The US wants a weak dollar to get out of the nosedive. This time Greenspan didn't turn himself inside his and made clear the US wants a weak dollar to grow out of the Bust. He communicated that the consumer are not reacting to the negative interest rates neither started consuming as expected and alerted for an inopportune drop in inflation. Which in Greenspeak means deflation. Deflation hurts since when prices go down the consumer expects to drop and feeds it back into the system and spirals down.
Greenspan doesn't point to a way out, but it is understood form between the lines in his speech that a weak dollar vis a vis Yen and Euro can help exports, generate jobs, stimulate demand and give a push into the restrained consumer. Since May last year USD weakened by 21.1% vis the Euro.
It is not the best solution for all but Greenspan already made public he worries about US being alone in the effort to make the world return to a growth path. And that can't be done internally only with taxes' incentive (less taxes) that increases fiscal deficit, but through increased exports that could reduce commercial deficit now at USD half trillion. How about capital flight with dollar's weakness? That's less urgent than the risk of deflation when interests rates are at 1.25% says Ashraf Laidi, of NY's MG Financial Group
When the word 'deflation' entered US's vocabulary, Milton Friedman replied: "That's easy to solve. Infect money into the economy" Greenspan expects that internal demand and exports kick starts. The Dept. of Commerce, however, cooled this down publishing in March that internal consume increased by 1%, but inventory grew as well by 0.5%. There was no new production but consuming of old inventory.
Does a lower dollar do the trick?...
Yesterday as a result of Greenspan speech, which was considered "strong" by the market, USD fell against the currency basket and mainly against the Euro reaching USD1.340/Euro. In six weeks the dollar few by 8.7% and by 19% in 12 months. It was result of Greenspan alone who caused that. It was helped by the nosedive in Europe too. German unemployment reached 10.7% and 9.2% in France. The highest level in 31 months.
Profit margins in the US went to hell, falling from 8.5% to 1.75%. That's what the devaluation of the USD is causing, says Harald Hendrikse of CSFB, referring to Volkswagen whose revenue dropped 68% in the first trimester. But that's not that bad: We expected worse that, he adds. How about the internal German market?
Volkswagen's sales dropped 5.6% in German in the same prriod. VW is not alone. Practically, all the industrial sector in Europe shrunk. In France, companies like Alcatel, Lafarge and Assault -just to mention a few- are suffering with the strong Euro, since they don't have an alternative because the internal market shrunk too. France's exports are 30% of the GNP and internal consumption about 54% In Germany exports are even heavier at 36% and internal consumption at 50%.
Yes, to the US, a lower dollar does the trick, but to the US...
The question yesterday was to discover is the FED intentionally ignoring USD devaluation to kick start growth out of the Bust.
"That wouldn't be bad to US economy. A weaker USD would keep internal prices high, would increase companies' profits and would make exports more competitive (mainly vis a vis the Euro area) says CNN, Mark Gondolf, conveying the feeling of the main market analysts. In fact it would be the most appropriated mechanism (for the US of course!) to blow prices a bit and give a little kick in consumers on USD8trillion presently cold market.
That's exactly what US trade partners in Asia and Europe are seeing and fearing right now., because this policy represents a serious risk for them and their main trade partners.
Perhaps, no, but...
And has the White House to say about all that? Asked about a weak dollar helping diminish the risk of deflation, the spokesman Ari Fleischer was enigmatic. "There are no changes on the dollar policy" But what this policy is? From then on things get really complicated. Secretary of Treasury Snow, says: "The Bush administration defends a strong dollar." Well, how to apply it then? "The best way is to keep the dollar strong to stimulate economic growth." So far only words. The USD is simply plummeting under the complacent eyes of the US monetary authorities.
In the end they are using the dollar as fertilizer for an economy that refuses to grow.
Alberto Tamer (Translated by Elmat) |
