If I was a European central bank, I would hang onto my dollars. It's a reserve asset almost as worthy as gold. Six months ago the gnomes of hard money Suisse were willing to part with their gold, but not with their dollars. If Russia invaded Germany it is only the US that would keep the peace. In that circumstance, tell me how valuable are dollars regardless of the US rate of inflation. Wouldn't Teitmeyer want to hang onto them? Don't believe in invasion? Don't remember the Cold War. Ich bin ein Berliner.
The world has been in intrinsic deflation since 1980. This has caused a lot of "slack". It has given central banks latitude to debase the currency. The dollar strength caused by fearful reaction to foreign overbuilding has masked the structural inflation in place. If you read the minutes recently released of the FOMC 8/18/98 meeting, you'll find repeated concern about this. The news media and the amateurs talk about deflation just like they talked about inflation in 1980. Don't believe them. Inflation is about to blossom. What kicks the season off is the reversal in the dollar. That's happening now. Started 8/28/98. Once our leveraged to inflation society gets a hit of the good stuff, the effects of COLA will come home to roost.
Get rid of this notion "exporting inflation". It misleads your understanding. Inflation is an abstraction. You export goods and services. I'm not being pedantic.Trade imbalance doesn't cause currency weakness. Currencies fluctuate based on the efficiency of labor and a trend develops when one nation's people are willing to persistently work cheaper at any level of output quality. Even then other factors come into to play and cause major reversals in currencies where none is presumably justified fundamentally. In 1995 the yen doubled against the dollar and since then it has given it all back, but the trade balance has continued as it has for the last 20 years. Just consider: they give us goods and we give them dollars. Why should that cause the dollar against their currency to undergo significant change?
The yen and yuan haven't strengthened. They're the Asian "reserve" currencies. They will once Japan pumps and Japanese short rates rise. The yen will pull up the yuan. Then you'll see China erroneously raise rates to prevent it. What a tangled web.
The sloshing dollars mostly stay where they are. They are the world's reserve currency. In Russia for example, if you walk into a store with a dollar bill, they aren't supposed to accept it, but they will and give you a good discount. On the other hand you can't find any store here that will accept a ruble note. They think it's "play money". Try tendering a yen note. In the midwest they get out the shotgun with the comment, "we don't take Tojo here". The Eurodollar or yen movements in small quantities can effect currency price profoundly. It just depends on elasticity of marginal demand/supply, how freaked out everybody is. Indeed, it is this sensitivity that alerts central banks and governments that it is time to change their bad economic policies and convert inelasticity to elasticity. Banks stop gambling with OPM under regimes of elasticity.
You say their companies need hard cash. If that is true then they must not be getting the dollars from the trade imbalance that keeps showing up. Where are they going? Maybe dollars aren't hard enough. Up to 8/28/98 the dollar has been the hardest currency on earth. The Japanese need to buy yen? The BOJ and the MOF keep saying that's what they will do, but it's all fluff. The latest is the $30 billion "investment" to encourage the Japanese people to buy Asian. A smokescreen. Half of it is already earmarked to defend the yen. The yen doesn't need protection. If they want the yen to rise against the dollar, all they need to do is create lots of them. That would cause Japanese short rates to rise and the dollar to fall against the yen. Are they stupid? Don't they know that? They know. The point is they don't want to give up their neo-mercantilist trading empire even though the sun has set on it. This is the major error: the failure to accept a new role in world economics and the belief their wealth will come from the competitive advantage of low compensation smokestack industries. They have no faith in their own people. Sad.
Inflation does not come from foreign lands. It is caused by domestic policies. Recently Teitmeyer, Chairman of the Bundesbank, emphasized that each country needs to set their own internal policies and to a great extent ignore what others do. Let the currencies adjudicate between the details. If a country is not selling its goods on world markets, it will have to change its internal policies in order to become efficient so that they can attract buyers. In this country the only acceptable way to re-orient domestic attitudes is when the FED busts monopoly labor inflationary wage demands with higher interest rates. After all, every university has proved that ESOP can't work. It is the only way and it will be the last desperate thing tried sometime in the 21st century. |
