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Politics : Dutch Central Bank Sale Announcement Imminent? -- Ignore unavailable to you. Want to Upgrade?

To: philv who wrote (22070)	12/2/2004 4:40:31 PM
From: sea_urchin	Read Replies (2) \| Respond to of 81102

Phil, here is an article which I think will interest you. We have often opined on what may/could happen in future as result of the huge USD deficits. Well, here is the opinion of two professors on the same subject. news.ft.com >>The work of these two economists assesses the real exchange rate adjustments needed to reduce the US current account deficit. But a prior question is whether such a reduction is needed. The honest answer is: nobody knows. But it is easy to accept that the present path is unsustainable, since both the current account deficit and external liabilities are on an explosive upward trajectory. On current trends, the current account deficit might even jump from 6 per cent of gross domestic product to as much as 10 per cent by the next decade. Total spending by US residents now exceeds GDP by close to 6 per cent. The size of the required price changes is determined by "elasticities of substitution" - a fancy name for the changes in relative prices needed to bring about given changes in demand. According to Prof Obstfeld and Prof Rogoff, the real exchange rate depreciation needed in the US could be as big as 34 per cent. To bring about a substantial reduction in the external deficit without a deep recession, the US needs a huge change in internal relative prices. If the financing of the deficit is indeed in doubt, a weak dollar is a certainty. Hard currency enthusiasts may want the US to choose a depression, instead, or hope the deficit can grow without limit. Neither position is sensible. Big adjustments in the dollar's real value are a certainty. The only questions are when, how and how much.<< A 34% fall in the USD brings the USD index somewhere somewhere near 54. As a thumbsuck, I felt for some time it could fall to 60. A 34% fall in USD would, if gold was functioning just a hedge to the dollar, bring its price to around $600. Maybe that would please the goldbugs but it would be a very different world. BTW, the reason I persist in saying that gold is functioning only as a dollar hedge is shown in this chart of the gold price in Euros. While the gold price remains below E350, and in a sideways movement pattern, I have no reason to believe that any factor other than its use as a dollar hedge is operating to determine its price. stockcharts.com[h,a]dalaynay[dh][pd150,2][ilb14!la12,26,9]