Scott:
Two pieces below - first from british financial press by way of Drudge and second from IHT by way of WP.
Lack of thought is breathtaking.
First my own comments from LidlessEye
Will go into it in more depth on blog later but essentially the EU is proposing to end the current borderless capital mobility.
1. slicing the world into literal currency blocks has massive ripple effects
2. the in and out status of London gets REAL interesting at this point - can the EU force non-Euro members to act to save the currency
3. they are beta testing in real time and incredibly complex system that no one has really mapped much less understands
4. it would mark the reassertion of the primacy of political control over the seperate player called the financial markets
Just to take a simple one
The EU non-Euro states
Do you errect capital walls between Euro and non-Euro EU members?
If not the proposed controls are a joke
If so you have ruptured the EU
The alternative is for the Euro states to force the controls on the others at gunpoint making them de facto Euro currency states
Read those then skip below to read the articles and consider the following:
1. Euro opened [was created] at a pegged valuation of $1.17-$1.19 [you will see different numbers but this was initial range - I will use $1.18 for math below]. Euro then fell like a rock to $.83 [ a drop of some 30%]. The 'giant' dollar rise has been to reverse this and then go up another 2.5%. So a 30% drop of the Euro from parity doesn't end the world but a dollar drop of 2.5% does. What does this say about the weakness of the world economy without the US as market of last resort?
2. The Euro going to $1.35 is regarded as intolerable. That would be a Euro gain of 14.4% from initial parity, less than half of what the dollar rose initially. Again think it through. No one says that the initial parity was absurd but that is the subtext. If the initial parity was correct and if the world was in great prosperity in the late 90's then a 30% swing to the Euro's side from initial parity should be equally fine. This would be $1.54 ish. Now I agree that this would probably be the end of the world but not for any of the reasons listed below. Euro's economy would implode from US competition. Essentially Europe could not sustain its economy at the initial parity. Europe is choking on a return to parity.
3. Supposedly the Asian economies drove the world boom more than the US did in the late 90's. Yes as far as it goes. Asia was the huge growth area. Now ask what drove the Asian economies and in every case you find the motor is exports to the US. So we are back at the conundrum I keep whining about - world prosperity seems to boil down to a formula of exports to the US. OK. This in turn means that every equation the Ignatius and similar articles list is just plain backwards. Asia and Europe did not set out to invest in the US. They sold goods and services to the US in excess of what they bought. We paid in dollars. They used those dollars to buy Treasury bonds till they choked on them. Some then spilled over into other portfolio investments [stocks, real estate, corporations, etc]. The same pattern the Japanese showed in the 80's. Now what do they do with the dollars if they don't want to hold dollars? They sell them. You sell currencies for another currency. So to sell dollars you must BUY some other currency. The Asians will not allow their currencies to appreciate to any real extent against the dollar. Financial liberalization is much less complete there than in Europe and North America. So the European and old Commonwealth [Australian, Canada, New Zealand] currencies take the hit. This means that the entire hit to employment,exports and the economy in general is to be taken by these nations. The EU is threatening to rebel against this formula. However what are the alternatives? The US is simply not going to go into recession for the benefit of Europe ['defend the currency' by shrinking the budget deficit and raising interest rates]. Neither the economics nor the politics make sense. Financial liberalization is up against the reality that the globalized financial world covers 3 essentially different variants of capitalism in East Asia, North America and Europe [with the UK fitting its Atlantic island status by being transitional between the two shores of the ocean]. We have three different social and economic realities. It is not that one is right and the other wrong. They are merely different and reflect different priorities on the interests of consumers,producers and citizens. Liberalization ultimately is about convergence. We have essentially reached first the limits of convergence in the 80's and now perhaps the ability to paper over those differences with short term expedients. Neither the EU or East Asia wishes to become more Anglo Saxon [or at least more Anglo Saxon any faster than they are]. The US certainly does not wish to become more Euro. Clinton in part papered this over. A glibb Democrat manages to sound more Euro than his country and thus allow people on both sides to pretend. A Texas Republican reminds the sheep who move the money markets of just how different we are. 911 was a further irritant. The US is at war. Europe is not [or does not regard itself as at war]. Bush justifies his deficits as war time budgets [yes it is mostly domestic spending but mentalities do matter]. Europe does not accept the justification. So europe now threatens not to play.
4. However what are Europe's real choices? The ongoing integration of the Atlantic economies makes delinking difficult. We have spent decades building links,many of them private and very poorly mapped. They have brought a good measure of prosperity but one of the prices of that prosperity was that the financial markets escaped from national control. The period 1914-1973 was one of ever greater subordination of financial and economic power to political power. The freezing up of the political system that resulted produced a change in mentalities in the 70's. Deregulation was less an economic theory than a political confession - the politicans essentially realized that planning fails because faced with having to pick losers instead of just winners, democratic parties and polities failed. Planning and state control turned into socialism by bankruptcy. Capitalism may feel unfair and uncaring to most people but the market is capable of making decisions. The problem is that it is often not capable of making rational decisions. The price signals are still acted on by people with all of the lack of logic than primates are prone to. They actually develope attachments to places and people. They actually find chaos in their professional [and thus personal] lives to be profoundly unsettling. Economists see labor as just one stastical input in arcane equations. People see their jobs as building blocks to construct lives. Creative destruction may work in the macro. Those 'creatively destroyed' somehow fail to see the magic. Now we can debate forever why Americans are willing to endure more disruption than Europeans or East Asians. Fact is that they are. The why doesn't matter except as a topic of abstract debate. The net effect is that East Asia and Europe will trade economic gain for social stability to a greater degree than Americans will. So we import more than the world average. We pay for those imports in dollars. Since the rest of the world finished rebuilding from WW2 [roughly mid 70's] those extra dollars have been a metaproblem to the world. In the longterm they are a wasting asset. We won't redeem them for anything finite. The others all want to run export surpluses and for somebbody else to take the resultation dollars. Yet if the US as a whole must be market of last resort somebody somewhere ends up with the dollars. Now we have fudged this for decades by allowing a nonterritorial player called the financial markets to hold those dollars. The markets are both multinational [all the major players play in all the major financial cities] and non-national [if Chase has major offices in NY, London, Paris, Frankfort, Zurich, Milan, Bahrein, Singapore, Hong Kong and Tokyo where does Chase live?]. So other than actual government holdings of US treasury debt the money is a floating thing - one keystroke away from being somewhere else with those keystrokes in the hands of yuppies of various races and nationalities whose only job is to make a small profit on the move. Thus it is not that 'european' money may move out of Wall Street on a steep dollar drop, it is that all money may. So far the electronic bankruptcies of nations have not touched the First World - it has been Latin America, Russia, Southeast Asia. The closest to a 1st world nation to be slaughtered was SK in the Asian Flu of the 90's. However the markets are essentially sheep. They ran the dollar up until it reached its limits. Now they are running it down to see if there is a floor. Japan has already blinked. It is spending massively to keep the yen from appreciating. So far it has suceeded. Europe is now going 'not me'. So should Canada take the hit? At one point in the 80's the land under the Imperial Palace in Tokyo was [nominally] worth more than all the real estate in California. These are the sort of insane short term swings financial liberalization can inflict on the real world. Everyone knew the valuations were absurd in any real world sense. Financial markets only intersect with the real world in the medium to longterm. Similarly everyone knew the dotcom valuations were absurd but no one wanted to be first off the roller coaster. The Japanese crash after the 80's bubble paralyzed the Japanese economy into a deflationary depression ever since. This was the price of trying to force financial liberalization ahead of integration of national and regional values. What could have been solved sensibly with quotas and tarrifs was solved at vast cost via the financial markets. A trimputh of ideology over sanity. Free trade uber alles.
5. The 'system' has essentially worked by allowing East Asia to mostly not play. Europe took a vast appreciation in their currencies in the 1970's and again in the late 1980's into the early 90's. However the motor of Europe is Germany. Germany is still choking on digesting East Germany. Europe as a whole has made more extravagant social promises than the US, carries vastly more debt, has a major digestive problem with the former Pact nations, is demographically inert and papered that over in the late 90's via currency devaluations. The Euro pact was built on phoney bookkeeping. Now France and Germany refuse to abide by the stablity pact.
6. Rationally this is all fixable. There is no inevitable clash. However Europe does not cope well with Republican Presidents. The tiff over 911, Afghanistan and Iraq was made worse by Europe being faced with a President they simply emotionally and culturally do not like. That dislike grows spat by spat. 1929 wasn't ineviatble. It was human beings making bad decisions for reasons of ideology, petty spite and deep stupidity. It is not impossible that we will do the same. Almost 80 years later there is only a vague and frequently disputed consensus on what exact moves blew up the world economy. This was an economy much less complex than the current one and much more like the economy the decision maker's thought they were dealing with. I highly doubt that any of the major decision makers on either side of the Atlantic understand the complex poorly mapped financial beast. One of the few things the Clinton administration had was some top Wall Street operators. The Bush administration lacks those. Wall Street types simply do not find the culturally orientations of the modern Republican party sympatico. In reverse the heartland oriented Reagan-Bush GOP increasinly is uncomfortable with the bicoastal brie eating types that populate the world of finance. Here's hoping the planet rolls lucky.
///////////////////////////////////////////////////////////////////////////////////////
Brussels considers imposing currency controls
By Ambrose Evans-Pritchard in Brussels (Filed: 04/12/2003)
The European Commission is examining the legal basis for 1970s-style exchange controls to stop the euro surging to destructive levels.
A team working for Pedro Solbes, economics commissioner, claims Brussels may lawfully impose "quantitative restrictions" on capital inflows, clearing the way for a crisis response if the dollar continues to fall.
The document, drafted last month on the orders of Mr Solbes's director-general, Klaus Regling, concludes: "Should extremely disturbing capital movements endanger the operation of economic and monetary union, Article 59 EC provides for the possibility to adopt restrictive measures for a period not exceeding six months."
Any decision would be taken by EU finance ministers under qualified majority voting, leaving Britain with no veto.
The move came as the euro hit highs against the US dollar, touching 1.2125 yesterday before closing at 1.2109. It has gained 42pc in less than two years.
The euro-zone has borne the brunt of the global realignment. The Chinese yuan is pegged to the dollar, while Japan has capped the yen by buying US bonds.
Industry leaders in Germany and France say the euro has crossed the "pain threshold" and risks aborting the euro-zone's fragile recovery. The latest survey data shows a renewed fall in confidence among French consumers and German retailers.
Jean-Philippe Cotis, the OECD's chief economist, said further appreciation posed a "great danger" to the euro-zone.
It is widely assumed EU law guarantees the free movement of capital but, after combing through the treaties and court judgments, EU experts have concluded that this "absolute freedom" can be limited in an emergency.
"Among the actions that can be undertaken when a member state experiences serious balance of payments difficulties, Articles 119 and 120 EC provide for the possibility to reintroduce 'quantitative protective measures' against third countries."
The document is is annexed to the Commission's 2003 EU Economic Review, released quietly last week. Some officials in Brussels, Berlin, and Paris believe the Bush administration is engaged in a "beggar-thy-neighbour" currency war.
Strong factions within the French and German governments want the European Central Bank to counter the "easy credit" policy of the US Federal Reserve with aggressive monetary expansion in Europe.
Faced with stubborn resistance from the anti-inflation hawks at the ECB, they are instead eyeing exchange rate policy as a means of imposing their will.
While capital controls are viewed as the "nuclear option" if all else fails, the collapsing dollar is rapidly bringing the issue to a head. A senior EU official told the Daily Telegraph that an exchange rate of 1.35 against the dollar is a likely trigger.
It is unclear where such a decision would leave Britain. While treaty law does not allow controls between EU states, any restrictions on dollar inflows into the euro-zone would create a legal nightmare and play havoc with the City of London.
Oliver Letwin, the shadow chancellor, said: "It is utterly risible for the EU to take a step back in time and pretend it can effectively control global capital markets."
The European Commission said there were no plans to impose exchange controls. "It's utter rubbish. The fact that we have carried out a study doesn't mean we are going to do it," said a spokesman.
+++++++++
Fiddling While the Dollar Drops
By David Ignatius
Friday, December 5, 2003; Page A31
Something ominous is happening when the United States reports its biggest surge in productivity in 20 years, as it did Wednesday, and yet the dollar plunges to an all-time low against the euro. The dollar is sinking these days on good news and bad, and the explanation is pretty simple: Investors around the world are worried that the Bush administration's policies are eroding the value of the U.S. currency. So they're rushing to unload greenbacks, in what could soon become a full-blown financial crisis.
"The dollar crisis is the story," warns James Harmon, an investment banker who headed the Export-Import Bank during the Clinton administration. "A lot of smart money has moved out of the dollar in the last six months," he explains. "Now the latecomers are rushing to sell, and that's adding to the momentum."
The "smart money" includes financial guru Warren Buffett. He disclosed last month in Fortune that since the spring of 2002, he has been making "significant investments" in foreign currencies for the first time in his career. What worries Buffett is that the U.S. trade deficit has "greatly worsened," and is now running at more than 4 percent of GDP. That puts the U.S. economy at the mercy of foreigners, and their willingness to hold surplus dollars.
So long as global investors believed that U.S. authorities were ready to protect the dollar as a reserve currency, they kept adding to their stashes of greenbacks, despite the trade deficit. But that confidence may finally be disappearing.
The dollar's decline during the Bush presidency has been remarkable. It has tumbled about 44 percent from its October 2000 high of about 83 cents to the euro. Over the past year alone, the decline has been more than 15 percent. Investors who trusted in the dollar as a store of value have been clobbered, so it's not surprising that they want to sell, even at current depressed prices. They fear that worse is coming.
"I'm appalled at what's happening to the dollar," says investment banker Felix Rohatyn, a former U.S. ambassador to France. "A basic responsibility of a government is to maintain the value of its currency."
Rohatyn argues that the Federal Reserve should signal that it "will not allow a dollar crisis to happen" by raising the Fed funds rate at which banks can borrow money overnight, from its current low level of 1 percent. Fed Chairman Alan Greenspan insisted recently that there isn't any dollar crisis, which only made some investors more nervous.
If you haven't already gagged on your raisin bran, consider this nightmare scenario -- outlined by an investment banker who for many years headed his firm's currency-trading operations. This veteran trader contends that the markets have entered a cycle in which "overshooting" -- meaning a further sharp fall in the dollar's value -- "is a distinct possibility."
The core problem, he argues, is that China and Japan have been determined to keep their currencies cheap -- China by fixing the yuan at an artificially low level and Japan by intervening in exchange markets to keep the yen from rising. With their undervalued currencies, the Asians can export massively to the United States and accumulate ever-larger surpluses of dollars.
Hence the nightmare scenario: Between them, China and Japan now hold more than $1 trillion in U.S. Treasury bonds, the trader estimates. But with the declining dollar, the Asian giants have suffered severe losses on these portfolios. If they decided to hedge just 20 percent of their dollar exposure, they could drive the dollar down from this week's low of about $1.21 against the euro to $1.35, contends the trader, and other sellers would trigger a further weakening to $1.45 or so. Facing that sort of decline, the Fed would have to boost interest rates to protect the currency. And higher rates, in turn, would drive down the U.S. stock market.
The Bush administration seems comfortable with a cheaper dollar because it's a way of stimulating demand for American products abroad and sustaining the U.S. economic recovery. In other words, it's good politics. But paradoxically, the U.S. recovery will only worsen pressure on the dollar by sucking in more imports.
To prevent a full-blown crisis, the administration must take prompt action. It should pledge to cut the deficit; it should stop playing politics with free trade; and it should signal that it will intervene in currency markets when necessary to protect the dollar's value. Those steps might convince global investors that somebody at the White House is at least minding the store.
davidignatius@washpost.com
posted by scott 3:42 AM