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To: PaulM who wrote (47049)	1/14/2000 7:27:00 AM
From: Phil Jones	Read Replies (1) \| Respond to of 116764

Replace "EXPANSION" with "HIDDEN INFLATION" in the title, and you've got the better picture. There's just no way that U.S. companies are putting out five times as much real value as 10 years ago. So stock prices at five times the level of 10 years ago have to be largely inflationary. The stock market for at least the last 10 years has represented a classic pyramid-selling scheme. In any country except the U.S. it would have by now caused a collapse -- because any other country would have been measured against the U.S. But because it is the U.S. and because the world economy is dependent on the U.S., the bubble won't burst easily. It has to be some outside force that sets it off, something that creates a general unease among Americans. I can't foresee what it will be, but the bigger the bubble gets the bigger will be the burst when it blows. Some time soon something will happen that will make the Emperor aware that he has no clothes.

To: PaulM who wrote (47049)	1/14/2000 12:19:00 PM
From: Alex	Respond to of 116764

Banks Are Losing Control of Money by Michael Klein Talk of an international financial "architecture" reveals a belief that clever humans can construct an orderly global financial system. However, what really determines the future may turn out to be a wave of technology-driven change in the world of money. The effects could be manifold. First, monetary policy and central banks may become irrelevant. The growth of real-time gross settlement systems promises to reduce the need for some form of "final settlement money". In addition, private settlement systems such as Chips may come to accept private means of payment including, for example, company shares. In a world of private money the fate for central banks is privatisation or maybe transformation into a regulatory body. Second, national and private currencies may compete effectively with each other, rendering exchange rate policy and balance of payment concerns obsolete. Smart payment cards and wireless communication devices are spreading across the world, even to the poorest countries, and costs continue to fall dramatically. The spread of the internet allows each financial transaction to be settled 100 times more cheaply than manual settlement via bank branches. Today, e-cash providers are offering new payment mechanisms, even for small cross- border transactions. Once the demand for privacy, security and trust is met via encryption, regulation and branding, we may see a new world of financial settlement. This is a world of "capital flight for all" and no longer just for the rich. People choose which currency block to belong to. As a result, there is no longer a match between geographical entities such as nation states and the money that is used to settle physical transactions conducted on their territory. Governments lose the tool of nominal exchange rate depreciation. National current account deficits would be as meaningless as in currency unions. Third, more flexible forms of denominating wages may act as a substitute for the loss of nominal exchange rate flexibility. Wage contracts are usually inflexible ("sticky"), because people will not agree easily to a cut in the remuneration agreed in their contract. In situations where wages need to fall to restore employment, the adjustment is long and hard, unless some mechanism such as currency depreciation allows all wages in a suffering country or sector to move downwards in one fell swoop. But in future wages could, for example, be denominated in shares of the employer. Or employees might prefer to have their contracts denominated in units of a diversified fund of shares in companies exposed to the same adverse shocks as their employer. By re-denominating contracts with "sticky" prices, society would create new "units of account". In fact, one cannot have both price flexibility for contracts with "sticky" prices and a unique unit of account. In a world of e-commerce and open borders, people would increasingly compare prices quoted in different currencies. Fourth, the work of bank regulators may be made easier by heightened capital market disciplines. In a world of private money or currency competition the state would no longer be able to provide open-ended deposit insurance or liquidity support by printing money. Overall, the disciplines on financial institutions would come to resemble the ones seen under free-banking systems of the 18th and 19th century. Without regulatory prompting, banks would typically carry capital in the order of 20 per cent of assets or more, a bit like today under currency board systems. They would advertise with hard numbers on their financial health and have an incentive to avoid moral hazards. Beyond private insurance schemes, the residual burden to provide liquidity support for banks would fall on fiscal policy. This would require strong underlying fiscal positions, so that governments could borrow in times of crisis. With limited fiscal options and without monetary and exchange rate policy, macroeconomic policy as we know it would be at an end. Finally, 19th century-style deflation and financial crises may become more likely, at least during the transition to this new world of money. The move to more flexible price systems would be lengthy and hard. Furthermore, as uncontrollable electronic flows swept across countries with weak banking systems, financial crises could be triggered. Ultimately, once monetary authorities are redundant, it will be harder to conduct counter-cyclical macro-economic policy. The unresolved debate is whether a market among competing issuers will work well or not - whether markets are destabilising, or self-correcting. What we do know is that the shape of the global monetary system will change. Since the introduction of fiat money and the demise of the gold standard, global monetary regimes have changed about every 20 to 30 years. Why should that stop? The real question is what comes next. The author is chief economist of the Royal Dutch/Shell group of companies. The Financial Times, Jan. 14, 2000