... Steve, I don't know who Robert Kingston is, but apparently he is from Australia or New Zealand ... I found this tonight in a discussion group on The Financial Times website...
... amazing analysis ... "bonkers" - that is ... pretty close to what is already in motion ... what do you think? ...
Ken
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Will the dollar fall further in 2003?
by Robert Kingston Guest #1000022 of 25
15 Dec 2002 11:21 AM (in London)
What will happen to the Dollar in 2003
Here is a view from Down Under.
The US trade deficit will weigh heavily on the US Dollar and the US Dollar will continue its structural adjustment downwards relative to the rest of the world.
The strong foundations on which the US domestic economy is built remain despite an unheathy dependence on imported oil and are going to be able to finance the economic wellbeing of the American people. However it is unlikely that the US economy is going to be able to continue supporting worldwide economic growth to the extent that it has during the last decade and this will effect the dollar.
The world needs China to agree to allow the revaluation of the Yuan which it is unlikely to agree to meanwhile Japan insists on trying to competitively devalue the Yen against a US dollar being rerated in Trade Weighted terms by Global Financial Markets. The pound will be increasing exposed as the dollar declines and will also decline.
The eventual losers are going to be Japanese savers/taxpayers/investors.
Europe is watching from the sidelines.
In Trade Weighted terms currency movements in 2003 will be as follows:
Euro - Stable
GBP - Down
US$ - Down
Yen - Up
Yuan - Up
A$ - Stable
My thinking is as follows:
The fizz in the US economy was supported by the US maintaining sound public finances whilst leading us all into the IT revolution (both the development and application of the technology), share price performance underpinned by once off productivity increases made possible by that IT revolution, financial engineering (gearing), management motivation (corporate sector wide adoption of performance based remuneration), unsound (not expensing options) and creative (hidden gearing) accounting and even outright frauds perpetrated on naive and willing victims from all over the world who uncritically swallowed the US business model triumphalism and new economy hubris.
US public finances have deteriorated dramatically due to fiscal boost of President Bushes tax cuts and the economic slowdown.
The IT revolution (or PC and networking part of it anyway) has taken the long march to China and is now a commodity product. Software development is going back to the internet "garage". Thousands of volunteers develop ever more robust open source software for the challenge of it and the pleasure of sticking it to the millionaires at Microsoft.
Once off productivity gains have been had as has the general public. These "productivity gains" (automated telephone systems for example) have often been at the consumers expense (uncosted manhours waiting through tedious telephone menus, do it yourself airline reservations etc), result net transfer of economic resource from the many (our time) to the few (the entities with whom we are obliged to deal), far less net economic gain than corporate performance might suggest. In many cases just a transfer from the now even more time poor consumers to producers.
Corporate equity was converted to debt to such an extent that what remained became dangerously overexposed to risk and lost value as a result. Consequence, previously bankable companies found themselves locked out of commercial debt markets and investors declined to take up the slack having lost their appetites for punting once the dot.com bubble burst.
"Enlightened" US management motivation led to senior management resembling an Xstreme sport the object of which was to keep the market and auditors fooled or compromised long enough to allow those deeply in the money options to mature and be eased into the market while staying in the job and out of jail. The next generation of senior management are going to have to dedicate themselves to establishing their credibility through the restoration of US corporate balance sheets. Result, less of tomorrows already reduced earnings are going to be be paid out to shareholders.
US accounting practices will become more principle based resulting in a long term lowering of profitability of US corporates as they expense options, fund pension commitments and phase out other "legally compliant" accounting tricks. Result even more of corporate earnings directed to paying for past sins. Accountants are not going to be highlighting their creativity on their CV's for some time.
In their enthusiasm to find scapegoats for their greed and stupidity the small investor will oblige politicians to impose counter productive regulations on the capital markets whilst simultaneously capitulating at the bottom of the market and crystallising stock losses where they will most impact consumer spending power and confidence. On the other hand the pro's, having already parked their "conservative" capital with the US government to fund the coming deficit and fully hedged their foreign exchange position, will allocate their "risk" capital to calling the bottom of the market and then just sit and wait for a generation. Excess capacity will ensure that any eventual recovery is some time off and fresh savings increasing go elsewhere (or foreign don't come to the US) looking for greener fields (emerging markets??).
Now if we were just talking about one of those smaller economies that periodically gets swamped by capital flows set off when someone in Washington or Wall Street has a bad hair day this wouldn't be a problem.
Someone would pontificate on the unsustainability of it all. The country concerned would haemorrage capital, politicians would fall, the social order would be challenged and most importantly the currency would collapse along with the economy.
Washington based economists from the IMF would no doubt provide an explanation as to how it all came about, who was to blame and what should now be done and life would go on.
However in this case we are talking about the worlds largest economy that has managed to convince not only its own citizens but also a large percentage of the world's population that its currency is a bankable asset into which they can safely invest their savings.
Clearly being the seabed to which everyone else is anchored can give the impression that all other currencies float relative to the mighty US dollar.
However, imperceptible as it may be continents shift and those floating on the ocean above merely adjust their moorings to maintain their position.
In other words the value of currencies is relative with respect to each other and the US dollar despite its size and importance is no different from any other in this respect. That free and unfettered movement of capital so beloved of advocates of unbridled international capital markets that can and often does overwhelm the smaller economies will eventually have its effect on the mighty US dollar.
Now those of you that were around in the 70's or have read a little about the OPEC inspired increase in the oil price may recall that the last time that a major bite was taken out of the US consumers pocket other than by Uncle Sam it was quickly recycled via Wall Street into developing world sovereign debt. By the time a large part of this debt was shown to be worthless in the 80's it had been sold off to institutional investors and the investing public wore the loss. The ever grateful oil producers continue to this day to hold their capital in US dollars.
Meanwhile over in Japan they had found that it was merely necessary to encourage their financial institutions to park the Japanese people's vast savings in US dollar assets to ensure that Japan could embark on seemingly never ending economic growth based on exporting from their relatively "cheap" industrialised economy to the huge US "expensive" one. The good old US consumer having paid a kings ransom to keep consuming oil along with all the other necessities of the American way of life then found themselves borrowing Japan's retirement savings to finance their continuing urge to splurge.
As the US dollar maintained its relatively high value to the rest of the world vast swathes of US industry found itself put out of business by the lower cost rest of the world.
A self perpetuating cycle developed whereby not only rational risk calculating international investors but also nationals of virtually every nation on earth financed the increasingly voracious appetite of the US for capital to fund its import bill with their flight capital and pension funds. Anyone familiar with pyramid selling structures will recognise this for what it was. A self perpetuating bubble that the longer it went on the greater the mess when it finally burst..
Now this shift in the global economic order was not a solely US affair and it affected other smaller economies like Australia in a similar manner. However throughout this process the US consumer took centre stage and the US dollar reigned supreme.
The process has undoubtedly had many beneficial consequences. The most important of which has been the gradual shift of the world's productive capacity and capital from the few developed to the many developing economies.
The widespread adoption of "economic rationalism" and US style capitalism can claim credit for the greatest reduction of poverty the world has ever known and the onward march of globalisation despite the occasional cultural clash is probably both inevitable and beneficial.
However the US consumer cannot continue consuming and underwriting through that consumption the financing of global economic activity indefinitely.
Now Australia is a trading nation with roughly a third of our exports going to North America, Europe and Asia respectively. However we are aware that a significant part of what goes to Asia eventually finds its way to the US incorporated into the exports of our Asian customers.
If the US consumer is no longer going to keep absorbing our exports who the hell is.
Good old Europe. Well no. The best we can hope for from them is that they maintain their economies on an even keel and things carry on with modest growth much has they have done for years. Unless, that is, they do something about EU support for agricultural producers with whose subsidised surpluses we and many developing economies then have to compete with on the international market.
While we wish them well on the great European project and trust that in time they find a way to open their market to the world's agricultural exports without destroying the culture and tradition bound up in the countryside we Australians so love to visit as tourists its unlikely that its going to happen in the short term. Nor are they likely to reform their expensive welfare states to the extent required to permit the EU consumer to finance an extended consumption binge of sufficient magnitude to fill the void left by the spent US consumer.
What about Japan the world's second largest economy and our biggest customer?
Oh dear. What a mess.
It is little more than a decade since Japan was being hailed as possessing almost devine insight into matters of political economy and industrial organisation. The decline of a country with everything going for it economically to one having the largest government debt in the world has been breathtaking and is perhaps still not fully appreciated by the world at large.
Only this week we have had the continuing spectacle of Japanese politicians trying to talk down the Yen in an attempt to maintain their ability to compete with China and maintain their vast trade surplus with the US. Its as if the only game they know is the mercantilist one of talking down their currency to export more to the US consumer whilst pursuading the Japanese people to continue to finance the whole enterprise.
Unlike the 70's oil crisis where the bill was ultimately paid by international investors left holding worthless sovereign debt the recycled Japanese trade surplus in the guise of the personal savings of the Japanese people is being used to finance the very US consumers whose ability to continue supporting their household debts, the coming US Federal deficit and consuming Japan's exports is in doubt.
To make matters worse Japan now finds itself having to compete with China for the US export market on which the Japanese economy depends.
The Japanese peoples savings which are being used to prop up the US dollar are in great peril.
For all their attempts to talk down the Yen the Japanese have failed to deal with the fundamental problem of an economy whose export performance depended upon the world's willingness to see them run a massive trade surplus with the rest of the world.
What started out as a generous gesture of support for a Japan reconstructing itself after WWII seems to have been perceived by the Japanese authorities as some sort of economic right that even now they believe they are able to assert.
The Japanese authorities will not be able to resist the combined effect of a structural decline of the US dollar and the rise of China as a competitor in the US market.
The Japanese people will pay for this with the loss of a substantial percentage their US dollar savings that is going to accompany the failure of the Japan's continuing attempt to prop up the US dollar against the might of the global foreign exchange markets.
It is coming down to the Japanese authorities attempting to stave off the global foreign exchange markets by throwing what remains of Japanese savings at propping up the US dollar while the Chinese sit it out with their low cost production denominated in a currency linked to the US dollar. Meanwhile it is only to be expected that as the Japanese people realise what is going on they are going to want to bring their savings back to Japan and convert them to Yen as fast as they can.
The Japanese authorities are relying on the US consumer regaining their appetite for Japanese imports before the Japanese people see the danger but don't seem to have taken account that any recovery in the US economy that takes place before the US dollar declines relative to the rest of the world is going to have to be met with a rapid rise in interest rates in order to finance the US current account deficit.
As interest rates rise US consumers will come under increasing pressure to reduce spending as well as redirect that spending towards lower cost producers such as China.
Investors willingness to finance the US current account in the knowledge that they are relying on an already shaky Japan to prop up the US dollar in the face of a fundamental economic readjustment to preserve the value of their investment is likely to be limited.
Europe and China will sit this out on the sidelines waiting to see how long it is before Japan goes the way of Argentina and has to acknowledge that it is in effect appropriating the US$ savings of its citizens to prop up the Japanese economy and the shareholders of Japan's banking system which is the root cause of its problems.
Until Japan reforms both its banks to deal with the legacy of the financial bubble of the late 80's and its mercantilist policy of relying on exports maintaining a perpetual trade surplus it will be in conflict with economic fundamentals and global financial markets.
Japan should take its place as a leading industrial economy and recognise, as the rest of the world does, that the failure to reform its domestic economy is destabilising the world economy.
China sitting on the sidelines is unlikely to agree to revalue its own US Dollar linked currency to reflect the increasing success of its own export led economic development whilst Japan is engaged in competitive devaluations with the US Dollar.
The Japanese have had over a decade to make the change from an export led strategy that served them well and only started leading to significant excesses in the 80''s. They have done nothing and continue to defy the calls to address their problems. It seems that the time is fast approaching when global financial markets are about to do it for them.
The 70's may yet come back to haunt us because those same oil producers who have made a point of maintaining their capital in US$ and conducting the oil business in US$ may find themselves facing enough political pressure in the coming months to set off a move away from the US dollar that Japan cannot resist. |
