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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: IngotWeTrust who wrote (13752)	6/24/1998 4:05:00 PM
From: Alex	Read Replies (1) \| Respond to of 116805

Borrowed this from Kitco. A bit dated, but interesting..................... IMAGINE A RUN ON THE DOLLAR Author: By Lester C. Thurow Date: TUESDAY, February 24, 1998 Page: D4 Section: Business The Boston Globe For Americans the debate over Europe's common currency, the euro, is over. It doesn't make any difference whether we think it will be good or bad for Europe. It's going to happen in just 10 months. For those of us who live outside Europe, the only relevant question is: How is it going to make our lives different? For Americans it means the dollar will no longer automatically be the world's reserve currency. Individuals, companies, and countries will have to decide how much of their reserves they want to hold in dollars and how much they want to hold in euros. They will have to decide when to move their reserves from dollars to euros or from euros to dollars. Effectively no one has had to make these decisions since World War II. Since then, reserves have been held in dollars. Individual European currencies were too small to be reserve currencies. Their markets were not big enough to allow hundreds of billions of dollars to move smoothly in and out of their currencies. Japanese markets were large enough, but the nation's financial markets were too regulated to let the yen play that role. No party moves money into a currency if it thinks government regulations may be invoked to stop it from leaving that currency whenever it wished. Size and freedom of movement are important in picking a reserve currency, but so is the expectation that the real purchasing power that was initially deposited will be there whenever the depositor wants to withdraw the funds. If there is a choice, no one wants to hold reserves in a currency that is falling in value. Ideally one would like to be in a currency that is rising in value so that one gets a little appreciation along with safety. But in the last 50 years there has not been a choice. If the value of the dollar fell, as it periodically did ( down nearly 34 percent from 118 to 78 yen to the dollar just a few years ago ) , depositors stayed in dollars and took their inevitable losses in purchasing power. A falling dollar did not lead to a Mexican-style run on the dollar. But that changes with the advent of the euro. If the dollar is falling in value or is expected to fall, everyone, including many Americans, will want to get out of dollars. A run on the dollar becomes possible. In making the decision to get out of dollars, beliefs about the long-run strengths and dynamism of the American economy are irrelevant. Holders of currency reserves are not buying shares in the American economy. They are simply looking for short-term safety. Initially the euro is apt to be an appreciating currency. With the onset of the euro, 12 European currencies will disappear. The reserves needed to make transactions in these currencies, now held in dollars, won't be needed. As these dollars are sold, the value of the dollar will fall and the value of the euro will rise. Countries, such as Saudi Arabia, that buy European products will have to decide how many of their existing dollar reserves should be moved into euros. Clearly some should be moved. As a result, oil companies such as Saudi Aramco will want to price some of their oil in euros. Others will have to make a choice between what are essentially two banks offering alternative currencies. The bank offering dollars, America, is running a large annual trade deficit ( $200 billion in 1997, but expected to be near $300 billion in 1998 ) and will have net debts to the rest of the world of about $1,500 billion dollars in 1999. In contrast, the European bank runs a trade surplus with the rest of the world and is owed money by the rest of the world. To many potential depositors, the European bank is going to look much less risky than the American bank. As the euro goes up and the dollar goes down, those looking for appreciation as well as safety will transfer from dollars to euros. Those who sold Mexican and East Asian currencies will be just as glad to sell dollars. If the dollar goes down fast enough or long enough, fears will rise that holding dollars will lead to large losses, and a run on the dollar will start. If this happens, the United States will quickly lose its ability to run large trade deficits -- just as Mexico and East Asia were quickly forced to correct their trade deficits as their currencies were tumbling. Since most of our imports are consumer goods, items like consumer electronics and gasoline would become much more expensive. This does not mean a foreign exchange crisis will hit on day one or day 1,000 after the introduction of the euro. It just means something that could not previously happen -- a run on the dollar -- becomes possible. An America that could comfortably run a perpetual trade deficit now runs large trade deficits at its peril.