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GRG55
11-26-07, 04:40 AM
Dollar’s last lap as the only anchor currency

From the FT:
By Wolfgang Munchau
Published: November 25 2007 18:51 | Last updated: November 25 2007 18:51

It has been one of the most influential theories about exchange rates in the age of globalisation and it may be about to go up in smoke.

In 2003, the economists Michael Dooley, David Folkerts-Landau and Peter Garber* proposed what has since been known as the Bretton Woods II theory. The idea is based on the observation that newly industrialised countries peg their currencies to the dollar at an undervalued exchange rate in pursuit of export-led growth. In return, they reinvest their loot back into the US, which acts as an anchor and consumer of last resort.

In 2006, the US ran a current account deficit of more than 6 per cent of gross domestic product, a level that would normally be considered excessive. The Bretton Woods II theory says that this state of affairs is both desirable and sustainable. To say that not everybody agrees with this theory would be an understatement. It now appears that no matter whether you find this state of affairs desirable or not, it probably is not sustainable.

One piece of statistical evidence – though certainly not conclusive – is the latest data on global flows of funds. The financial flows back into the US appear to have come to a sudden stop this summer. The US Treasury International Capital System (TIC) data show a massive drop in net foreign purchases of US long-term securities since the end of June.

To get an idea of the magnitudes involved: foreign net purchases of long-term US securities – the difference between foreign purchases of US securities and US purchases of foreign securities – had been running at an average of about $70bn a month in 2005, and a little higher in 2006. The monthly net inflow in June this year was still a strong $99.9bn but that figure dropped to plus $19.5bn in July, minus $70.6bn in August and back to plus $26.4bn in September.

If you take the 2005 and 2006 data as roughly what you need to sustain the US current account deficit at 2006 levels – give or take a few billion dollars – this sudden decline looks very much like a big structural shift.

As the US capital account surplus is falling, then so, logically, must be its current account deficit. However, that suggests that the Bretton Woods II system is no longer working the way it is supposed to work.

In some respects, Bretton Woods II appears like a giant money laundering cartel. You buy my goods and, in return, I give you the money back in the form of a loan. It is, perhaps, no surprise that it took a credit market crash to bring that macroeconomic scam to an end.

What will come next? Global currency regimes tend to come and go in long cycles, with fixed-rate and floating-rate regimes following each other with a surprising degree of regularity.

The end of Bretton Woods I was followed by a period of floating exchange rates. Europe started a long process towards monetary union, via an exchange-rate mechanism, which resulted in a single and free floating currency 30 years later. So what will follow Bretton Woods II?

I can think of two scenarios. The first is that the dollar’s global monopoly will give way to a duopoly of the dollar and the euro. It is impossible to predict the timing of any such shift. Over time, as countries replace a dollar peg with a mixed basket peg, they are likely to readjust reserve portfolios as well.

An important reason why they want to change the dollar peg is the threat of imported inflation, which has become a problem in China and the six countries of the Gulf Co-Operation Council (GCC) after the dollar’s devaluation. There have been a number of signals recently that the dollar peg is about to be dropped, for example, in the United Arab Emirates.

Of course, if that were to happen, the dollar would almost certainly fall further and this might induce others to drop their pegs as well. It is not difficult to imagine a situation in which Bretton Woods II could unravel in a disorderly fashion.

Another, at least theoretical possibility is the emergence of regional exchange rate regimes, along the lines of what happened in Europe after Bretton Woods I. There has been a lot of talk for a long time about Asian monetary union, with little progress so far.

Either way, we are probably in the last long lap of the dollar as the world’s only anchor currency. We do not yet fully comprehend the new era, but it is fair to say that it is probably not going to be Bretton Woods III.

jk
11-26-07, 12:01 PM
In some respects, Bretton Woods II appears like a giant money laundering cartel. You buy my goods and, in return, I give you the money back in the form of a loan. It is, perhaps, no surprise that it took a credit market crash to bring that macroeconomic scam to an end.i think "vendor financing" is a better description. the conveyor belt took the money from u.s. consumers and sent it to asian exporters, who sent it back to u.s. borrowers. the housing crash broke the link back to the consumers and borrowers.

What will come next? Global currency regimes tend to come and go in long cycles, with fixed-rate and floating-rate regimes following each other with a surprising degree of regularity.

The end of Bretton Woods I was followed by a period of floating exchange rates. Europe started a long process towards monetary union, via an exchange-rate mechanism, which resulted in a single and free floating currency 30 years later. So what will follow Bretton Woods II?

I can think of two scenarios. The first is that the dollar’s global monopoly will give way to a duopoly of the dollar and the euro. It is impossible to predict the timing of any such shift. Over time, as countries replace a dollar peg with a mixed basket peg, they are likely to readjust reserve portfolios as well.this, to a degree is happening, de facto. if reserve holders want to "diversify," where can they put their funds if not in u.s. dollars? the only global currencies are the euro, the yen, and - to a lesser degree - the pound. the yen is managed and, essentially, has been pegged to the dollar, although that is changing. the euro has benefitted by default, and the screams of pain in southern euroland are being heard 'round the world. in my opinion the pain will eventually cause the ecb to blink, and lower, and beggar-thy-neighbor will become the globally ratified policy.

An important reason why they want to change the dollar peg is the threat of imported inflation, which has become a problem in China and the six countries of the Gulf Co-Operation Council (GCC) after the dollar’s devaluation. There have been a number of signals recently that the dollar peg is about to be dropped, for example, in the United Arab Emirates.

Of course, if that were to happen, the dollar would almost certainly fall further and this might induce others to drop their pegs as well. It is not difficult to imagine a situation in which Bretton Woods II could unravel in a disorderly fashion.
disorder in the currency markets is, i believe, a significant possibility. this is one of the many arguments in favor of "the fourth currency" -- gold.


Another, at least theoretical possibility is the emergence of regional exchange rate regimes, along the lines of what happened in Europe after Bretton Woods I. There has been a lot of talk for a long time about Asian monetary union, with little progress so far.

Either way, we are probably in the last long lap of the dollar as the world’s only anchor currency. We do not yet fully comprehend the new era, but it is fair to say that it is probably not going to be Bretton Woods III.
these regional currencies - an asian currency and an "amero" - might emerge, but not until AFTER a period of disorder. i don't see them any time soon.

rj1
11-26-07, 05:41 PM
these regional currencies - an asian currency and an "amero" - might emerge, but not until AFTER a period of disorder. i don't see them any time soon.

If the reigning American government decides to go for the amero, I'm all up for either a military-led coup or regional secession of states so that the United States become effectively dead.

Neither will happen, but damn it, a country's currency is a measure of sovereignty, it should not be given up!

I think something like the amero is destined to happen though, just cause as U.S. financial hegemony wanes, the Fed and the Treasury will want to try and retain their control of other countries' economies via dollar pegs and the IMF like they have done for so long.

Slimprofits
06-24-08, 04:18 PM
http://futures.tradingcharts.com/charts/US98.GIF

What is up with the volume spike?

Does it coincide with the rush of FED Governors to talk about inflation and rates?

KGW
07-02-08, 12:32 PM
Sovereignty? That is, perhaps, a sometime thing. . .Or, perhaps this is just more psychological pressure on "the expectations of inflation."

http://business.timesonline.co.uk/tol/business/columnists/article4232162.ece

Saudis press United States to put an end to rate cuts



SO the Federal Reserve Board’s monetary policy committee (technically, the Federal Open Market Committee, or FOMC) has decided to leave interest rates as they are - which is far less important than how it arrived at that decision. What follows is a combination of hard fact and my own surmise, mixed together so as to shield the usual highly placed, reliable source.
There is something called “the Fed family”. It’s not as shady as a mafia family, but far more powerful. Members include chairman Ben Bernanke and the six other members of the board of governors, appointed by the president; the presidents of the 12 regional Fed banks, five of whom serve on the FOMC; and several influential alumni who are frequently consulted by Bernanke and the White House, and whose public utterances Bernanke cannot ignore.

In times like these - when recession looms, inflationary pressures are rising, and a lot of banks are, er, teeter-tottering - many of the family members weigh the several dangers differently. Some worry about rising unemployment, and want to keep interest rates low. Some worry more about inflation, and want to raise rates. Others worry about the health - or lack of it - of the banks, and favour the sort of open-handed policy that Bernanke has adopted to provide liquidity to the banks. Still others worry that bank bail-outs will create the moral hazard that the Bank of England’s Mervyn King so fears, and produce even more reckless lending behaviour. Gone are the good old days when benign economic conditions led to virtual unanimity of views.

So far, so obvious. But two things are not so obvious. The first is the intensity of the battle within the Fed family. That has an advantage: Bernanke benefits from a wide range of views, which he says he welcomes. The board of governors generally worries most about the soundness of the banking system. The presidents of the regional banks, selected by local businessmen and bankers, generally worry more about inflation than anything else, which is why the presidents of five Fed regional banks have opposed recent rate cuts. The members of the FOMC worry about everything. And the alumni sit on the sidelines, rather like inlaws, sniping or supporting the chairman, depending on their view of each of his actions. Not a bad system, even if it is a bit messy.

Enter Treasury secretary Hank Paulson, the Saudis, and the White House. Someone has to find customers for the billions in Treasury IOUs that result from our ongoing federal budget deficits. That’s Paulson’s job, making him the nation’s No 1 bond salesman. The Saudis are among his most important customers. But the decline in the value of the dollar is steadily reducing the value of the dollar-denominated bonds they hold. So Paulson decided to go to Riyadh late last month to soothe some ruffled royal feathers. Reliable sources say that the Saudis “hinted, as is their style” that if America wants more oil, it should do something to shore up the dollar. Not unreasonable: the falling dollar reduces the purchasing power of the bits of paper the world uses to pay for oil.

Paulson brought that message back, got President George Bush and Vice-President Dick Cheney to agree, and started talking up the dollar. Independently, or perhaps not so independently, Bernanke let drop a clue that further interest-rate cuts are not now on the cards. As the Left is wont to say, it is no coincidence that the Saudis followed by announcing several increases in oil production.

But the story doesn’t end there. Higher interest rates not only boost the dollar, they make it more expensive for the banks to raise the new capital they desperately need. Bank shares plummeted. The members of the Fed family who worry most about the stability of the banking system saw meltdown in America’s future if all this talk of interest-rate increases persisted. Timothy Geithner, as president of the New York Fed the man closest to financial markets, undoubtedly pressed for an end to all this talk of raising interest rates.

So here we are. Paulson, with the backing of Bush, pacified the Saudis by promising to support the dollar. He could have done that by direct intervention in the currency markets - a power possessed by the Treasury, not the Fed. But Paulson probably knows that such interventions rarely succeed in “fighting the market”, and so confined himself to jaw-boning.
In return for talking up the dollar, and putting an added strain on the banking system, he got a bit more oil, mostly of the sour, heavy sort for which there is no available refining capacity. The Fed had to make sure that things did not go from bad to worse for the banks, even if that meant not hinting at the dollar-boosting interest-rate increase that the Saudis are looking for. So in last week’s statement the FOMC indicated that it is worried about inflation, but “expects inflation to moderate later this year and next year”. No interest-rate increase needed, at least unless the inflation indicators head towards the sky.

The ball is back in Paulson’s court. He has to decide whether his commitment to the Saudis now requires him to start buying dollars to prevent a further decline in the greenback. Or he could try to persuade his royal customers, who kept their end of the bargain, that merely by threatening intervention he was strengthening the dollar.

This is the stuff of which good novels are made. But it is not fiction. The Saudis have now extended their influence over oil prices to American monetary policy. If another reason for America’s politicians to end what Bush calls the nation’s addiction to oil is needed, surely this is it.


Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute