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Don't Cry For Me, Argentina. updated

by r------ Fri Jan 5th, 2007 at 05:31:43 PM EST

The US Dollar (USD) is going down the tubes, or so the pessimists would have us believe. It's been hovering at near-record lows versus the Euro (EUR) again, while the Financial Times announces announces that the Euro has now surpassed the US Dollar as the most circulated currency in the world.

As Laurent Guerby excerpts in a recent interchange here on ET:

The US dollar bill's standing as the world's favourite form of cash is being usurped by the five-year-old euro.

The value of euro notes in circulation is this month likely to exceed the value of circulating dollar notes, according to calculations by the Financial Times. Converted at Wednesday's exchange rates, the euro took the lead in October.

The figures highlight the remarkable growth in euro notes since their launch on January 1 2002, three years after the start of Europe's monetary union, which in January welcomes its 13th member - Slovenia, the former Yugoslav republic...

By the end of October the $759bn-worth of US dollar notes in circulation was only a fraction ahead of the value of euro notes, converted at exchange rates at that time.

But since October the euro has risen strongly against the dollar and this month the value of euro notes has risen to more than 610bn, or in excess of $800bn at the latest exchange rates. That level is unlikely to have been beaten by the greenback.

Setting aside questions about what exactly US all of this really means, there is indeed quite a bit of angst in the financial press, as well as among us common plebes, about the value of the dollar. Some see in a weak dollar opportunity: exports become more competitive when cheaper on world markets, which is good, at least theoretically, for manufacturing jobs. Others worry about the inflationary pressure devaluation necessarily ratchets up. Still others point out that a falling dollar solves little: exports may grow somewhat, but the US simply doesn't make enough stuff other countries want to buy, causing continuing trade deficits financed by, increasingly exclusively, foreign central banks. Sure the dollar is falling, they say, yet the trade deficit with the Euro zone has continued to grow, as affluent America's taste for high-end goods and main-street American's continuing need for European-manufactured goods, financed by foreign capital inflows, outpaced the export growth. Now imagine what would happen if the dollar began to fall against more currencies than the Euro...

And this angst is creeping into more places than the shadier parts of the on-line financial press that Ron Paul tends to inhabit. Even the solidly respectable neo-liberals at the Economist get into the act, opining on US calls, via its Treasury Secretary (Minister of Finance) Henry Paulson , for the PRC to allow its currency to strengthen:

Even if the Chinese central bank does, as some expect, let the yuan strengthen more than previously anticipated, this will not be the panacea that many hope for. As Tyler Cowen, an economics professor at George Mason University, points out, China imports many of the components it assembles into finished products; a strengthening yuan will make these components cheaper, eroding some of the effect on export prices. Nor is China's competitive advantage limited to a cheap currency. And although China is one of the big funders of America's current-account deficit, it is certainly not alone. Unless Americans curb their appetite for imports bought with borrowed money--and start making more things other countries want to buy--the deficit will continue to be a problem. This is roughly what the Chinese government has been saying.

A rising yuan will have some negative effects on the West, not limited to a shortage of cheap electronics. Cheap Chinese imports have kept a lid on inflation in many countries, letting central banks keep interest rates low without worrying about their economies overheating. As Mervyn King, the governor of the Bank of England, has warned, once the yuan begins to strengthen, central banks will face higher inflationary pressures. With oil prices already pushing inflation to worrying levels, Mr Paulson may not be as eager as he seems for a rising yuan.

Why Current Accounts Matter

People, serious or otherwise, are vaguely aware of the US' huge trade imbalances with most of the rest of the world.  It's trade deficit is chronic, currently representing roughly 6% of GDP, which is extremely high, historically, for a developed country and, needless to say, unsustainable in the long run. Adding in the money foreign nationals working in the US send back home, the country's Current Account deficit is quickly approaching 7% and beyond, also unsustainable. But this is not of much concern to Joe Sixpack, as it hasn't started hurting him yet; the deficit, similar to taking on more household debt, hasn't crimped his style yet - the banks are still giving him credit. And so in similar fashion the US Current Accounts deficits is funded by capital inflows from abroad.

And, if the US Treasury Department's Foreign Inflows report is any gauge, those inflows are increasingly dominated by central banks. You can see this by seeing how much of the inflows are "private" versus how much are "official". The official flows are coming from the PRC, Japan, Korea, and Saudi Arabia, in part to manage their exchange rates viz the dollar to facilitate exports to the US, in part to manage the value of the USD-denominated assets they already hold in reserve. (In the former case, you see the banker offering credit to America's consuming middle-class, while in the latter, you see the banker offering more credit so that the consumer can more easily pay for the former.)  On the other hand, private flows normally represent actual investment in productive US assets, and thereby indicate a more broad sentiment of confidence both in the dollar as a source of value stability, and in dollar-denominated assets as a source of future economic value.  

Either way, without those inflows, the value of US dollar-denominated assets starts a toilet-like spiral not unlike that which one observes while taking ones morning constitutional. And the shift towards more "official" inflows indicates that the robustness of those inflows is in doubt, while the indication that even some central banks are moving away from USD (South Korea did this last year, Iran and, to some extent, Venezuela recently) puts those inflows in doubt, period. And so, the hand-wringing about whither the dollar continues apace.

As noted above, none of this concerns Joe Six-pack in any but the most vague way, if but for no other rightful reason than he can still get his Molson Canadian for $13.99US a two-four, the Chinese-made underwear he buys at Walmart still costs $0.89US a pair, and the US-made Cheetohs he favors have even gotten a little cheaper. Why? Because the People's Bank of China is loaning him the money to buy those skivvies, while fortunately, Molson has bought an American brewer, complete with US-based production facilities, making for itself a natural hedge which allows it to sell decent quality beer to Americans for the same price as five years ago, despite the acute appreciate of the Canadian dollar over that time frame. Similarly, Joseph Snifter-drinker also can afford to be insouciant about the state of affairs, for the simple reason that the People's Bank of China is, indirectly, financing his consumption of French champagne, German cars and his wives' Italian handbags, too. Thankfully, there is a banker on hand for consumption-directed lending.

And none of this concerns the mainstream finance world overmuch, though the situation is certainly taken seriously, as the Economist cite above attests. And the reason for this is a little different, having more to do with the banker who lends to keep the creditor afloat so as to better pay for prior loans. Which is the deconstructed meaning of statements like "Saudi Arabia will never sell off USD because it has so many that when it starts doing this, it devalues its own reserves far to onerously to be considered" or " It doesn't all collapse with a bang because that's in no one's interest."

The fact of the matter is that it probably doesn't, ie the USD, while clearly headed downward as long as its Current Accounts is still a mess, will not crash. But if a tipping point accidentally gets hit, it's another matter entirely. These tipping points can happen any number of ways. Geopolitical risk weighs heavily on such things. Imagine, for instance, a major row over Taiwan, leading to open conflict between the US and the PRC. Or civil unrest, certainly not out of the question, due to an economic slow-down, again in the PRC. Or what might happen if the House of Saud fell. Or what might happen to South Koreas reserve in the event of resumed conflict with the north or, alternately, abrupt re-unification. Well you get the picture. All of these events could cause major turbulence for the US dollar and, by extension, its economy (via inflationary pressure).

The Argentine Connection

But you don't even need to resort to disaster planning scenarios to talk about tipping points. And Argentina in the 1990's can tell us a thing or two about tipping points in a more or less stable geopolitical environment.

Back then, everyone knew Argentina's position in the '90's was unsustainable. Damn near every issue of the Economist talked about it.  Mendoza state was printing money (essentially issuing debt) to pay its public service workers.  The country ran twin deficits, just like America, public and trade. The public deficits were in the 2% of GDP range, less than America of course, but then, the Argentine peso is hardly a reserve currency anymore, so there was no effective zero-interest financing available to it either. And the trade deficit was, like America's, pretty structural as well, for the most part in the 3-5% of gdp range throughout the 90's, again roughly half that run in America. And masked, like America, by offsetting capital inflows.

And, just like America, the federal public deficit seen at first glance masked even deeper structural flaws - its states were also running up debt, as is the case in the US (witness California's recent bonding in order pay essentially operating expenses which, being denominated in USD, were backed by the US Central Bank, not terribly dissimilar to the situation of Mendoza state issuing its own currency).

Such imbalances are accidents waiting to happen, and like the situation in the US, there were many, in particular American and Spanish banks, who had an interest in making sure that when the accident came to pass, it happened in an orderly fashion in a manner which protected their assets, all the while reserving for losses on those assets.  Accordingly, Banco Santander and Banco Bilbao Vizcaya both foresaw the risk (that is what risk managers do) and, when the boom finally fell, when the Argentine Peso lost 40% of its value overnight, exposing the banks collectively to approximately EUR 1.5 billion in losses in nominal terms, their reserves were sufficiently large as to not even warrant an analyst downgrade. Such was not, of course, the case for a large segment of the Argentine population, and when they started going hungry, they began to riot, bringing down the government.

America is no Argentina. For one thing, its economy is far bigger and, well at least historically, is far more diversified. For another, America has a lot of interest-free creditors, the inherent advantage of the faith and credit of a government whose central bank issues the world's premier reserve currency.  
But while it's probably likely that America's economic standing will observe a long, gradual, secular decline, and its currency will continue to weaking equally gradually, I don't think we can completely discount an Argentina-like collapse, if but to a less extreme extent, either.

The reason for this is two-fold. First, US twin deficits are not only unsustainable, they are, in nominal terms, roughly double those in Argentina. Second, we take as a given that lenders to America will continue to throw good money after bad in order to maintain the value of their existing USD-denominated holding and, importantly, be able to continue to export to the US consumer markets. But this is not a given. Other growing markets exist for those products; the pipeline increasingly is becoming diversified for exporters like Japan (which shifts to the high-end PRC market, among other places), the PRC (Russia, the EU, NDCs in East Asia, India) and elsewhere. And it is a truism that creditors tend to keep lending in an effort to keep their existing investments intact; current analysis of the situtation largely ignores the concept of sunk costs, whereby there is indeed a point where throwing good money after bad becomes a losing proposition. Which is why good creditors reserve for losses, and increase those reserves when the losses become more likely. And, once they've achieved adequate coverage, there's no reason to be quite so diligent about how the accident comes to pass. If the accident has already been priced into ones expectations, it has already taken place, after all. And so, the IMF saw fit to pull the plug on  Buenos Aires, and Argentina saw a helluva financial crisis.

When I was a kid, the franc was worth 25 cents US. Right now, its worth more like 20 cents, triangulating via the Euro. I can see it going easily to 25 cents or more. Other Western Europeans can probably come up with similar statistics. But this is largely irrelevant in and of itself to America's economic prospects; we are simply a contributing factor to the mosaic which is a mess waiting to unravel.

The real pain hits when the same things happen with the renminbi and the yen. And then what? The US produces less and less stuff, so it's not like it can export itself out of this. Again, like Argentina, when the boom falls, it will be painful to average citizens. And I think we all remember what happened in Argentina. Of course, the good news is that only after such a crisis and misery befalling Argentina's middle class was real reform possible, and poverty rates are falling, economic growth robust, and the neo-liberal orthodoxy has been chucked away like the cheap, ill-fitting suit it always was.

In any event, one thing is clear. The US dollar has nowhere to go but down. It's simply a matter of time. It's impossible to predict, as with any forecast of bubbles bursting, to predict day that Americans, middle-class on up, be forced to live within their means, but the the day will come - that much is easy to predict. Unpredictable is what follows, both in terms of global economic impact, and internal political impact in the US.

When the boom falls on the US dollar (and in truth, its not a matter of if, it's a matter of when, and how), it is likely that the currency will inexorably forfeit its role as premier reserve currency. It may happen as it did to Sterling - over a long period of time. Or it may, somewhat less probably, happen via a shock or two.

Will the Euro take its place? In my opinion, probably not. Rather, what will begin to emerge will be more multilaterally-managed reserves, much like the modern multinational corporation manages currency risk. This involves baskets of currencies on reserve, in direct proportion to the currency inflows and outflows forecasted in the future with ones major trading partner. And, given that the EU is the leading trader in the world, the Euro will be a major reserve currency. But so will Chinese yuan, Japanese yen, a less-weighted US dollar, and perhaps Indian rupees as well. The Euro may get a favorable bias in your typical central banker's allocation model, much like Swiss francs get today, on the basis of its historically tight monetary policy (and whether this is a good thing or not is a topic for a different discussion). But given the increasingly multilateral nature of trade, it is likely that the days of massively preferential terms of reserve for one currency or the other are going to be over, probably sooner than later.

This what we were aiming at?

BTW, I don't really read bonddad anymore, well sometimes I do, but I have to say we diverge on a lot of things, and frankly, the comment threads he tends to attract piss me off more than most things on kos. Makes me lose faith in whatever hope the American left has of ever getting ideological moorings whatsoever.

Having bonddad essentially citing, and leaving in long passages taking swipes on solidarity (or the European welfare state, if you will), one of the most right-wing Republicans on economic matters in the US Congress, was sort of delicious confirmation.

Don't think any kossacks noticed. Which is sorta par for the course.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Fri Jan 5th, 2007 at 05:35:47 PM EST
First, Ron Paul is not a conservative but more a Libertarian of the card carrying looney bin variety.  I happen to agree with him on budget balancing to some extent but a lot of what he has to say is far far from Republican thinking.

Bonddad is stuck in super bear mode and can't seem to let go.  he's been predicting a crash for so long now that it would take a 20% retracement of the Dow just to get back to where he first started waiving red flags.  If you read between the lines you almost see gold buggy pessimism -- something that should be viewed with real suspicion.  I've been on the same page with him but am reaching the conclusion that I let my politics interfere with my stock market analysis to the detriment of our investments.  But not making is still a lot better than losing.

As for Kossacks noticing.  Bonddad has a following but I have to think many of us are a bit jaded with the one note analysis and skip over his diaries.  But that's not uncommon on Kos.  The peeps love certain memes and it's hard to sail against those winds.  

by HiD on Fri Jan 5th, 2007 at 08:24:00 PM EST
[ Parent ]
I respectfully disagree about "conservative" and Ron Paul. Yes, he's a loon. But he's a Republican congressman, and he's a libertarian extremist on economic matters, though oddly, on various social matters, he finds a way to fit in with the religious folks who flock to the US right.

Must be something in that Texas water.

I agree with him on one thing. Iraq. He got that one right.

In any event, when I hear guys like Paul holding forth (and there are plenty like him in America - he's simply one of the few who got elected) it reminds me of one of those ads exhorting readers to "get into forex trading while there's still a killing to be made" of the sort one often reads in, for instance, Pat Buchanan's rag.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Fri Jan 5th, 2007 at 11:21:06 PM EST
[ Parent ]
fair enough.  But I doubt most of the Republican party would claim Ron Paul.  Any more that most of the Dems would claim Traficant.  Paul is prone to p--sing on his own team when it suits.

Europe has no shortage of extremists as well.  Throwing rocks at an entire nation is petty.

by HiD on Sat Jan 6th, 2007 at 03:38:40 AM EST
[ Parent ]
Oh, I know, and I must apologize, again, for that bias and my tendancy for intemperate remarks in this regard.

This being said, if throwing rocks is petty, how about invading without provocation?

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Mon Jan 8th, 2007 at 10:14:41 AM EST
[ Parent ]
Rocks are petty, daisycutters are grand.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Mon Jan 8th, 2007 at 10:18:14 AM EST
[ Parent ]
Very good!!!

I would add though more ideas brought by Drew about why is not possible. This is.. I would give more space to all the ideas about why it makes sense to beleive that it is impossible to reach a sudden crack. I know you cover the points but I would take some explicit drew words and put them here.

I would also try to add the points regarding why a weak dollar is also good like expensive oil for the worst consumer (keeping oil prices stable for the rest). How it will probalby force the Reserve to forget generating another asset bubble in the US and how it seems desirable to have a soft landing , with a very low growth in the US as the starting point of a economic restructure.. septially regardign the large quantity of imports.

I think all these points were covered very well by drew, Jerome (and even myself)...I think you can take them literally and add them easily to this post...I am sure you can add those points...

Actually I can do it myslef on sunday probably.

Excellent.. in any case... and by any measure.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Jan 5th, 2007 at 08:03:37 PM EST
Sorry, didn't know that was the exercise. Well, now I see in another thread that maybe that is where the thing developed, but originally, afew suggested I expand on a point I made on the Euro v Dollar thread and make a diary out of it, so that's what I thought the exercise still was.

Don't think I said anything that either yourself or Drew or Jerome would necessarily would disagree with (Drew perhaps might), and I was worried about length and rambling, two things I'm really bad at. So, well, anyhow, how 'bout we do this. You (and Drew and Jerome and whoever else) propose edits and email them to me, whereupon I'll try to integrate those edits into the current diary.

Sound good?

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Fri Jan 5th, 2007 at 11:25:44 PM EST
[ Parent ]
Covered Jérôme's suggestions, I think, save the one about FFR and DM (explained below).

Any further suggestions anyone?

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Mon Jan 8th, 2007 at 10:16:24 AM EST
[ Parent ]
we were in roughly the same position in the late 80's/early 90's.  Weak currency ($/sterling was $1.96 when I moved over in 1990), terrible budget situation, foreigners buying up the country, books like "the coming war with Japan" etc.  From all the gloom you'd think we'd be a third world country by now.

Fast forward to 2000.  A mild tax increase, big booming economy and our budget woes abated and the $ strengthened dramatically.  If we face the music by putting taxes on the wealthy back up, stop pissing $200 billion/yr down the rathole on a pointless set of wars and otherwise get sensible, this mess can be reversed.

by HiD on Fri Jan 5th, 2007 at 08:30:12 PM EST
Absolutely so.

And I'm with you nearly 100% on your last sentence. Up to a point. It depends on how high we're willing to set the marginal tax rates on upper-income brackets, how willing we are to reverse the tax breaks afforded to rent income. Clinton-level rates will not do the trick.

I also wonder how reasonable it is to expect Americans to resist the urge to throw their wait around the world. I guess it's just that I'm a bit skeptical that it can be done. Well, we'll see. New congress, cautious optimism and all that, though I'm not hearing the sorts of tax progressivity hints I'd expect to be hearing if we were going to start seeing this being tackled seriously.

All this being said, back then in the late '80's and early '90's, the budget situation was dire, but it was arguably nowhere near as structural as it is today. The S&L bailout was hitting general fund outlays pretty hard back then. Now there's reasonably strong growth and real deficits in the 4% range.

Second, the CA deficit was less than a third what it is today back then.

Third, US manufacturing had not yet been hollowed out as it has been today, impacting US ability to export its way out of whatever might come down the road. You have to be able to produce things other countries are willing to buy in order to do that, it its relatively less true today that the US can do this than it was 15 years ago.

Finally, the amount of assets owned by foreigners was far less back then than it is now, scarcely 15 years later. Foreign asset ownership as measured by the fed (z.1 schedule) has gone from roughly 10% of gdp to approaching 60%, and grows a further five percentage points a year thanks to the equally structural CA deficit. This causes far more exposure to capital flight than was previously the case. The last time there was a major financial crisis in the US, just over 30 years ago, the US was a net creditor, so the risk was far more mitigated. But that didn't stop the stock market from going into the shitter for damn near a decade, and you probably remember the crazy things that happened to the price of gold and silver back then.

And not only this, but the dollar tanked back then too, far worse than when Papa Bush was simultaneously borrowing money hand over fist while the fed kept interest rates at recessionary-low levels. And again, this happened even though the US was in a far better situation with respect to CA, the federal budget deficit, and the economy's balance sheet.

Despite this, Nixon's crisis drove the franc to roughly 25% more than it is worth today. It isn't a stretch to imagine, given the current parlous state of affairs, something significantly worse. In fact, it certainly is far from an issue which only cranks write and worry about, as this Rogoff (former chief economist at the IMF) article on the eve of Dubya's mandate makesquite clear:

The US deficit problem is not only a domestic issue, but a
global concern and neither candidate has the answer

890 words
1 November 2004
Financial Times
London Ed1
Page 19
2004 The Financial Times Limited.

Should the next US administration worry that high oil prices are pushing America's
current account deficit towards 6 per cent of national income, the country's all-time
record high? Should it worry that the US is single-handedly eating up more than 70 per
cent of the combined current account surpluses of China, Japan, Germany and all the
other surplus countries in the world? Should it worry that foreigners might start balking at
the sub-par returns they have been averaging in the US market for more than a decade?
Will it matter for this foreign borrowing binge whether George W. Bush or John Kerry
wins tomorrow?

Our answer to the first question is a resounding "yes". We first began publishing papers
on the risks of a US current account collapse more than four years ago.(1) Back then it was
an important medium-term problem. Today it should be problem number one on the new
president's international financial agenda. Sadly, we fear it will not be. The winning
candidate will probably find it convenient to hide behind one of the proliferating versions
of the revisionist theory that there simply is no problem.

According to this seductive view, foreign investors, especially official ones, will never
tire of accumulating crisp green dollars. In fact, it would be unneighbourly of the US to
stop pumping nearly Dollars 600bn (Pounds 325bn) a year (and growing) of its liabilities
out into the world market. Besides, even if the current account did close up and the dollar
collapsed (by 20-40 per cent, according to our latest analysis(2)), there would be no need
to worry. Global capital markets are deep, and a dollar meltdown would be relatively
benign, as in the 1980s.

We are very sceptical. When one looks closely at the US twin deficits (current account
and fiscal) in the context of open-ended security costs, geopolitical tensions, rising old
age pensions, higher energy costs and extraordinarily stimulative macroeconomic
policies, we see stronger parallels to the early 1970s than to the late 1980s. The years
following Richard Nixon's 1972 re-election were not pretty for the dollar or for the world

If current accounts are forced towards balance in the context of a difficult global
economy, the effects could include financial crises, higher interest rates and a big drop in
global output.

No, a sober US president-elect ought to worry a lot about his country's foreign borrowing
addiction. But what to do? Given that the federal government's own impecuniousness is a
big part of the problem, raising taxes would seem like a good place to start. Taxes would
have to rise more broadly than in Mr Kerry's proposals to tax high wage earners, even
ignoring his spending promises.
George W. Bush, if he wins, ought to look at how
Ronald Reagan did it. His decision to raise taxes in his second term almost certainly
helped facilitate the steep but smooth adjustment in the dollar's exchange rate that took
place on his watch.

Perhaps as the Federal Reserve continues to normalise interest rates, that, too, will help
by tempering the dollar's fall and stimulating US private saving. Countries such as
Germany and Japan could help by encouraging productivity growth in the nontraded
goods sectors that constitute the bulk of their outputs. Productivity gains would be
welcome in traded goods, but if that is the main locus of growth, current account
imbalances will get worse before they get better. Of course, a move to more flexible
exchange rates in Asia is also needed, although this step alone is not enough.

Four years ago the US current account deficit stood at 4.4 per cent of gross domestic
product, below today's level. We then speculated that an unwinding of the imbalances
would probably take place over a three to five years, accompanied by a large depreciation
of the dollar. That was before the Bush tax cuts, September 11 2001 and the Iraq war.

Four years ago the US current account deficit was arguably financing high investment,
although a collapse in private savings also weighed heavily. Today's 6 per cent deficit is
larger and is mainly financing government borrowing, a far riskier situation. With the
government's fiscal deficit now accounting for most of the country's overall borrowing,
events are likely to unfold within the next presidential term.

Neither candidate has yet proposed a convincing solution. Both seem to think, in denial
of spending realities, that at least half the budget deficit is going to evaporate painlessly.
Whoever wins tomorrow can look forward to a cold blast of water from the ocean of
international capital markets. The problem for the world economy is that many other
countries will get flooded at the same time.

(1) "Perspectives on OECD Capital Market Integration", in Global Economic Integration
(Federal Reserve Bank of Kansas City, 2000);
(2) "The Unsustainable US Current
Account Position Revisited," NBER working paper 10869, October 2004.

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Sat Jan 6th, 2007 at 12:04:20 AM EST
[ Parent ]
You keep on mentioning the franc, but the more relevant comparison would be with the DM - and there, the numbers are quite strikingly unfavorable to the dollar, which has lost about two thirds of its value against the DM (just like the franc did, until the late 80s) in that period.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 6th, 2007 at 07:42:54 AM EST
[ Parent ]
Three reasons for this.

First, because its personally relevant, but this is surely not the most convincing reason.

Second, because it hints at the future. France was a major player (arguably the major instigator), via converting dollars to gold, in ultimately bringing about both the collapse of Bretton Woods and the financial crisis which resulted in the collapsed dollar in the early 1970's. And example of how a medium size power like France can bring about what I'm refering to, without necessarily fully intending to do so.

Third, because France's tactics in trying to modify the terms of Bretton Woods (conversion of dollars to gold, counter proposals to Bretton Woods) were arguably very similar to the sorts of central bank activities and pronouncements (like the ROK last year) about dollar holdings today, and underline the similar weakness both of Bretton Woods and of the more multi-lateral and consensual arrangement which has evolved and which has left USD at the center of a global finance dilemma supposedly solved by ditching Bertton Woods - the Triffin Dilemma.

Germany wasn't doing any of this, it was France. So while I know that in today's perspective DM is more appropriate, in yesterday's (ie 1960's and 1970's) perspective I'd argue this is not as much the case.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Mon Jan 8th, 2007 at 10:38:46 AM EST
[ Parent ]
Up to a point. It depends on how high we're willing to set the marginal tax rates on upper-income brackets, how willing we are to reverse the tax breaks afforded to rent income. Clinton-level rates will not do the trick.

Sorry, Redstar, I have to disagree with this.

More taxation on income is not IMHO the solution.

In addition to a simple taxation mechanism applied on gross revenues at the level of the clearing system I think we need a rational tax or "Commons Rental" aimed in particular at addressing the increasingly inequitable distribution of rights to Property (not just of Land, but also of Knowledge).

Henry George got this right in principle, but was wrong in thinking that income taxes would be unnecessary if the "Single Tax" (as he called the tax on Land Rental Values he advocated) were introduced.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 6th, 2007 at 09:44:52 AM EST
[ Parent ]
I think bonddad's choice of a source was unfortunate, because the source should simply have been the FT article which Laurent Guerby first quoted, and which refers only to cash:

Euro notes cash in to overtake dollar

The US dollar bill's standing as the world's favourite form of cash is being usurped by the five-year-old euro.

The value of euro notes in circulation is this month likely to exceed the value of circulating dollar notes, according to calculations by the Financial Times. Converted at Wednesday's exchange rates, the euro took the lead in October.

The figures highlight the remarkable growth in euro notes since their launch on January 1 2002, three years after the start of Europe's monetary union, which in January welcomes its 13th member - Slovenia, the former Yugoslav republic.


By the end of October the $759bn-worth of US dollar notes in circulation was only a fraction ahead of the value of euro notes, converted at exchange rates at that time.

But since October the euro has risen strongly against the dollar and this month the value of euro notes has risen to more than €610bn, or in excess of $800bn at the latest exchange rates. That level is unlikely to have been beaten by the greenback.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 6th, 2007 at 07:40:20 AM EST
I'll stick to my point that the dollar needs to fall, for reasons expressed elsewhere (see the euro vs dollar thread) - or, more to the point, that US consumption needs to fall.

The problem is that the euro (and the other currencies against which it can move, like the Canadian or Australian dollars or the pound) is NOT the currency it needs to move against. And, strangely enough, it's not so much the renminbi either, but the other Asian currencies that are most out of whack - and oil.

But there are major political obstacles there - first and foremost within the Asian countries - to decouple their currencies from the dollar and/or to accept a realtive devaluation of the renminbi to their currencies.

Thus the adjustment downwards of the dollar comes against the euro, which only amplifies the imbalances - the Asians still continue their mercantilist policies, the US trade deficit does not improve, and Europe bears the pain.

(btw, the euro has increased in value by close to 60% against more of the currencies of the world in the past 5 years, and yet its exports are reaching record levels, so I am skeptical about claims of Europe's low productivity growth)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 6th, 2007 at 07:52:28 AM EST
[ Parent ]
Added more stuff on how it needs to fall.

Absolutely correct you are about where the currency needs to move against, and how that will play out. Have some more oblique language about this already, not sure how to say it further without getting into Asian trade policy though, and then its another diary altogether.

Make sense?

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Mon Jan 8th, 2007 at 10:56:11 AM EST
[ Parent ]
Revised accordingly.

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Mon Jan 8th, 2007 at 10:40:48 AM EST
[ Parent ]

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