Wednesday, 7 November 2007

Currency Mayhem, still here...

UPDATED: I have left this post here today in the light of the $/£ hitting 2.11 today. As Newmania says in the comments below, time to do some Xmas shopping in NY

The exchange rate system in the world today is paddling against some strong tides. Many economies the world over, including China, Hong Kong, Dubai, most of Latin America and many smaller nations, have their currency pegged to the US Dollar. Even the British Pound today stormed the $2.10 mark, pity the US tourists trying to eat in Garfunkels.....

The Federal Reserve has been backed into a corner by the credit crunch and been forced into reducing interest rates even whilst some key inflationary measures are pointing upwards. This has led to a significant devaluing of the US dollar, which forces these countries to defend their own pegs by buying dollars with hard earned cash.

Some currency experts are predicting a the bottom. Indeed when Giselle Bundchen gets on this bandwagon then surely the wheels are due to come off soon.

However, in the long-term the US may well be playing a global strategy game with some success. It is quite possible to blame part of the credit crisis on the mercantilist policies of many of the rising economies and petro-economies. They have sucked in Western money and held on to it. They have not managed to raise their internal demand nor lend it back to the West in any form of finance. As such the Western Economies response was to ease credit (of course, there are other reasons that helped this decision too); but this could only go on for so long before sparking off inflation or causing a systemic shock.

Now there has been such a 'pop' to the balloon with the credit crunch.

But have the mercantilists' really won over the West? Should we all learn Mandarin and worship only to the East? Some may think so but now the rising economies are faced with massive losses on their dollar assets as it falls in value, a drop in demand from their expert markets as their growth rapidly slows and not enough domestic demand to keep themselves going if exports start to fall. On top of this the currency pegs they are trying to hold are costing them huge amounts of cash; transferred in the main to western currency speculators. Finally, with all the money having nowhere to go there are huge bubbles of their own, see the Shanghai stock market as the leading example, which are going to lose billions of dollars for unsavvy investors in the not-so-distant future.

America's inflation scenario, whilst no good for those with domestic savings (who are few in the US ), may well save their country long-term and like magic end the damaging mercantilist policies of the Middle East and Asia as they will come off currency pegs and have to somehow re-invest their dollar assets or face huge write-downs in value.

All this led by George Bush's appointee Ben Bernanke; maybe George is smart after all?

18 comments:

Sackerson said...

Unless the foreign-held dollars are reinvested (via Eastern sovereign wealth funds) in US stocks, temporarily boosting American shares but also handing over the keys of the economy to competitors and potential enemies.

Anonymous said...

When Bernanke got the job, I did remark widely on the unwisdom of appointing someone whose surname invited rude rhymes and whose first two initials are BS. Nomenology - more accurate than Astrology, and ruder too.

Old BE said...

Unlike our selfless leaders*, the US generally runs its policy for its own benefit.

*gold

Anonymous said...

I'm not sure how the U.S. wins out of all this. The American people become much poorer in real terms while emerging markets build their infrastructures, secure resources, and become wealthier. Forex losses seem small in comparison.

CityUnslicker said...

Sakerson/Matt - Bu they will be buying over-vauled assets. Remember the Japanese buying the US studio's in the ealy nineties and losing their shirts.

They have no choice in a way, which means the US co's can demand unrealistic prices. As for the commanding heights of the economy...where was google 10 years ago. Such ideas are somewhat fleeting methinks.

CityUnslicker said...

dearime - There is certainly something in theat BS thing for sure!

CityUnslicker said...

Wd - sadly I think our leaders are just incompetent. I expect nothing less as none of them has ever had an economically prodcutive job.

Anonymous said...

"Unless the foreign-held dollars are reinvested (via Eastern sovereign wealth funds) in US stocks, temporarily boosting American shares but also handing over the keys of the economy to competitors and potential enemies"

Except that the US is already taking steps to limit what sovereign funds can spend their money on.


"I'm not sure how the U.S. wins out of all this. The American people become much poorer in real terms while emerging markets build their infrastructures, secure resources, and become wealthier."

I would argue that the US has been rather wealthier than it deserves for some time, I don't see any good reason why Americans should be better off than Germans, for instance. They work in the same sort of industries and don't work any harder. One might say of the US "what have you done for me lately?". The inflation problem is a reality check. As for the emerging economies they have "emerged" as a result of sellign products to "rich" westerners that were not actually rich at all but were actually in debt - debt financed by the emerging economies. That was never likely to be a runner, lets face it. Mostly the West got rich by selling material wealth to its own people. Pleaces like China are trying to short-circuit this process by getting their hands on Western wealth - but actually this indicates they don't really understand macro-economics too well. I had an interesting conversation about China that I will relate later....

Anonymous said...

O.K. got some time now:

I had a discussion with a Chinese colleague about China's motives for buying US Treasuries. He tells me it is all about demographics. As you may recall, China has a policy of limiting the number of babies a couple should have. This was aimed at reducing China's population, a major reason for poverty in China as too many people are living on too little land. The policy has not worked - the population has continued to grow, but the population is biased towards male children since the Chinese prefer to have male children. Why? Well because despite China being a communist country there is no proper universal welfare system or health care system (!) and people rely on their children to look after them when they are old. Male children are therefore beneficial.

Now lets simplify things by cosidering what would happen if ALL babies born were male, 3 to each couple. You can see that initially the population would continue to expand. But after a generation the population would be all male. Clearly no babies can be born to an all male population, so the population DOES start to collapse at this point. And what would happen after another generation? You would have 1.5billion old men with no young people to take care of them or support them!

Now the situation in China is not quite that bad because there are a lot of women in China BUT men do significantly outnumber women by about 17% already after one generation and the policy is still in place (because the population is continuing to grow despite the policy). China is between a demographic rock and a hard place - remove the policy and have ever more severe population problems, or keep the policy in place knowing that the population will reduce eventually but in a generation there will be severe problems taking care of the elderly. China has opted for the latter policy - which means that in order to feed a rapidly ageing population it will need to buy the help of the Americans.

Anyway, that was the upshot of our conversation, and it sounds pretty plausible.

Newmania said...

Should I be buying my pressies in new York this year CU ?I

Whispering Walls said...

Well, even Sarkozy knows that the dollar's their currency but our problem. What about RTZ?

CityUnslicker said...

Anon - I had never thought about the china issue that way. I do agree with you strongly about the Eastern ideas on mercantilism.

I am with the economists who say that it is imports that make a country and people rich, not exports. China has only exports and therefore has cash to show for its expansion and some jobs, but little else. It is forced to spend the money on infrastructure updgrades and US treasuries. A very difficult problem

CityUnslicker said...

newmania - absolutely yes. This is a once in 20 years opportunity for a bargain. Even the flights are very cheap, despite the fuel surcharges!

CityUnslicker said...

WW - you mean Rio Tinto. Sounds an amazing sort of deal, I am no expert but it would suggest economies of scale in mining really can be found at the global level. or at least the BHP board are convinced of this...

Nick Drew said...

And you called 2.10, several months ago CU - I'm impressed !

Steven_L said...

Right, a couple of things.

Firstly, regarding the China/demographics/buying US treasuries thing - maybe I'm being ignorant and stupid here, but I thought they bought dollars to maintain the dollar peg on their currency that the Yanks keep whingeing about.

On this note I've been pondering recently reports that the Arabs want to start pegging to the IMF basket properley and the Chinks want to 'diversify' their foreigh reserves (does this mean the same thing?). Surely this means that the dollar will have room to fall to more competitive levels (in terms of exports) and that Sterling/Euro's will be kept high. I don't know but that's what I was thinking anyway.

Secondly, does anyone know it to get a shopping visa for the USA at short notice? I've been toying with the idea of doing some clothes shopping in New York. How much is a pair of Levis or Nike Air Max over the pond these days?

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