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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Skeet Shipman who wrote (1705)	5/27/1999 9:19:00 AM
From: X Y Zebra	Read Replies (1) \| Respond to of 3536

If you don't mind would you expand on your first two points please, so I can further understand them. As for the third, I understand such re-pricing needs, my assumption is that many would accept such risks in exchange for a more stable and known risk. (as it is, current re-pricing exists already, over and above the "planned daily devaluations", [1984 through 1990, or so]and/or the sudden devaluations as in 1976, 1982, 1994). Many times they have tried to "price" things with monthly "devaluation escalators" that always prove to be too weak. In addition, (at least in Mexico, but probably throughout Latin America), there are a number of leasing and sale contracts, mainly in real estate, that are priced in dollars... the key is that both parties accept them, I do not know if a leasing contract would stand a legal challenge. The way the legal system works, it is probable that the parties would come to some sort of arrangement (out of court), before a decision in such matter would become a reality. From the practical point of view, (again, at least in the case of Mexico, and probably Argentina), all it would take would be some sort of "blessing signal" from the politicians, and the people would embrace it with gusto.... they are fed-up to no end due to years of absolute mismanagement of the "peso". As you have indicated the costs far outweigh the benefits. Indeed, along the border between the US and Mexico, many items are traded based on US dollars, certainly Real Estate. As far as the re-pricing issue, it already happens.... often. Why is Argentina "unique"...? and lastly, as far as "regionalization of South America".... I think you should say Latin America, to include Central America and Mexico...besides.... I think "regionalization" is already a given. Thank you in advance.

To: Skeet Shipman who wrote (1705)	5/27/1999 9:37:00 AM
From: Daniel Chisholm	Respond to of 3536

Hi Skeet, regarding dollarization, First, the country needs to maintain on average a trade surplus and a capital flow surplus, or a combined surplus. The size of this surplus becomes a currency constraint on the economic multipliers in the economy. Is this in order to build, and then grow, the country's US dollar money stock? Second, the currency , US dollars, has to be purchased or borrowed from the US or other nations. This increases the country's debt payments. Isn't this simply a restatement of your first point? If the country runs a trade surplus, then that generates US dollars for them. If the country borrows US dollars, doesn't that contribute to that country having a capital flow surplus? If they choose to borrow, then presumably the debt payments (principal and interest) they incur would be, in their judgement, worthwhile. Third, because the currency, US dollar, does not reflect international competitive pricing in commodities and industrial goods, frequent price changes would be necessary; and long-term contracts would need to be written using an average international currency index. Long-term economic misallocation of resources and productivity could result. Imperfect though the US dollar may be, if we consider it to be a good proxy for a "stable currency", an effective "store of value" and a widely accepted "medium of exchange" (at least on a relative basis to the national currency it is supplanting), then what is the problem? If the dollar remains (relatively) stable but competitive price pressures lead to changes in the US dollar price of steel, pulp, oil, coffee, etc, what is the problem? Isn't this the case today already, i.e., most commodities effectively trade in US dollar terms, and local currencies either track the US dollar (and maintain their relative value) or increase/decrease in exchange rate, providing "price stability" for particular industries but introducing changes (usually unfavorable ones) to the exchange value of local residents' savings and earnings power? (Two armed economists are bad enough, I think when considering international macro stuff most economists must have three arms!) - Daniel (edit: I see Gastón has already responded. Interesting topic, eh?)