability to pay for their oil import bill would be sorely disappointed.
The falling dollar has another implication as well: a lot of oil-exporters — those who are producing more than they need to cover their import bill — have traded an appreciating asset (oil in the ground) for a depreciating asset (dollars in the bank).
Yet a host of oil-exporting economies in the Gulf – Kuwait excepted – still seem determined to follow the dollar down. Serhan Cevik of Morgan Stanley:
""There is one simple reason behind this intriguing case of exchange rate misalignment (not just in Saudi Arabia but also in the rest of the Gulf region) and that is the exchange rate regime pegged to the US dollar," the author writes."
Gulf inflation is already high, and looks set to get higher. Real rates are close to zero in Saudi Arabia, and negative in many smaller economies. They are set to turn even more negative. All this adds to the current boom — but carries with it large future risks.
The IMF, though, doesn’t seem terribly concerned. The IMF certainly hasn’t been willing to criticize the Gulf countries for their dollar pegs – even though inflationary real adjustment with negative real rates hardly seems like the kind of policy the IMF would endorse.
The IMF’s staff – in their Article IV report – pretty much endorsed the UAE’s dollar peg. The IMF staff also indicated that the UAE’s real exchange rate was about right. Paragraph 24 on p. 14 goes out of its way to argue that there is “no misalignment of the dirham” – despite some evidence of a “modest” undervaluation — given the uncertainties of an oil-exporting economy.
Really? The UAE’s real exchange rate did appreciate in 2005 and 2006, as UAE inflation topped the inflation of its trading partners. But that appreciation came after a real depreciation in 2003 and 2004. The dollar fell even faster in 2003 than in 2007. In real terms, the dirham is probably flat over the past five years. In real terms, oil has soared. If the IMF expects oil to remain far higher than in 2002, I am not sure why evaluating the real exchange rate of oil-exporting economies poses any particular difficulties.
I think that the IMF’s real exchange rate model predicts that, over time, the real exchange rate of an oil-exporting economy will appreciate by about half as much as the real price of oil. In dollar terms, oil is up by more than 300% relative to the end of 2000 — and more than 400% from the end of 2001. But most Gulf currencies have depreciated in real terms since the end of 2001. This combination seems to suggest that the Gulf currencies – and especially the Saudi Riyal — are quite undervalued, and will need to appreciate substantially in real terms over time.
The IMF did note that the Saudi real exchange rate — which has depreciated by about 20% since 2000 according to the latest IMF real exchange rate data – is moderately undervalued. But the real undervaluation was so small that, in the eyes of the IMF, it was nothing that a bit of inflation couldn’t fix. That after all is the implication of fiscal expansion and quasi-fiscal investment spending; both imply less fiscal sterilization.
Directors noted the staff view that the Saudi riyal appears to be moderately undervalued at present. Many saw this as a transitional phenomenon reflecting the positive terms-of-trade shock. Several other Directors considered that the riyal is broadly in line with fundamentals. …. Further, they noted that any undervaluation of the real effective exchange rate can be expected to reverse in the near term as the external current account surplus declines in response to the authorities' expansionary fiscal stance and the investment programs that have been launched. Directors also considered that the current pegged exchange rate regime has served the economy well, although a few Directors were of the view that a more flexible exchange rate would help reduce fluctuations in the face of oil price volatility.
One of my habits — noted by IMF uber-blogger Simon Johnson — is to read the IMF's World Economic Outlook from back to front. But I have other bad habits. I also like to compare the WEO’s assessment of real exchange rates to the assessment in the IMF’s country reports.
That comparison though produces a puzzle, at least in my mind.
Through the end of June, Canada’s real exchange rate has appreciated by around 35% since the end of 2000. Relative to its value at the end of 2001, it has appreciated by even more 940%). When the IMF adds more recent data to the IFS data series, it will show an even bigger real appreciation. Canada’s dollar just hit a new high in nominal terms. The IMF, in the WEO, noted that the Canadian dollar is fairly valued – presumably because Canada’s real appreciation has been matched by a large increase in the real price of its commodity exports.
I can see – though with a bit of difficulty — how the IMF could find the GCC’s real exchange rate is now fairly valued and the Canadian dollar is over-valued. And I can easily see how the IMF could find the Canadian dollar is fairly valued and the GCC is under-valued. But I cannot really see how the IMF can find that Canada's real exchange rate and the Gulf’s real exchange rate are both appropriate.
Both export commodities. Both have enjoyed a large increase in the real price of their exports. One has experienced a substantial real appreciation. The other has not.
The STAGFLATION COMBO. GET OUT OF U.S. assets if you can because the only way the U.S. dollar can be saved is through a major financial crack which cancels all of planet earths debts or World War 3 that destroys various central banks. Canada is in good shape compared to the U.S. and the Canadian dollar should be valued much higher in my opinion. The IMF is predicting a growth rate of 2.3 % as opposed to 2.5% but still positive growth and exports are moving along.
Nicolas: “…the only way the U.S. dollar can be saved is through a major financial crack which cancels all of planet earths debts or World War 3 that destroys various central banks.”
The dollar could also be saved by creating a “new dollar”. One “new dollar” would be worth, say $ 100 “old” dollars”. A fixed time period, say one month, could be established for converting “old dollars” for ” new dollars” ksued by the Fed. After the period, “old dollars” would be declared worthless. I think this is possible in theory, at least; but very difficult in practice because of political fallout worldwide.
Yet a host of oil-exporting economies in the Gulf - Kuwait excepted - still seem determined to follow the dollar down.
How do you explain this, other than to conclude the people in charge are rather stupid?
The US Treasury Plunge Protection Team has devised the world’s first financial market system that doesn’t care about trashing the monetary currency. The US Dollar devalues toward zero monetary value but the stock market hits record highs everyday. Jim Rogers is right, sell and get out of US Dollars immediately before the scam unravels.
The US Dollar is crashing versus the Euro and Canada Dollar
http://finance.yahoo.com/currency
And Gold at $787 per ounce, Up $16.50
http://money.cnn.com/data/commodities/index.html
And Oil at $92 per barrel, Up $1.40
http://money.cnn.com/data/commodities/index.html
>> Yet a host of oil-exporting economies in the Gulf - Kuwait excepted - still seem determined to follow the dollar down.
How do you explain this, other than to conclude the people in charge are rather stupid?
“>> Yet a host of oil-exporting economies in the Gulf - Kuwait excepted - still seem determined to follow the dollar down.
“How do you explain this, other than to conclude the people in charge are rather stupid?”
Protection money?
Brad, you should have some other bat habits, at lest on fridays.
Some beer, without “pegging” on it, would be healthy!
Have a good week-end.
You are not alone, Brad:
Petter Schiff’s today comment starts like this:
“Send in the Clones:
Four leading members of the Bush administration’s economic team, including Ed Lazear, Chairman of the Council of Economic Advisors, Commerce Secretary Carlos Gutierrez, Al Hubbard, director of the National Economic Council, and Jim Nussle, director of the Office of Management and Budget, convened on a CNBC panel earlier this week and confidently forecast that the economy would avoid a recession. As they uttered their platitudes, we learned that housing sales plunged again, with national inventories of unsold homes hitting a new record high, and that Merrill Lynch disclosed nearly $8 billion in losses. Set against this backdrop of deteriorating economic news, it would have been more honest, and perhaps more effective, if the Administration team came on stage in clown makeup and oversize shoes.
The group’s most entertaining routine could be described as the “falling dollar hot potato”. It is a testament to the professionalism of CNBC host Dylan Ratigan that he was able to suppress howls of laughter while the economists scrambled to avoid any discussion of the dollar by claiming that only the President and the Secretary of the Treasury were allowed to comment. (Of course the only thing Bush or Paulson will utter on the subject is the all too familiar mantra “a strong dollar is in our national interest.”) [...]”
Add to that the last graphics about foreclosures in California, by CalculatedRisk, and one only can say:
Get rid of Bush & Co., forget Iran and make some ‘clever’ decisions.
2008 will be a long year for USA, China and Iran, if things don’t get worse this year.
some of the comments have become a little hysterical. why the financial advice ? every day i get spam from people who urge me to buy what they have just bought. funny. the only person who timed his exit from the dollar perfectly was saddam hussein. making an exit now may pay off - but we must soon be getting close to ‘last sucker’ time. the big names in the great bear raid on america made their moves months ago, years in some cases.
yes gold will go up for ever, like property last year and information technology a while before that. no good telling us what to buy if you don’t stand by to tell us when to sell . . .
recall the dollars ? - yes america can tear up the bill, but don’t expect the red carpet next time you try to dine out at the global restaurant. people may be stupid, but not that stupid.
http://darkbrownriver.blogspot.com/2004_12_01_archive.html
Explanations (for following the $ down):
Mismatches in the banking system (riyal liabilities, $ assets);
Conservative (as in don’t like change) rulers
Asymmetric pressures from rising assets and falling assets — rising assets and the associated pressures don’t require immediate policy shifts;
Real estate investors (including members of the ruling families) benefit from low real rates and don’t feel the effects of inflation given how rapidly their income is falling;
A sense that oil revenues would fall (in local currency terms) if the local currency rose against the $ (that’s true, but each unit of the local currency would also buy more — so in real terms, it is a wash)
Protection money (Saudis hold $ for US protection), though that doesn’t explain why Kuwait — literally a US base — allowed the KWD to appreciate and shifted its assets away from the $.
But I now will take the advice above, and focus on other things for the remainder of the evening!
The point is that, unless the Fed changes course, the USD will lose value against real things, no matter what central banks of countries with Current-Account surpluses do with their exchange rates:
- if they stop intervening and let their currencies appreciate against the USD, prices will keep stable in those currencies, but will rise in USD;
- if they keep buying dollars and printing huge amounts of their currencies (as GCC countries, China, Argentina et al are currently doing), they will keep the exchange rates stable but will have high inflation, so prices of real things in USD will rise just the same.
Players all over the world have assumed that the USD will just keep losing purchasing power in real things. The US is risking a massive run away from the USD and the loss of its role as reserve currency.
I recently published an essay on this where I quoted a paper by Benn Steil (probably your boss in your new CFR post), where he wrote:
“The status of global money is not heaven-bestowed, and there is no way effectively to insure against the unwinding of “global imbalances” should China, with more than a trillion dollars of reserves, and other asset-rich central banks come to fear the unbearable lightness of their fiat holdings.”
As Krugman said in his latest paper, the USD could have a “Wily E. Coyote moment”. And as he also said, the US in 2007 isn’t Argentina in 2001. Only that, contrary to what he meant, the present situation of the US has far more downward potential than that of Argentina in 2001. This might be shocking for anyone familiar with the magnitude of the adjustment that Argentina underwent at that time, best illustrated by the fact that imports dropped from 20 billion USD in 2001 to 9 billion USD in 2002. Why and how could possibly the US face an even harder adjustment?
To understand why, we will use Jacques Rueff’s tailor metaphor as quoted by Steil (2007), after making a couple of observations to it. In the first place, it is just not true that dollars are of no use outside the US, at least today. Because as we have said, the dollar today is regarded as valid tender for goods, services and property rights from any country. So, in order to pay for Saudi oil or Brazilian soybeans, China must have in hand and tender US dollars, not bonds or stocks. Secondly, and related to the above, to use the metaphor in a more realistic way, we need to include, along with Steil’s Chinese tailor, an Arabian shoemaker.
So, here we have a customer (the US) to whom a number of providers sell real things (suits, shoes) in exchange for IOU’s. (And by IOUs we mean US dollars themselves, not US bonds, because as we have said, a fiat currency abroad is intrinsically a promise to the holder that he will be able to exchange it for goods, services or property rights from the issuing country. A bond is just a promise to get more promises.) The providers have been doing that for some time and by now have piled up a huge stack of IOUs, to the point of starting to worry whether they will ever be able to exchange the IOU’s for real things from the customer. And as they see that the customer is showing no sign of lowering the amount of IOU’s he issues per year (and much less stopping issuing them, and even less starting paying them out!), they can be reasonably expected to take action about the situation. What kind of action? Basically, stop selling anything to the customer until they have cashed out (exchanged for real things from the customer) at least a large part of their stacks of IOUs. Which in the real world is particularly important for the shoemaker because the product it sells (oil) comes from a finite, absolutely exhaustible endowment.
And this makes the first difference between the US in 2007 and Argentina in 2001. Even if some of the products the US sells to the world are absolutely essential (e.g. grains), there are enough dollars (and dollar-denominated debt) outside the US to pay for those products for an extremely long time. So the world can buy those products from the US without the need to sell anything to the US for that time. In contrast, there were no Argentinian pesos circulating outside Argentina in 2001 or anytime. Therefore, if someone wanted to buy Argentinian soybean or wheat, they had to tender the international means of payment (US dollars) for that.
The second difference lies in the respective quality of imports. In 2001 Argentina was an exporter of not only food, but also of oil and natural gas. So the drop in imports did not involve anything essential for running their infrastructure. In contrast, today the US imports 59 % of their consumption of crude oil and petroleum products. The disruption its stopping could cause is mind-boggling.
The one thing the Fed can do to stop this collision course is to send a very strong signal that they care about the USD’s role as international reserve currency and about it keeping its purchasing power in internationally traded goods. That signal would be a rate HIKE of 50 bp on Oct 31. That would send this message to the world: “We acknowledge the important role the USD plays in global trade and we assure all countries that our monetary policy will be geared first and foremost to preserve the purchasing power of the USD for international transactions, so that countries can confidently hold it (or debt denominated in it) as a store of value.”
Conversely, this was Sep. 18’s message: “Look, the only thing we care about when setting our monetary policy is the level of our internal economic activity. And by that we mean mainly the production of goods and services that you can’t buy from us. We don’t care much about our currency holding its purchasing power internally, let alone when measured in internationally traded goods. So, if you use our currency to trade between yourselves, it’s your problem. And if you are so stupid as to use it (or debt denominated in it) for holding your savings, you do need professional help.”
The whole essay is here
http://peaktimeviews.blogspot.com/2007/10/realistic-view-of-international.html
What would happen if China, the biggest pegger, let its currency free? In the longer run it would help US export and the current account balance. But in the short run, the Chinese financing of the US would probably disappear (why should they buy dollar anymore?), which would lead to higher rates. Higher import prices (the rest of Asia and other countries would be glad to follow the yuan’s appreciation) would lead to inflation and/or higher FED rates. What would those people who have yuan do with their money after the exchange rates settle? They would get a lot less yield in yuan than in dollar (the yuan rates would probably go down).
I think that for China a good escape from the current situation would be the introduction of an export tax. It would slow down export, generate government revenue, and fight speculative dollar inflow (some thinks that a lot of dollar go into China by exporting and importing the same goods expensive/cheap).
“…the Kingdom is not likely to stand idle. We don’t doubt that Riyadh’s increased leverage in Washington due to higher oil prices and a declining dollar will be put to at least subtle use. It is difficult to imagine exactly how that leverage over Washington will manifest itself, but it may include higher technology weapons at greater discounts…” http://www.ft.com/cms/s/0/b1cc3f16-824e-11dc-8a8f-0000779fd2ac.html
@AC,
China, the biggest pegger
Not true. The Chinese may be managing the rise of the Yuan, but it is NOT pegged. If anything, Japan is the real pegger in Asia.
I think the Chinese government is quite comfortable with seeing the Yuan gradually rise against the dollar, say at 4% a year or so. This gets them some return on their Treasury holdings.
I think the best description of China’s exchange rate is that it is a crawling peg v the dollar. The NDF market is currently pricing in a somewhat faster than 4% appreciation; more like 6%.
AC — I think you are right that in a market equilibrium, US rates would need to be higher than Chinese rates to induce Chinese investors to fund the US deficit (see japan). But the exchange rate is now so far from equilibrium that i find it rather implausible that China would ever let it move towards a true market rate. Even if China moved by 10-15%, i suspect that most investors would think that there is more to come — and thus China would still need to accumulate large quantities of reserves.
Turning back to my original post — can anyone figure out how the IMF can conclude that Canada’s RER is fairly valued even though it has experienced a large real depreciation w/o also concluding the Gulf states are substantially undervalued?
RealThink, thanks for the great post. At one time, a country’s economic strength could have been measured by the strength of its currency, but now, with all the pegging going on, it’s all skewed. When the Saudis figure out that we have to buy oil at whatever price they charge, and become bold enough to let their currency strengthen, they can go on a US shopping spree and buy up our banks, infrastructure, ect at deep discounts. Allah could then control the Christian Right crusaders.
You’d expect me to say so, but there’s likely a political-economic explanation behind this “I’m OK, You’re OK” game. We must read between the lines.
Bottom line: Given that Article IV is rather toothless, what difference would it make if the IMF prescribed currency appreciation for GCCs? Even if their currencies are clearly undervalued in REER terms, maybe it’s better for the IMF to stay friendly with these GCCs knowing it can’t do much of anything about how things are. They’re all on relatively friendly terms with the overlords of the IMF, so why sweat it?
Instead of uselessly prodding GCCs on exchange rates, IMF staff probably have better things to do while in the Middle East, like going skiing in Dubai [!]
Black Swan, remember what happened when China wanted to buy Unocal. And when Dubai wanted to buy the operator of US ports (whose name I can’t recall just now).
Yeh, we told them that all they could buy with their US debt money was more US debt. None the less, “eight of the 25 largest bank-holding companies in the U.S. by total deposits are owned by foreign companies—double five years ago.”
“When the Saudis figure out that we have to buy oil at whatever price they charge, and become bold enough to let their currency strengthen, they can go on a US shopping spree and buy up our banks, infrastructure, ect at deep discounts”
It never ceases to amaze me that a bunch of commenters on an econ blog (no matter the quality of that blog) seem to know far better than, well, everyone else who has managed to make it into a position to actually make the decisions that these commenters know better than. The cannard has been for decades that “as soon as (whoever) manages to (wake up and smell the coffee) then (something horrible is going to happen to the US).” Or, on the flip side, we have the “as soon as (whoever) no longer politically/economically/militarily needs the U.S. then (something horrible is going to happen to the US)” arguments. As I’ve said before (and mirrored by a comment in this thread that comments around here are becoming somewhat hysterical), the degree of jingoism lurking behind cogent-sounding arguments is a little boggling, but at least it’s instructive. I feel like I’m reading the opinion of Iranian state economists here half the time.
“It never ceases to amaze me that a bunch of commenters on an econ blog (no matter the quality of that blog) seem to know far better than, well, everyone else who has managed to make it into a position to actually make the decisions that these commenters know better than.”
i have heard the same thing put another way - ‘how is it that the only people who really understand how the country should be run, are cutting hair and driving taxis ?’ (!)
US assets are already fairly cheap when expressed in terms of Saudi Arabia’s biggest export (a barrel of oil buys a lot more financial assets — whether in the us or europe — now than in 2001). And that is what really matters for the Saudis. The riyal/ dollar only matters if the saudis are borrowing in riyal to buy US assets — rather than trading oil for assets.
indeed, i have heard it argued that the saudis desire not to “devalue” (in riyal terms) the value of their supposed $800b of foreign assets (that total includes a substantial chunk of private investment) is one reason why the saudis don’t revalue.
I would also note that the US has never, ever indicated that it would direct its monetary policy to maintaining the external value of the $ in the post BW era. THose financing the US know this — or at least should. It is clearly expressed in the US statements as part of the IMF’s toothless Article IV process.
Emmanuel — i am less impressed than you are for the arguments in favor of pulling punches and not saying the gcc currencies are undervalued to preserve the imf’s relationship with the gcc countries. that relationship isn’t that good to begin with (it isn’t like the gcc countries are models when it comes to meeting imf standards for data transparency, for example) and the imf’s soft stance undermines its broader credibility.
Finally, I think it is understandable that the US has concerns with the growing presence in US financial markets of various kinds of state capitalists. The US has long been uncomfortable with a large ownerhship role for the us federal government in the US, so it isn’t terribly surprising the us isn’t completely comfortable for SAFE to own US equities when say the soc. security trust fund is just in us bonds.
Sure, some of the sov funds have been around for a while, but their current scale (and more importantly their future scale) does sort of change the game. China has been reluctant to allow US banks to operate freely inside china, in part b/c private us banks wouldn’t play by the existing rules of the Chinese domestic financial game (which buying sterilization bills when asked). I don’t think it is all that surprising that the US has some qualms about state investors from countries with very different political and economic systems buying certain kinds of US assets.
I think my writing on this has been consistent — and hopefully not hysterical. Back in 2005 at the time of cnooc/ unocal (and again with Dubai ports world) I have noted that central banks capacity to convert their dollar debt into US equity was not unlimited, and as a practical matter, there were restrictions on state actors ability to trade debt for equity. Those buying US debt, I argued, should understand the terms — the debt could be traded for other debt and perhaps some other assets, but probably not every asset foreign states wanted, and the US had made no commitment to protect the dollars value.
Bottom line: I don’t think the rules of the game really have changed that much, and to me the real surprise is that foreign investors were willing to accept those terms back in 2004 and 2005 and 2006 and even so far in 2007. Remember, no one is forcing the world’s central banks to extend an unconditional line of credit to the US; tis their own policy choice.
Brad, Saudi inflation is up 375% over last year, and even that number is synthetic, because, as you know, the Saudi govt uses subsidies to control its country’s domestic inflation. Obiously, the Kuwaitis have figured out something that the Saudis haven’t.
Prince Alwaleed bin Talal, the largest single shareholder in Citigroup, bought his shares before the big plunge in the USD’s value. Lately, he’s been complaining about the lack of value in his investment. His citi shares are worth 25% less in the European market. Aside from the Saudy Prince having to deal with the inept Citi Prince, there is the weak USD problem.
Guest 12:38:22, If you’re bent on posting pejorative diatribes, at least do it with semi-literate punctuation and pronoun-anticedent agreement.
Brad Setser wrote:
“Those buying US debt, I argued, should understand the terms — … the US had made no commitment to protect the dollars value.
Bottom line: … the real surprise is that foreign investors were willing to accept those terms back in 2004 and 2005 and 2006 and even so far in 2007. Remember, no one is forcing the world’s central banks to extend an unconditional line of credit to the US; tis their own policy choice.”
Which is in total agreement with my view that US Fed policy should be construed as the US saying to the world: “We don’t care much about our currency holding its purchasing power internally, let alone when measured in internationally traded goods. So, if you use our currency to trade between yourselves, it’s your problem. And if you are so stupid as to use it (or debt denominated in it) for holding your savings, you do need professional help.”
“…Canada’s largest foreign investment, which is in the US, gives Canadians control over only a minute portion of the US economy, in contrast to the very large fraction of the Canadian economy that is controlled by American interests…” http://en.wikipedia.org/wiki/Foreign_ownership_of_companies_of_Canada
“…A more expensive riyal will affect Saudi exports and dampen the enthusiasm for FDI flows into the Kingdom. This could undermine the Kingdom’s goal of becoming among the top ten most attractive destinations for foreign investment in the world by 2010…” http://www.arabnews.com/?page=6§ion=0&article=101872&d=29&m=9&y=2007
“…Abu Dhabi is planning a series of industrial cities offering huge incentives such as 100 per cent foreign ownership and tax free status…” http://www.menafn.com/qn_news_story_s.asp?StoryId=1093170954
RealThink on 2007-10-27 16:16:38
Don’t presume to identify so quickly those who agree with ‘your view’.
The issue is foreign central bank intervention and distortion of market-determined exchange rates.
Those who intervene to set artificial exchange rates are the ones inviting ‘your view’ into their own economic consequences.
The US is the one country that (so far) is setting the example of operating according to a principle of free markets. It’s a miracle the country has had the fortitude to uphold this principle so far.
Brad Setser wrote:
“I would also note that the US has never, ever indicated that it would direct its monetary policy to maintaining the external value of the $ in the post BW era. THose financing the US know this — or at least should. It is clearly expressed in the US statements as part of the IMF’s toothless Article IV process.”
I completely agree. I never said that current US monetary policy implied a breach of word, or that foreign dollar holders had been conned. I do think they have been very unwise in accumulating such excessive dollar reserves. My point is that their realizing and rectifying that folly could turn out very upsetting to US life. And that it would be in the best US interest NOW to change its long-standing monetary policy in order to smooth that unwinding of global imbalances by, in Steil’s words, helping China and other asset-rich central banks feel that their fiat holdings are not so unbearably light.
BTW, I don’t think that Steil or Krugman have been hired by the Ayatollahs or are cutting hair or driving taxis, the last two being thouroghly respectable jobs otherwise.
” Conversely, this was Sep. 18’s message: “Look, the only thing we care about when setting our monetary policy is the level of our internal economic activity.”
Absolutely wrong - they also care about external adjustment, and are prepared to accelerate that adjustment right now - which includes more exports. Look at the recent numbers.
‘how is it that the only people who really understand how the country should be run, are cutting hair and driving taxis ?’
I’m not driving a taxi or cutting hair, but I can say that shorting the dollar and going long on foreign equities has been very profitable. I’m very happy to see that others (counterparts) are bullish on the US.
For anyone to surmise that my comments are hysterical take note that I’ve worked within the financial community
and am educated as an Economist. I also instinctively concur with the comments made by Jim Rogers because I believe the U.S. government/treasury financial system is out of control and not functioning properly by sound economic standards.
‘how is it that the only people who really understand how the country should be run, are cutting hair and driving taxis ?’
Come on, gillies, admit it. Isn’t Bush living proof that it’s easier to run a country into the ground than to cut hair while driving a cab?
“…Collectively [the BRICs'] GDP amounted to $5.6 trillion at the end of 2006. That’s 43% of U.S. GDP, 56% of the 13-nation euro area’s and 130% of Japan’s… The aggregate free-float value of the Brazilian, Russian, Indian and Chinese stock markets is a mere 4.9% of world market value, according to Morgan Stanley Capital International. The four BRICs are 12% of the U.S. market value, 16% of Europe’s and 56% of Japan’s…” http://www.bloomberg.com/apps/news?pid=20601039&sid=auhSx4a0tgkY&refer=home
‘antecedent’
“…It’s gotta triple. It’s gotta quadruple,” [Rogers] was quoted…as saying…” http://www.thestandard.com.hk/news_detail.asp?pp_cat=2&art_id=55680&sid=15969224&con_type=3
“…Chinese officials argue the gradual pace of appreciation is needed to prevent instability in China’s banking system…” http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=6db6eecb-48a8-447b-a632-f885175a8394
” can anyone figure out how the IMF can conclude that Canada’s RER is fairly valued even though it has experienced a large real depreciation w/o also concluding the Gulf states are substantially undervalued ”
(You mean appreciation I think.) Only if a case can be made that the Canadian dollar was undervalued relative to the Gulf states several years ago. (I don’t know what that case is). But it does depend on the measurement period. e.g. The Canadian dollar is nominally flat against US over the past 30 years and probably not far off in real terms.
“…Let’s have the federal government issue about $10 trillion in Steven A. Cohen National Debt Retirement Fund Bonds. After interest is paid on the bonds, if Mr. Cohen makes 40% on the money, the fund will return 36% a year. That means that in only two years… he can pay off the entire United States federal debt. Even if Mr. Cohen follows his usual pattern and charges the client — in this case, the government - 50%, thus lowering the effective yield to a “mere” 16%, his brilliance and skills will have paid off the entire national debt in less than five years. That’s unless, of course, Mr. Bush - or Hillary or Mitt or Rudy or Barack after him - add hugely to the national debt… Why do we need federal taxes?… Suppose that Treasury Secretary Henry M. Paulson Jr. issues $6 trillion in Steven A. Cohen Budget Anticipation Trust Bonds. And suppose Congress mandates that Mr. Cohen not charge a fee for managing this fund. In one year, his bonds will have earned enough for all federal expenditures, thus eliminating the need for taxes… And that’s just the beginning…” http://www.nytimes.com/2007/10/28/business/28every.html?ref=business
award of the month for economic linguistic contortion:
” even though inflationary real adjustment with negative real rates hardly seems like the kind of policy the IMF would endorse ”
ironically, the sentence is perfectly correct!
” Gulf inflation is already high, and looks set to get higher. Real rates are close to zero in Saudi Arabia, and negative in many smaller economies. They are set to turn even more negative.:
The table for Saudi Arabia shows real rates of 3 per cent and trending up since 2003?
Just imagine if there were a Chinese conspiracy to destroy the monetary value of the US dollar, it would be interpreted as a “de facto” declaration of economic war against the United States. Now US Treasury Secretary Hank Paulson is travelling to Beijing in December to lecture the Chinese to immediately depeg from a currency basket, and sharply devalue the monetary value of the US Dollar. Is Hank Paulson insane? A massive devaluation of the US Dollar would negatively impact the Chinese economy, but would pail in comparison to the economic destruction across the US Economy. The Chinese didn’t cook up the subprime mortgage scam by Wall Street investment banks that has massively misallocated capital across the US Economy. Instead of lecturing the Chinese, Hank Paulson should apologise for Wall Street selling $10 billion of subprime AAA-rated and now worthless securities to the state-owned Bank of China.
Forgive me but yes the East are full of skeptics, especially that of the West.
” At the start of the week-long conference that ends Feb 19 2000, Malaysian Prime Minister Mahathir Mohamad said he was disappointed that “the international community cannot think of any other solution to the crisis in East Asia except call for improvements in transparency and governance.” Mahathir regretted that although blame for recent market crises in the region was being laid on the lack of transparency and accountability, concrete measures were not being taken to address these issues such as direct regulation of hedge funds and “highly leveraged” institutions. ”
Why direct the current financial anomaly at only certain Asian Countries? I have made this point numerous times, and I will say it again. Why the extra loud complaints against an artificial weak currency but a muted (if theres any) one at a burgeoning trade deficit beggar thy neighbour policy?
Mahathir might not be a perfect leader, but he was one of the rare few who dared to speak the unspeakable.
Any one from the West who dares to be another Volcker? Most of the learned friends here knows the best way to solve this current malaise is the hard way. Why the fingers pointing now when the bubble has burst?
“The table for Saudi Arabia shows real rates of 3 per cent and trending up since 2003?”
And it’s only that low because of Saudi domestic consumer subsidies, like the huge subsidy for gasoline. It taxes the imagination to even think about the US consumer getting a gasoline subsidy from the Federal Goverment, which instead, subsidizes consumer inflation inducing ethanol programs.
Is anyone in government concerned about STAGFLATION / INFLATION that will hurt consumption even more than the other problems? This is the major consequence of this dollar fiasco.
I’ll toss in the simple (though somewhat circular) argument that Canada and gulf state currencies could both be “fairly” valued because the gulf currencies are undervalued.
GCC countries have made it very clear that they intend to maintain the peg, even though that is likely to be inflationary, and have historically acted in ways consistent with this intention. Canada has made it very clear it intends to maintain stable prices, even if that means an appreciating currency, and has historically acted in ways consistent with that intention.
A profit motivated agent would have to discount current “fair value” of GCC currencies for the inflation risk, but not that of CAD. As such, both might be “fairly” valued vs USD, notwithstanding similarities such as energy exports.
Just got this information from my broker, I hope you can use it as more comfirmation on holding a dollar-peg:
“DJ GCC To Set New Money Union Date After Assessing Econ-Agency
DUBAI (Zawya Dow Jones)–Gulf Cooperation Council, or GCC, countries will set a new date for their monetary union after assessing their economies, Saudi Arabia’s central bank governor said on Saturday.
“The situation will be assessed, taking into consideration the economic situation in the region in order to set a new date for the monetary union of the council,” Saudi Press Agency, or SPA, quoted the country’s chief banker, Hamad al-Sayari, as saying following a meeting of Gulf finance ministers and central bankers in Riyadh.
The six GCC countries, Saudi Arabia, Kuwait, United Arab Emirates, Qatar Oman and Bahrain had 2010 set as their deadline for reaching a single currency zone, but technical, as well as rumored political differences have proved to be serious obstacles to achieving that date.
Earlier this year, Oman announced it would not be able to meet the date, citing technical difficulties, while Kuwait broke the taboo and ended its currency’s link to the weakening U.S. dollar, setting another obstacle to hopes of a single currency.
Al Sayari also said that, except for Kuwait, the oil-rich countries will keep their current exchange policies, and maintain their peg to the dollar despite its ongoing falls against major currencies.
“We agreed unanimously that there is no need to change the policy for the time being,” he said.
He added that in case the greenback keeps falling against major currencies, “proper policies will be adopted” to face the situation.
The dollar fell to a fresh low against the euro Friday as more weak U.S. data increased expectations that the Federal Reserve will cut its benchmark interest rate in the coming week to deal with a drooping economy.
The greenback also reached a fresh 33-year low against Canada’s currency, a 23-year low against the Australian dollar, and it dipped to its weakest point in three months against the United Kingdom pound.”
The Dane
http://seekingalpha.com/article/48958-research-in-motion-f2q08-qtr-end-9-1-07-earnings-call-transcript
http://www.rbcprivatebanking.com/dubai.html
“We agreed unanimously that there is no need to change the policy for the time being,” he said.
“He added that in case the greenback keeps falling against major currencies, “proper policies will be adopted” to face the situation.”
That’s sounds a lot like the weatherman saying it might rain, unless it doesn’t. In other words, they could be riding on the Kuwait express as soon as next month.
I’ll fix the language on Canada. I did mean appreciation. If the Gulf states are gonna have a real appreciation thru inflation and that process is only beginning, then at this point in time they are still undervalued.
I agree with Guest’s take on the GCC statement. The longer monetary union is put off, the harder it is to argue that “holding onto to the dollar peg until we have a monetary union and then decide on a new regime” is a sensible policy. it means holding on to a dollar peg for a long, long time.
as for Saudi real rates — nominal rates earlier this year were around. inflation is now above 4 — ergo, real rates are heading down fast, and are now close to zero. A lot depends on how you do the calculation. But at the this stage, my bet would be that the ex post real rate on funds borrowed for a year on jan 1 will be close to zero.
after the dollar goes down further, it will hit bottom, (which may be immediately apparent - or only in retrospect.) - and after that it will rise again. that is how it has always been, and how it will be again. the deeper the descent, the greater the likliehood of overshoot and a sudden rise.
the concept that ‘this time it is different’ has proved wrong on all previous occasions.
if on the other hand the current incipient crisis is so catastrophic that the global financial system is going to fracture, do not be too certain that the dollar will be the first or only thing to crack.
continue to be dollar bears if you like, but when everyone (everyone in the market) is a dollar bear - the dollar will have only one way left to go . . . . . up.
china has a lot to lose if the dollar goes to wheelbarrow confetti. now somebody please tell me - who has not ?
p s i cut my own hair and drive my own taxi. i am not an economic or financial specialist. i will explain my simple views again - perhaps when oil next hits $40 / barrel.
Dave Chiang:
“Just imagine if there were a Chinese conspiracy to destroy the monetary value of the US dollar, it would be interpreted as a “de facto” declaration of economic war against the United States. Now US Treasury Secretary Hank Paulson is travelling to Beijing in December to lecture the Chinese to immediately depeg from a currency basket, and sharply devalue the monetary value of the US Dollar. Is Hank Paulson insane?”
He is certainly not insane. Nor is he dumb. As far as that goes, his boss isn’t as dumb as a lot of people think. There is a method to their apparent madness.
“A massive devaluation of the US Dollar would negatively impact the Chinese economy, but would pail [sic] in comparison to the economic destruction across the US Economy.”
People who write blog comments (when business is slow at the barber shop:) universally assume this, but is it really true? What if Paulson is smart enough to look more than one move ahead, and he has concluded that the damage to the US would be containable, but the damage to China would be fatally destabilizing? As was stated in the fxstreet article linked just above, “Chinese officials argue the gradual pace of appreciation is needed to prevent instability in China’s banking system.” If the dollar crashes, the Chinese have an impossible choice: either let the yuan crash along with the dollar, or let it float. They lose either way.
It’s not just China. In Krugman’s recent dollar crisis paper, he said
“So it seems likely that there will be a Wile E. Coyote moment when investors realize that the dollar’s value doesn’t make sense, and that value plunges.
“The case for believing that a dollar plunge will do great harm [i.e. to the US] is much less secure. In the medium run, the economy can trade off lower domestic demand, mainly the result of a fall in real housing prices, for higher next exports, the result of dollar depreciation. Any economic contraction in the short run will be the result of differences in adjustment speeds, with the fall in domestic demand outpacing the rise in net exports.
“The United States in 2006 isn’t Argentina in 2001: although there is a very good case that the dollar will decline sharply, nothing in the data points to an Argentine-style economic implosion when that happens. Still, this probably won’t be fun.”
Following his paper there is a discussion by Kevin O’Rourke, who says “This ‘probably won’t be fun’ for the United States, as he [Krugman] says, and it risks being a great deal worse than that for Europe.”
By the way, I wrote this before I saw the comment by Gilles, “china has a lot to lose if the dollar goes to wheelbarrow confetti. now somebody please tell me - who has not?” Everybody has something to lose, of course, but Paulson thinks the US will be the last man standing at the end of the day.
There is absolutely no sign of concern over the dollar in the US treasury market - as has been the case for years. And there shouldn’t be. This will continue. Foreigners will continue to recycle dollars into treasuries and will eat whatever currency depreciation is fed to them. They have absolutely no choice. The dollar is highly overestimated as a negative risk to the US economy. The Fed will ease by a further 25 basis points this week, with little concern for dollar risk or its consequences.
re: “China has a lot to lose if the dollar goes to wheelbarrow confetti”
China has even more to lose if it spends a ton of money trying to keep the dollar from going to wheelbarrow confetti, and at the end of the day the dollar still ends up as confetti. That is what scares me. China (and some other countries, including likely the Saudis) are already spending a ton of money propping the $ up. if they stop adding to their exposure, the $ tanks. if they don;t stop adding to their exposure, they are really taking a huge financial gamble.
Guest — your comment assumes that the same forces that support the treasury market now will remain in place. that is a reasonable bet — indeed, i now think the most likely outcome is the one you describe. but it is still a bet.
http://www.ft.com/cms/s/0/19910d64-858f-11dc-8170-0000779fd2ac.html
Lawrence Summers piece on FT.
He said “First, any new approach must be premised on the desirability of a strong, integrated global economy that benefits the citizens of all countries, not on the idea that economists or politicians can calculate “fair” exchange rates.”
My concurrence. Should the call to arms goes too far and morph into a widespread witchhunt, it serve no good to any of the counterparties. Chinese and the Middle Estern countries have a big issue but it doesn’t insulate the US or the ROW from any hiccups that might arise.
Summers argument also caught my eye;
He rather clearly wants to avoid prescribing too much what the world should do. He also — reflecting much of what he argued at the IIE conference — tried to avoid telling China that change is in China’s interests. rather he frames the case for change in terms of a global interest in adjustment.
Still, it seems to me like he is suggesting that the US needs to step back from its strong dollar policy (such as it is) and find a new approach. even if done diplomatically and with a fair amount of tact, such a reorientation would have important consequences for the rest of the dollar zone.
There are interesting times, currency-wise.
gillies wrote: “i have heard the same thing put another way - ‘how is it that the only people who really understand how the country should be run, are cutting hair and driving taxis ?’ (!)”
and: ” ps i cut my own hair and drive my own taxi. i am not an economic or financial specialist. i will explain my simple views again - perhaps when oil next hits $40 / barrel.”
Well, gillies, I guess you prove that you are one of those “people who really understand how the country should be run”.
I think by the end of 2008 US Dollar rate will be US$2 = EUR1. Although there is no substantial reason for the USD to go down anymore, so it seems to be some kind of artificial thing going on with the US Govt. pulling the USD down. There’s no other reason for the US going down this fast. It’s called The Inside Job.