This article touches a lot of things already discussed on this thread.
Ron Reese has explained the role of paper money to sustain and nourish
economies in a national and global context, and this article seems to
take the stand that the methods similar to those Ron has expeditiously
placed on this thread were put into place, and the author gives his views
as to present outcome resulting from their use.
Please all comment on any angle of this article.
Le Metropole Cafe
David Tice, The Prudent Bear, King Dollar?, July 21, 1999
.... we view the dollar as a critical factor in the US bubble.
For the past six weeks, the Bank of Japan has been intervening
repeatedly in currency markets to support the value of the dollar....
.... make this week look like an important inflection point for
the greenback. ... Are fundamentals beginning to shine through?
In regard to fundamentals ... trade data was simply atrocious...
...our trade position is deteriorating rapidly ...
By country, our imports from Canada, our largest trading partner, rose
almost 10%, from Mexico 11%, China 12%, France 10%, Germany 8%, United
Kingdom 9%, and Korea 19%. This certainly provides some explanation as
to why these economies are doing better...
Our country's export situation, however, continues to look bleak.
Year-over-year, exports to Western Europe have declined about 2%, while
exports to Eastern Europe collapsed 44%. Exports to Japan are 10% below
last year and Hong Kong 20%. The recovering economy in Korea was
noticeable, however, with a big jump of American imports. Closer to
home, prospects in Latin America look particularly poor. The
recession-battered economy in Brazil imported 16% less US goods,
Argentina 19%, and Colombia 30%. Yesterday, Argentina's Economic
Minister estimated that the country's industrial production in June was
10% below last year. Today, a leading economic consulting firm stated
that Argentine industrial production continues to decline, with June
levels 14% below last year.
Interestingly, it was not that many months ago that conventional
thinking in the markets and economic community had it as an economic
truth that Argentina's currency board was a savior, ensuring financial
and economic stability. Well, now Argentina is a basket case and some
are beginning to call for a repudiation of the currency board so the
Argentine central bank can begin "printing money". Wow, what a
difference a few months makes. Today, the piece, written back in January
by Lawrence Kudlow, "King Dollar Smartest Way to Rule Latin America"
seems a bit off the mark. Basically, his argument had the dollar as
"King" of the world and all countries had to do to prosper was either
have a currency board tied to the dollar, like Argentina, or simply
dollarize.
Well, sometimes it appears the rules of global currency systems are
being written as we go along. After dropping gold backing, fiat
currencies move at the whim of the marketplace. In 1993, Wall Street
loved Mexican financial assets, in 1995 the peso collapsed. In 1996,
Wall Street loved SE Asia financial assets, in 1997 collapse here as
well. At the outset of 1998, "hot money" Wall Street had a love affair
with financial assets in Russia, by summer default and a collapse of the
ruble. Wall Street had similar love affairs with securities in Brazil
and Argentina that now appear but inadvisable lust. In each case, money
moves into a country's securities which helps foster a boom, the boom
helps propel financial markets, which fuels a flood of money into the
economy, in what is seemingly a self-feeding state of prosperity.
This prosperity feels great for everyone involved. There is no doubt
that the locals love the influx of foreign money. As was the case in
South Korea, it provided capital to invest in manufacturing
capabilities. In the case of Russia, it allowed the locals to buy
Mercedes and properties in the Mediterranean, as well as feeding Swiss
bank accounts. Either way, everything is fine, as long foreigners are
happy to continue to hold the respective country's IOUs. Well, the laws
of economics dictate that credit-induced booms do go bust and eventually
something happens that leads investors to want their money back. This,
however, changes everything. A big problem quickly develops as few are
willing to part with cash in exchange for the foreigners' securities.
And, it's not like there is money sitting around available to return to
investors. Investors' money was long ago spent. This, somewhat
simplistically, explains why things can turn sour so quickly with a
change in perceptions.
And, importantly, you never know what event will alter market
perceptions. Who knew that devaluation in Thailand would set off a
global crisis? What was knowable, however, were the degree of credit
excess and the distortions that had developed from the flood of money
into these economies, and how this had created acutely vulnerable
financial systems. How, especially in the frothy stages, the booms in SE
Asian, Russia and Latin America were driven by "hot money" with the
potential to turn and run for the hills at a moment's notice.
With this in mind, we believe it is of utmost importance to understand
how similar dynamics have been at work here in the US for some time, and
how vulnerable our system has become. Huge foreign flows have financed a
boom and everyone has been quite happy. We trade goods for securities
that only seem to rise in value. Importing much of the goods we need, we
can use our resources to ... But let's not kid ourselves, this may be fun
but with the great cost of distortions to our economy and financial system.
And, actually, these destructive forces have become much more powerful
since the Fed's accommodations last Fall. Yet, today such distortions
are easily ignored with the basic bullish premise that the rest of the
world loves US financial assets and, with this being the case, we are
indefinitely the great beneficiaries of King Dollar. This school of
thought believes that our country's trade position is irrelevant, as
foreigners are, and will continue to be, more than happy to recycle
these dollars back into American financial assets. Truly, this is a
momentous, and we would say reckless, assumption. And, especially after
repeated bouts of love turning to hate for securities markets around the
world, rationality would dictate a major dose of skepticism that foreign
investors will always love our stocks, bonds, and dollars.
It is just hard for us to forget those days early last October when the
dollar and the stock market were falling together and liquidity quickly
vanished in our financial markets. At the time, it certainly looked like
we were at the brink of a critical change in market perceptions, a
point where foreign investors might decide to ask for their money back.
Indeed, despite the doubling of tech stocks and more than 4,500 points
added to the Dow, we still see last fall as an important inflection
point. It was when cracks began to form in bullish perceptions of the
health of the dollar. And, importantly, it marked a turn in the fortunes
for many in the leveraged speculating community.
Today, we are left pondering who is going to be buying all these dollars
that we are increasingly flooding the world with. For years it was the
foreign central banks, largely Asian, who accumulated these dollars so
their local currencies would not rise, in what proved a failed strategy
of boom and bust. In fact, foreign central bank holdings of US
Treasuries grew from $350 billion to $650 billion from the beginning of
1994 to the end of 1996, and today are at about $600 billion. Meanwhile,
we benefited from a few years of dollars being recycled back to US
securities markets with the leveraged speculating community borrowing at
low Japanese interest rates. This too, looks to have run its course as
these players have suffered significant losses. And certainly the
perception of an improving Japan adds considerable risk to shorting the
yen.
With this backdrop, we continue to see a weak dollar as the big surprise
going forward. And with sentiment extraordinarily bullish on the dollar
and US financial assets, any sudden change in perceptions could be
cataclysmic. And we do not choose the word "cataclysmic" for hyperbole.
Only time will tell how large the "hot money" flows have been into the
dollar and US financial assets. And, unfortunately, we have witnessed a
series of currency crises develop over the past few years in a global
financial system that simply breeds excess and resulting crisis. We
don't know what will spark a break in market psychology the change in
perceptions as to the long-term health of the US economy and financial
system. We do recognize, however, that the degree of credit excesses,
stock market speculation and economic distortions are unprecedented. In
sum, the foundation of our prosperity could not be more fragile. One of
these days, foreign investors may actually want their money back. Or, at
least, they may take a close look and determine they don't like the way
their money was spent. Either way, when that time comes, there won't be
talk of King Dollar.
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