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

To: Jay Scott who wrote (6544)	9/21/1998 3:07:00 PM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 9980

Jay, No, I don't think AG is consciously making deflationary policies, but on the other hand, he doesn't appear to see the devastation that a rich dollar has wrought overseas. There is some disagreement on this. There are those who would argue a strong dollar is in fact an advantage to the embattled economies. By keeping the dollar strong you keep US demand elevated and make US exports less attractive. By doing this you are in effect providing a trade advantage that will allow the troubled economies to export their way back to health. Yes the strong dollar gives them problems with their debt. However the whole idea of emerging markets borrowing in dollars was a masquerade in the first place that allowed this situation to get out of hand. It set up incentives that led to the reckless behavior that contributed to the current situation. The emerging markets want to borrow in dollars (or yen or marks etc) because it gives them more access to global liquidity and generally much lower rates than can be achieved domestically. However couple these low rates with a fixed exchange rate and an economy that is growing at the high growth rates typical of an emergent economy and you have a recipe for an asset bubble. You have effectively created negative real rates of return and all sorts of marginal or even uneconomical projects get funding. The system creates the illusion of stability and prompts excessive and over stimulative borrowing resulting in just the type of asset bubble we are currently witnessing. Lending to emerging markets in dollars is also an illusion. It gives the lenders a false sense of security in that they believe they have eliminated currency risk. They believe they have confined their risk to a more easily analyzed credit risk. In fact all they have done is transfer currency risk to sovereign risk and then done a poor job of analyzing that risk. By allowing dollar policy and our interest rate policy to be dictated by the fact that these nations have made the mistake of taking on to much dollar debt only sets up a situation in which we inevitably import the contagion. I'll comment on gold in a separate post. Henry

To: Jay Scott who wrote (6544)	9/21/1998 3:43:00 PM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 9980

Jay, Let me start by saying I am not a gold bug. I will say that gold has some predictive value but no more or less than any commodity. Also it needs to be looked at in a global context. However let's look at the current predictive capability of gold. It's hard to make an argument that gold has correctly predicted recent economic trends. Yes the price of gold has declined vs the US dollar and under this theory that would predict declining price levels in the US. However we have not seen that. In fact the one thing the Fed has been most concerned about is signs of an inflationary uptick in such indicators as employment costs. Over the last few years in which gold prices have declined it is difficult to argue that we have seen a deflationary trend in the US. The response I usually hear to that is that the deflation is not occurring in the US but is occurring in the emerging markets. Yet those currencies have all weakened significantly against the dollar to the effect that gold has risen substanially in terms of most of the emerging market currencies. Shouldn't the theory state that inflation is in fact a problem in those currencies since gold is so strong? Clearly that is not the case. I believe Greenspan recognizes that there are other things happening and gold does not have an overriding predictive ability. That is not to say there are not reasons to argue for a Fed rate cut. I believe a rate cut would be appropriate. I just don't believe gold is giving us reliable signals one way or the other. Henry