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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (1156)	10/1/2003 12:07:58 PM
From: russwinter	Respond to of 110194

Another excellent piece JW, encourage everybody to read it. From Japan Times ties in to your point about the yen. Currency interventions prove to be both fruitless and costly By CHRISTOPHER LINGLE Special to The Japan Times GUATEMALA CITY -- The weakening of the U.S. dollar accelerated after finance ministers from the Group of Seven issued a communique calling for market-oriented international exchange rates. Soon afterward, the Japanese yen set a two-year high against the American currency. Of course, Japanese exporters complain that the rising value of the yen will erode their profits. This has brought considerable political pressure to support government intervention in forex markets to avoid further advances in the value of the yen. In turn, officials in Tokyo have been jawboning the markets and implying that they will continue to weigh in to thwart foreign-exchange speculation and stem appreciation. However, the doom-laden estimates offered do not consider the total impact of an appreciating yen. A focus only on the impact on exporters overlooks the fact that a strengthening currency benefits importers who buy more goods with fewer yen. And domestic producers are able to buy imported inputs for less. Meanwhile, many Japanese companies have offshore production facilities that will offset the impact of an appreciating yen on their ability to hold market share. While a stronger currency may adversely affect some exports, this impact is mitigated through diversification of domestic production. Intervening in currency markets discourages producers from making decisions that will be in their long-term interest. It turns out that these interventions cannot alter the inevitable gains in the yen against the dollar because of the inherent weakness in the U.S. currency. Most market analysts and dealers expect the dollar to continue its downward path. This is perhaps the most ruinous outcome of the irresponsible monetary policy pursued by the Federal Reserve under Chairman Alan Greenspan. By forcing interest rates down artificially, it has caused such a massive flood of dollars into the system that no amount of intervention will be able to stem its decline on global currency markets. While forex intervention is likely to be fruitless, it involves high costs and is a distraction from implementing other policies that could promote long-term growth. Indeed, currency intervention goes against the most basic notion of financial prudence. Basically, buying dollars that are certain to be less valuable with yen that are becoming more valuable is equivalent to a "buy high, sell low" activity. While the net impact of market-induced changes in currency valuations is uncertain, there is also no way to know what the proper market rate of exchange is. And so, forex intervention is a highly speculative and Quixotic adventure that should be avoided. In all events, currency values are less important as a determinant of long-run competitiveness than rising growth in productivity. Policymakers should be focusing on how to ensure that the investment and regulatory climate is inviting for both domestic and foreign investors. There are better tools at the disposal of Japanese policymakers if they wish to improve the capacity of their economy to grow. These include reducing tax burdens, public sector debt, government spending and waste or corruption. On the microeconomic side, a rising yen will force out some inefficient firms that operate on small margins to eliminate some of the excess capacity in the domestic manufacturing sector. The reduction of overcapacity and elimination of nonviable companies will improve the economic climate. Of course, a sharp rise in the value of a currency could increase foreign-exchange risks that could then lead to a sudden decline. But the current volatility of the yen is within acceptable bounds. And economic fundamentals suggest that there is no heavy downside threat. Although it is impossible to know what the optimum level of any currency is, there is scant evidence that the yen has overshot its long-term position. Meanwhile, neither the U.S. nor the European Union has done much to curb the decline of the dollar. History is littered with failed attempts by government agencies or industry groups to set prices. Such failures have been recorded with price intervention on commodities, rental properties and exchange rates. Ultimately, many individual market participants -- who are disconnected in purpose and space -- will determine currency values by making decisions that they are not aware they would make. Although politicians and bureaucrats will continue to meddle, it is better to allow prices of currencies and other things to be discovered in the complex interactions of human choices, not political design. Of course, Japan has an arsenal of foreign reserves with which to do whatever it wishes. But the erratic behavior of the Bank of Japan and the Japanese government concerning the valuation of the yen casts doubts upon the viability of such a project. Both have spent most of the postwar era fulminating over market valuations of the yen and fighting a Procrustean battle to move it toward a specified value. As in so many other areas of government activity, forex intervention creates a batch of unintended consequences and distortions. It turns out that there is a remarkably consistent lack of success when governments attempt to support prices of commodities or currencies. Therefore, it is likely that this move may lead to greater instability and lower economic growth.