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To: dwight vickers who wrote (21194)	3/17/1998 10:45:00 PM
From: Paul Fiondella	Read Replies (1) \| Respond to of 42771

(Off Topic) Asia and the US market Here is Abby Cohen, market guru and Bull, as interviewed in SmartMoney: - Abby Joseph Cohen, Goldman Sachs "Asia's problems are easing and that will help the whole global economy this year. As a result, earnings for the S&P 500 companies will improve...." She was hyped all over CNBC today every hour. Is it any wonder that the market is so overvalued when this is the type of understanding of the world economy that drives the process forward?

To: dwight vickers who wrote (21194)	3/18/1998 11:59:00 PM
From: Paul Fiondella	Read Replies (1) \| Respond to of 42771

(Off Topic) Asia --- what Japan thinks of the US economic miracle ============ The author rejects the entire US Treasury Department solution to the Asian problem. He rejects the Treasury Department's pressure on Japan to stimulate their economy. (An effort to relieve the US from being the buyer of last resort for the goods Asia will need to export to climb out of the currency mess) He seems to invite a collapse of the current international monetary system which is based upon the use of the $$$ as the world's reserve currency. Of course were Japan to provoke such a crisis, which hasn't happened since Nixon ended the European dollar crisis by ending the gold standard and effectively devaluing the $$$ then we might be looking at a repeat of what happened to us in the 1970's. The US owes a fortune to the rest of the world. The day they stop taking dollars is the day of judgement. This article gives you some idea of what is behind the Euro. Both Japan and Europe want to move away from a $$$$ centered world economy. ================================ POINT OF VIEW: Global financial system needs a complete overhaul Susumu Saito Special to Asahi Evening News Since U.S. President Richard Nixon suspended the convertibility of the U.S. dollar into gold in August 1971, the dollar's exchange rate against the other major currencies, especially the yen and the mark, has fluctuated wildly. International financial crises are nothing new, as the International Monetary Fund (IMF) pointed out recently. The IMF has been urging the Republic of Korea (South Korea) and the Southeast Asian nations in crisis to reform by liberalizing their domestic markets in exchange for financial assistance to keep them solvent. It has been also pressing those Asian nations to tighten up their monetary and fiscal policies to rectify external imbalances of payments. Since the Asian financial turmoil began last summer, Asian nations have been blamed for pursuing "irresponsible" macroeconomic policy management that has resulted in the large current account deficits on their balances of payments. To be fair to them, however, the sum of their current account deficits is a token amount compared to the U.S. current account deficit of $166.4 billion (20.8 trillion yen) in 1997. Also the U.S. deficit problem is not a recent phenomenon. It has been chronic since the 1970s. The cumulative total of the U.S. current account deficit since the beginning of the 1970s is estimated to amount to about $1.6 trillion. Many people, however, might have wondered how the United States has been able to finance its huge current account deficits for the past quarter of century or so, while South Korea and Southeast Asian nations have suddenly found it extremely difficult to do so. Why doesn't the IMF demand that the U.S. change its ways, as it has done in Asian nations? What has exempted the United States from being obliged to change for such a long time? A country successful in letting other countries accept its "fiat money" as a means of external payments can enjoy several privileges. Let's call such a country the key currency country. First of all, the key currency country can settle imbalances of external payments with its own fiat money. That way, it can "automatically" finance its imbalances of external payments. For the key currency country, the problem of external payments simply does not exist. The list of privileges does not end here. As the key currency country incurs external deficits, assets in its own currency which are owned by foreigners increase. However, most of such liabilities are deposited in the accounts of the key currency country's financial institutions in the form of short-term financial instruments. (Editors Note: he means short term US Treasuries) Then, the key currency country can transform such short-term liabilities in its own currency into long-term assets by investing in the domestic as well as the overseas markets (Editors note: buying up foriegn assets with US currency), and can enjoy the differentials in long-term and short-term interest rates. The privilege of the key currency country is further reinforced as the central banks of the non-key currency countries begin to have as reserves financial assets denominated in the key currency in addition to gold. (Editor's note: in the current crisis Gold declined in value while Treasuries increased in value.) The United States has enjoyed to a full extent these privileges--or seigniorage--as a key currency country since the suspension of the convertibility of dollars into gold in August 1971. This mechanism has been functioning in a way like opium--as it causes no pain to the United States even with its chronic current account deficits. The United States has been applying political and economic pressure on Japan, which has chronic current account surpluses, for the past quarter of century. Political negotiations have focused on "opening up the closed Japanese market," and talking down the dollar against the yen to reduce the bilateral trade imbalance, coupled with demands to stimulate Japan's domestic demand. This U.S. approach in dealing with its own external imbalance is becoming less and less persuasive. The U.S. economy is already operating almost at full employment after a prolonged boom in the mid-1990s. It is not a consistent argument that such an economy will be able to grow out of its huge current account deficits by exporting more. (editor's note: This is as clear a statement as you will ever find of the Japanese position.) The accommodation of U.S. demands for stimulating Japan's domestic demand has caused a cycle of boom and bust here in Japan after all. Japan has suffered withdrawal symptoms and has needed treatment since the beginning of the 1990s. Likewise, the above-mentioned "addiction" is not maintained by the United States alone. It has required international cooperation by the other major economic powers. To keep the system operating, the United States and the rest of the world demand more and more doses of dollars, or fiat money. This process, however, is very difficult to stop until the rest of the world realizes that they have "earned" only fiat money, and the system itself breaks down. Then the U.S. seigniorage will very likely be recognized as an "American problem" after all. And the U.S. giant will suffer from severe withdrawal symptoms as it weans itself from its addiction. Other giants such as Europe and Japan will not be able to remain unaffected. Realistically, the restructuring of the global financial system will start in earnest only after the United States recovers from this addiction. At present, we can only say the following: a new system is needed to remove the elements of dependence in the current system, which place the key currency country and the non-key-currency countries in asymmetric relationships.(Editor's note: They will be able to say more if the current crisis is transferred from Asia to the US.) The new system will need to incorporate self-regulating mechanisms to stabilize the relationship between the dollar, the "euro" and the yen. This will necessitate the creation of an institution with authority over these three currencies. A partial overhaul of the IMF will not suffice. The world will have to start serious discussions toward the creation of a world central bank in the true sense of word for the first time in history. * * * The author is an economist and director of the Trilateral Institute in Tokyo. ================================= Print it out and read it at your leisure.