Wednesday, January 26, 2005
It Has Begun
Fasten your seat belts, ladies and gentlemen. Get those ARMs converted to fixed-rates while you still can. Item: The next chairman of the Federal Reserve needs to be somebody who can say 'no' to the man who appoints him, or the trend of foreign investors to pull out of the US will accelerate. Unfortunately, Krugman describes why BushCo will never appoint somebody like that. Item: China's starting to decouple itself from the dollar.
DAVOS, Switzerland - China has lost faith in the stability of the U.S. dollar and its first priority is to broaden the exchange rate for its currency from the dollar to a more flexible basket of currencies, a top Chinese economist said Wednesday at the World Economic Forum. At a standing-room only session focusing on the world's fastest-growing economy, Fan Gang, director of the National Economic Research Institute at the China Reform Foundation, said the issue for China isn't whether to devalue the yuan but "to limit it from the U.S. dollar." But he stressed that the Chinese government is under no pressure to revalue its currency. China's exchange rate policies restrict the value of the yuan to a narrow band around 8.28 yuan, pegged to $1. Critics argue that the yuan is undervalued, making China's exports cheaper overseas and giving its manufacturers an unfair advantage. Beijing has been under pressure from its trading partners, especially the United States, to relax controls on its currency. "The U.S. dollar is no longer - in our opinion is no longer - (seen) as a stable currency, and is devaluating all the time, and that's putting troubles all the time," Fan said, speaking in English. "So the real issue is how to change the regime from a U.S. dollar pegging ... to a more manageable ... reference ... say Euros, yen, dollars - those kind of more diversified systems," he said. "If you do this, in the beginning you have some kind of initial shock," Fan said. "You have to deal with some devaluation pressures."You have been warned. This is what will keep Bush from invading Iran. Expect to see interest rates topping 10% in the next year and a half, unless Bush suddenly mends his ways. Which he won't.
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I think things will bump along, with the dollar gradually sliding... for a time. The problem is that all the big financial firms are confident that they can frontrun a panic. JPM is very smug about it.
There is some reason for them to feel confident. The big bond holders are foreign central banks. Because of the need for public scrutiny, there's more transparency than there is with corporate actions.
But smugness leads to complacency. There could easily be another trigger to a dollar crisis that would cause everyone to head to the exits simultaneously. It's unclear how the world would cope with it. In the case of the Asian currency crisis, the Fed flooded the world with liquidity. But in the case of a dollar crisis, that would exacerbate the problem.
There is some reason for them to feel confident. The big bond holders are foreign central banks. Because of the need for public scrutiny, there's more transparency than there is with corporate actions.
But smugness leads to complacency. There could easily be another trigger to a dollar crisis that would cause everyone to head to the exits simultaneously. It's unclear how the world would cope with it. In the case of the Asian currency crisis, the Fed flooded the world with liquidity. But in the case of a dollar crisis, that would exacerbate the problem.
The Davos comments, I expect, were a warning shot across Bush's bow with regard to, among other things, his Social Security privatization plans. The warning being: "Don't you dare think of adding another $4 trillion in debt to what you already owe us, you moron."
If there's anyone left who's sane in Bushistaland, this would suffice to make Bush look for a face-saving way to back off from privatizing Social Security. But that is a very big "if". We've already found that Bush refuses to hear anything critical of his actions and policies, thus depriving himself of any sort of reality check.
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If there's anyone left who's sane in Bushistaland, this would suffice to make Bush look for a face-saving way to back off from privatizing Social Security. But that is a very big "if". We've already found that Bush refuses to hear anything critical of his actions and policies, thus depriving himself of any sort of reality check.
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