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To: Chip McVickar who wrote (1721)	3/29/1998 8:40:00 PM
From: Henry Volquardsen	Read Replies (2) of 3335

Off Topic to Chip and CLK Very interesting post Chip. We are certainly in for an interesting period with a lot of important developments in the coming years. I have seen many of the forecasts for what may happen in the coming years and you can get a wide range of opinions from the collapse of the Euro to the collapse of the dollar. I am involved with the currency markets professionally and have spent a lot of time thinking about the prospects. My own opinion is to discount the dire forecasts at both ends of the spectrum. I believe the Euro will eventually have very positive benefits for the European economies. But there will be a long adjustment process, longer than most Europhiles are willing to admit. The simple truth of the matter is that there is still a lot of divergence in European economic performance. It is quite clear that European economic policy will be guided by the needs of the core economies (Germany, France, Austria and Benelux). These countries economies are already largely in sync. However the peripheral economies are not in sync. As I stated in my earlier post, the initial policy goal will be job creation in the core economies. To this goal interest rates will be kept very low. In countries like Italy this will create a tremendous economic boom. Since the goal is to sell the European public on the notion that the last five years of austerity was worth the pain, this will be a happy side benefit. This happy boom will most likely last several years. However all booms contain the seeds of the bust to follow. This will cause problems down the road. It will take time to get the European economies in sync. This is natural and not unlike the experience of the US. Eventually the Euro will emerge as a vibrant currency that will benefit Europe. I just believe it will take longer than the more enthusiastic proponents suspect. As far as the impact on the dollar. First I strongly disagree with Mundell's contention that the Mexican crisis was responsible for the dollar falling to 79 yen. If that were true the dollar would have weakened significantly against Europe as well and it did not. That was a period of yen strength against all currencies and surprisingly enough it was the result of the dire state of the Japanese economy. As the Japanese bank crisis deepened many Japanese banks found themselves with Dollar assets with thin spreads being funded with yen liabilities. As their credit worsened they were forced to pay a market premium for funding and this made billions of assets money losers. In response they were forced to dump billions of dollars in assets to repay yen liabilities. This meant selling the dollar proceeds to generate yen. The stronger the yen got the worse the situation became. They were caught in a very vicious circle. Ask any market professional about the Japanese premium and you will hear the details behind this. Back to the fate of the dollar. I strongly disagree with the notion that the US dollar is fundamentally weak or that we have a major problem with our debt. First off, regarding the debt, US outstanding debt is @60% of GNP. While this is higher than I would like it is less than any of the countries going into the Euro. Total Euro governmental debt will be significantly larger than dollar debt. In addition there will be significant questions about individual European currencies ability to print money to pay debt. There will be more market questions about European debt than US debt. Indeed current trends show a significant reduction in US debt for the last 9 months of this year and I suspect there will be market signs of a shortage of US debt. The markets are different than when the pound sterling collapsed as a reserve currency. Currency markets today have become much better at policing bad currency management. In addition the British economy itself was deteriorating badly when it's currency collapsed. The US economy remains very strong and vibrant. I have very little worry about the long term viability of the dollar. I suspect we will see the Europeans take a longer period to get their act together than we now forecast. But they will do it and it will not be a bad thing for the US. Two large currencies will most likely create very strong influences on each other. I suspect over time the two currencies will develop a very stable relationship. South America and Asia are much greater concerns. Henry

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