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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Cynic 2005 who wrote (1914)	2/5/1998 6:30:00 PM
From: Rational	Read Replies (2) \| Respond to of 9980

Mohan: I envy you for your trip to India. I had planned to visit; there was a joint Exec Dev Program with XIM (Xavier Inst of Mgmt) planned to be held in Bombay. But, the dates coincided with another program; Indian economy was slow; XIM was charging the highest rate in India; we got 10 participants and I was not too excited (although we were making some profit); we postponed to summer. Coming to your question about higher interest rate when the love for USD fades, I feel Fed's options will remain limited because the economy is not going to keep humming -- the Fed will be reluctant to keep the USD high by raising interest rate because this may deteriorate the economy and worsen the trade deficit. It also seems the Clinton scandal has not gone away. Many criticisms like high current account deficit, trade deficit, and artificially high value of the currency and excessive debt were leveled against SE Asia. These criticisms apply to the US more than to any other country. The only main difference is a sudden exit of capital that crashed the currencies in SE Asia. Such a sudden exit from US will not take place because the banks cannot go anywhere else like Mars or Moon! <G> Where will the excess capital go? Actually this excess capital is fake to a great extent. It is the excess money supplied by the US over years. This fiat money has created a notion of wealth due to its circulation. Just imagine that in Indonesia, prices are quoted in USD and exchanges are not made in local currency. People are clutching to their USD all over the world and obviously more money than is necessary has been printed by the US. When the USDs emerge from the closets of housewives in every nook and corner of the world, there will be a big drop in the value of USD. The Fed will be forced to buy the USD since raising interest rate will not be a good option. What will the Fed pay to get these extra USD? Well, Fed does not have enough reserves of other currencies. They may sell gold as other CBs have been doing. But, this will unlikely solve the problem. This is a scary scenario and I have to think more carefully. At least, I see a gradual erosion of US growth leading to a recession in some years. The culprit is exchange rate which is so artificial because not many (especially currency traders) have the will to know the fair rate. At the end a day, the rate is a result of speculators and government defenders in small economies and pure speculation in others (e.g., US and Japan). I wish there existed a better medium of exchange. Sankar