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To: smolejv@gmx.net who wrote (3043)	4/15/2001 2:25:13 PM
From: westpacific	Read Replies (1) \| Respond to of 74559

DJ - I make you the official policeman of SI! You are here crowned. LOL And yes the article was from Prudent Bear - one of the great sources of truth in this market and a breath of fresh air. (I am very good at posting credit to the source. On occasion it does not get dragged and pasted.) West

To: smolejv@gmx.net who wrote (3043)	4/15/2001 2:28:08 PM
From: smolejv@gmx.net	Read Replies (5) \| Respond to of 74559

During the bubble of 2000 it was generally accepted that the euro weakness reflects the strength of American economy and the lower future earnings prospects in Europe. In the mean time the US stocks are free falling, FED cut rates several times and the US current balance is at record levels. Whoever uses the arguments cited should now have to explain why the procession of horrendous earnings warnings does not bring euro towards and over the dollar parity. The arguments, which assume that the shifts between the markets would influence the exchange rates, are fallacious. The mechanism of exchange rates (and their apparent disparities if such exist) is not coupled to the liquidity flows. It’s the liquidity preferences that regulate it. So why would anybody prefer greenbacks to euros? There are two reasons, both based on the fact, that euro is still a virtual, intangible commodity. First, a lot of people are afraid of having to go to the bank start of next year and change their old money for euro bank notes. The reason for this angst is simply the provenance of the cash reserves. The banks are required to register greater amounts to avoid money laundering. So the Euroland owners of black money will for the time being have to switch to some other currency, with US dollar the most obvious candidate. The relevant orders of magnitude are not small to say the least. The shadow economy in Euroland is assumed to be in the order of 16% of GNP, but, because it uses exclusively cash transactions to operate, its size is way beyond the expected amount of 14% or 50 Billions euros. Second, a lot of people outside Euroland sit on DM-cash; they more or less have no idea that the Euro union has become a reality. They just heard that not so far away in the future their 10DM bank notes would be toast. Nobody knows, how the physical exchange of banknotes will take place, what the expected costs will be and who will do the bank note exchange. Think of deutchmarkized countries in Balkans. Or imagine clan chiefs in some bombed-out place in Chechnya, sitting on their DM coffers and discussing their 2002 budget. At the time of euro introduction in January 99 the census was that about 60 to 90 Billions of DM cash were either used or stashed away outside Germany. This includes the numerous 1000DM notes stashed in Turkish mattresses as well as DM saving books in Croatia, Slovenia and other east European countries. These DM levels correspond to about 20 to 30% of German cash levels (or 8%-11% of euro levels, when recalculated to Euroland as 100%) or in absolute terms to 30 to 45 Billion DM altogether. All those cash levels are orders of magnitude higher than the funds used by EZB during its few interventions. Unavoidably the exchange rate has to show the effects. The change in preferences should also be easily detectable by a growth in US money supply, accompanied by a lower than expected inflation. There are already case histories to this effect, like after the fall of iron curtain, where DM mark displaced the local currencies and the growth of money supply did not cause any appreciable stability problems. This process has turned around two years ago. Since the euro introduction the rate of money demand has been decreasing in comparison to BNP, so much so that the absolute level of money demand has fallen in Q4 of 2000. This highly significant departure from long-term trends can hardly be explained by anything but the reasons suggested above. --- Based on "The money, that's coming in from the mattress" - by H.W.Sinn, in Süddeutsche Zeitung of April 6 2000 -