It is nice to have a bit of high profile support
At least on the case for more exchange rate flexibility in the Gulf. Former Fed Chair Alan Greenspan.
Former Federal Reserve Chairman Alan Greenspan said on Monday near-record Gulf Arab inflation would fall "significantly" were the oil producers to drop their dollar pegs, in contradiction to Saudi policy.
"In the short term, free floating… will not fully dissipate inflationary pressure, although it would significantly do so," Greenspan told an investment conference in Jeddah.
And, in Abu Dhabi
" Referring to Persian Gulf countries, he said “letting the currency float is probably the best way to stop the flow of foreign exchange into the economy and cause inflation.”
(cause looks like a misprint; curb is more consistent with his other comments)
Dr. Greenspan though doesn’t seem to share my concerns about the impact of the expansion of sovereign funds on global markets. Oh well. One of two isn’t that bad.
I am more concerned by the policies that gave rise to large funds — policies that have impeded adjustment in the global balance of payments — than the funds themselves.
But I also wouldn’t underestimate the impact of shifting from a world where sovereign investors buy $1 trillion of bonds every year to a world where sovereign investors buy $1 trillion in equity. The shift from a world with roughly $2.5 trillion of SWFs increasing by $100-200b a year to a world with say $4 trillion in SWFs growing by $1 trillion a year is unlikely to be smooth. It also is also, at least for now, just a forecast, not market reality.
UPDATE: Pam Woodall of the Economist joins the bandwagon calling for the Gulf to depeg. Alas, though, I am one for two with her as well: She doesn’t seem convinced by my argument that dollar weakness actually leads to more dollar reserve growth, and that there actually hasn’t been much of a change in the dollar’s share of emerging market reserves since late 2003/ early 04.
US consumer feelings and attitudes and spending habits are all overrated. Here is one example:
“Nippon Steel Corp. and JFE Holdings Inc., the world’s second and third-biggest steelmakers, raised domestic wholesale sheet prices a record 31 percent to pass on higher material costs, officials involved in the pricing said.”
The demand from BRIC countries for all kinds of products and services is so huge that it is more than compensating US consumers cutting down.
For example, it is not uncommon to see tens of MILES of trucks, bumper to bumper, in EU countries bordering Russia, waiting to enter Russia through customs. Cars, furniture, electronics, all kinds of stuff going to Russia.
If the problem of letting SWFs invest in G6 (G7-Japan) private equity rather than sovereign debt is the fear that portfolio decisions be determined by politics rather than risk/return considerations, here’s an idea. Recommend SWF countries to distribute their sovereign wealth among their own population in the form of individual social security accounts (to be used for retirement,health,unemployment, and other purposes). This accounts should be managed by professional international investors, and people could add their own contributions to them. This would be a sure way to eliminate politics form the global allocation of the savings. It may not fly, but at least the G6 would be saying something different than “Revalue your currencies”.
http://www.thestreet.com/_yahoo/markets/worldmarkets/10404763.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA
Reports out of China claim that the securities regulator has short-listed Japanese equities as a legitimate destination for domestic institutional funds, and that China’s sovereign wealth fund will take a stake of up to $10 billion in Japanese stocks.
let me second JC. i do not expect it to happen, but the fragmentation of decision making would lubricate markets. it is soviet style centralised decision taking that upsets markets. the elephant in the rowing boat.
but perhaps you could now export the mandarin greenspan to china – like they sent lenin on the train to russia – while you in the states, instead of handing out prescriptions to others, take a little chinese medicine ? a little austerity ? a tiny savings surplus of your own ? you will not get off the bubbles, until you admit that you have a problem.
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I would also second JC.
re: CIC and Japan, wouldn’t $10b of $70b be roughly equal to Japan’s share of the MSCI? (haven’t done the numbers recently tho)
Gillies — wouldn’t the mandarin Greenspan be better suited to convincing China of the miracles of letting banks extend consumer credit and thus running external deficits? of the folly of hoarding funds at the central bank rather than living it up, as modern markets allow you to borrow against your future wealth?
tis hard tho to think of austerity as Chinese medicine when china is in the midst of a major stock market boom and a huge investment boom; the only austerity in China is for Chinese workers, who haven’t been able to secure enough of the growing pie to keep their share of the pie from shrinking. and on that point, the US doesn’t have much to teach anyone.
Rising costs close thousands of China factories
http://www.theaustralian.news.com.au/story/0,25197,23273438-36375,00.html
CHINA’S Pearl River Delta – the southern coastal area that in the past two decades has become the world’s factory floor for low-end goods — is losing thousands of factories.
The Federation of Hong Kong Industries estimates 10 per cent of the 60,000 to 70,000 Hong Kong-owned factories in the delta region will close this year – likely the highest rate of closures in 20 years, deputy chairman Stanley Lau says.
In the past year, more than 1000 shoe factories and related suppliers have closed in Guangdong. In some cases, Walmart is also turning to poorer countries with lower wage levels. That means new investment and assembly-line jobs in countries such as Vietnam and Bangladesh.
Seems to me the world is on the cusp on very destablilizing global super inflation tha t could eventually destroy all the worlds currencies. The US is the leader in this category.
Its simple. India let loose its currency (to 10%) last year and controlled inflation. It was a master stroke.
Its time Saudis, chinese (and others who have inflation problems) do it.
I’m not surprised that Greenspan is pushing depegging of other currencies from the US dollar, as depegging would help to rehabilitate his reputation. The value of all things (even fiat currencies) is relative. The dollar must drop in value compared to other currencies for us to devalue our way out our unpayable debt.
No matter how you cut it, this is going to sting.
I’m not surprised that Greenspan is pushing depegging of other currencies from the US dollar, as depegging would help to rehabilitate his reputation. The value of all things (even fiat currencies) is relative. The dollar must drop in value compared to other currencies for us to devalue our way out our unpayable debt.
No matter how you cut it, this is going to sting.
Ahh, look what hungary did today.
http://www.ft.com/cms/s/0/97e1db9c-e3d8-11dc-8799-0000779fd2ac.html
A Petrodollar Tsunami Warning
At US$100 a barrel, the value of the total proven oil reserves in the world is US$121 trillion, US$48 trillion of which belongs to the GCC countries. On a flow basis, annual oil export receipts of OPEC countries total some US$1.3 trillion, at US$100 a barrel. High oil prices, in short, will lead to a significant transfer of financial power to the petrodollar holders.
Rising Inflation Creates Unease in Middle East
Inflation, caused in part by the skyrocketing price of oil, is pushing many ordinary people toward poverty even as oil money stimulates a new surge of economic growth in the gulf.
S&P ratings for MBIA are a joke. Let’s Do The Math
http://globaleconomicanalysis.blogspot.com/2007/12/mbia-admits-306-billion-cdo-exposure.html
In MBIA Admits $30.6 Billion CDO Exposure we saw that in addition to the $30.6 billion in worthless CDOs that it guarantees, MBIA has an additional $8.1 billion in worthless CDO squared (CDOs of CDOs) securities that it guarantees. That’s makes MBIA’s total CDO exposure $38.7 billion. And it hid that for months. It has total cash of $5.73 billion. Even if one pretends those CDOs will be worth 50% on the dollar, how does one possibly get AAA out of that mess?
1. MBIA hid $38.6 billion in CDO exposure for months
2. MBIA Posted a loss of $1.93 billion last year
3. MBIA CEO will not sign off on results
4. MBIA may have losses of $5.5 billion before tax, eliminating its entire capital cushion.
5. MBIA wants to hide losses for up to 5 years, hoping nothing else blows up, and future earnings cover the losses.
To top it all off, earlier today the S&P Sniffed Horse Hockey and Called it a Rose, by reaffirming the AAA rating of MBIA and Ambac. What a complete joke.
Indian banker — thanks for highlighting the florint’s float.
Suppose the Saudis knew what Matt Simmons has suspected and what the Saudis have kept hidden: That the age of oil is closing and that their own wells are close to or are at peak?
If you were a Saudi prince, what would you do? Seems to me he would play his cards precisely as they have been played. Keep the peg so that the purchase of other assets are possible. Create new niches for yourself.
Peak oil does not mean that oil will run dry, just that production capacity will diminish. Consider what is happening a “transition” game.
Stormy i think if you were a saudi prince you wouldn’t worry that much about the end of the age of oil — everyone else is likely to run out first (tho i guess not in simmons more extreme scenario).
More importantly, i don’t think you would want to have as much of your wealth tied up in the dollar as is now the case. the US is the oil importing region with the biggest current account deficit. it also likely accounts for the majority of the saudis external assets. that isn’t a great combination.
You may be right, in a sense. Nonetheless, it seems sensible to me to diversify–not all eggs in the oil basket. The ME seems to want to be the new financial capital, for example; interested also in shipping and maritime related activities.
What is happening is not easy to capture in a few sentences. Already there is a strong move to find alternate sources of energy–global warming is one incentive; the other is oil as a soon to be dwindling commodity. The noise for other sources grows daily in the press. And OPEC seems to have lost the power to control the price of oil with more pumping. Certainly, it is aware of the enormous stress the high price of oil is having.
(I think May 2005 still stands as a high point for crude…not sure) SA certainly did not heed…could not heed..GW’s plea for more oil.
The increasing cost of energy is inflationary…overcoming the deflationary effect of globalization. Talk of peak oil was the province of those thought as “nut” cases.
I agree that at this point it would be wise now to diversify away from the dollar.
All of this has happened so quickly…really. Not too long ago, we had started to talk about China’s opaque black currency box; we were all speculating on how fast they would allow their currency to rise. But China was…and still is…on a mission to develop as rapidly as possible. As I have said many times, I don’t see how they are going to do it….the cost of energy alone is going to curtail their efforts. Global warming and pollution…well, you know what I think there. China is a Johnny-Come-Lately to the party.
In some ways, I think events in many areas have moved faster than anyone expected…and far more out of control than anyone thought could happen. I, for one, sense it.
I think we are fast approaching the time when events are in the saddle, as Emerson said, and they ride mankind. (But then I am always given to hyperbole lol)
Sorry, if I ramble.
@ BSetser “At least on the case for more exchange rate flexibility in the Gulf….”
My guess is that a lot of dollars will be pouring into the riyal and other pegged currencies that don’t have exchange controls.
This will be increasing the local money supplies and causing inflation.
Maybe this is what Greenspan meant about causing inflation.
This will pressure them to float.
The reason that money is piling into these currencies is that everybody must know by now that the US$ has to devalue to help fix it’s problem.
They are protecting their post devaluation dollar purchasing power.
Better float sooner than later, I’d say the Hungarians are the start of a trend.
It is insane that the consumers of oil have allowed its price to rise so high, given that (1) it is likely that fossil fuels cause adverse climate change, (2) we know that burning oil generates other pollution, and (3) oil tends to come from politically risky places. Its consumption should be so heavily taxed that the producers should be almost giving it away by now. America should tax petroleum more and emerging Asia should subsidise it less.
Just to give you an idea of how much resetting we might expect.
Some Australian commentators are predicting $1.2o for AU$1.
The AU$ breezed through 90 cents a few days ago.
Getting into those currencies must seem like easy money for those holding US$.
rebel — you are right.
but gas taxes are still considered political suidcide in the us. in some deep sense, the us has the mentality of a major oil exporter (keep oil cheap) not a big importer. a holdover from 1900-1950 …