MacHamish wrote:

> On Thu, 25 Nov 2004 21:11:42 -0700, "John P. Mullen" <jomullen@zianet.com>
> wrote:
> 
> 
> <snip>
>>
>>The dollar going crosswise with the Euro is something to worry about.
> 
> 
> I absolutely agree.  The question is, who should worry more, USAians or
> EUians? 
> 
>

Well, considering the direction of the change, I'd say the USAians.  At 
least any USAians buying European products, such as flu vaccine.


>>The countries that have pegged currencies, except for China, would have 
>>no power to stabilize the USD and, as I pointed out above, China may 
>>unpeg soon.
> 
> 
> China may unpeg soon under heavy pressure from the IMF and the major
> countries' central banks.  They'll resist it as long as possible because the
> declining dollar benefits China by making its exports more competitive.
>

True, and as long as the central government can get cheap labor and skim 
immense profits out of the exchange, they will resist.  But eventually, 
as happened in Japan, Korea, etc. the workers will become more 
experiences and want a farer share of the pie.  At that point,t he 
leadership will realize how much the pegging is costing them and will 
allow a float.

How long that will take is anyone's guess, but it is starting in Hong 
Kong already.

> Certain countries whose currencies aren't pegged to the dollar have the
> biggest problem.  Their exports to the USA become more expensive in the
> world's biggest market, a market they've come to depend on for their
> prosperity.

Well, Europe is a pretty big market, too.  India is getting pretty big. 
Also, eventually, China will be a huge market.

> That's why countries like Japan and South Korea have been
> intervening in the currency markets to stem the dollar's decline.  This has
> happened before.  It never works over the longer term, and it obviously
> isn't working now.  Intervention distorts the free market.  The "invisible
> hand" will give them all a good slap before it's over.
>

When there is a small to moderate leak, bailing works, but the USA ship 
is taking on too much water for that to work now.

> The fact is, the US can't continue to run the massive current account
> deficits of the past few years.  $50 billion + per month simply isn't
> sustainable.  There has to be an adjustment.
> 
> 

Indeed!

>>You argued that the countries with pegged currencies would take action 
>>to keep the USD up, but there is no reason to expect such a thing. 
> 
> 
> No, I didn't.  That was Rykk, I believe.  

Sorry.  You are right. It was Rykk.  My mistake.

> He's right where China is concerned.  

Well, for the moment.

> China, along with other major exporting countries, has been
> buying US dollars to slow the decline.  It's a two edged sword, you see.  A
> lower dollar is good for China in competitive terms, but it's bad for China
> in that it devalues their holdings in US assets.  What the whole world wants
> and needs is stability in the currency markets, even if it means a lower
> USD.
> 
> 

Well, it is a bit iffy now.  To keep liquid, the US has to get billions 
of dollars every week in new loans, about half of which comes from 
foreign investors.  The interest rates are low and the investment is 
getting riskier.  Sooner or later, there will be nobody left willing and 
able to loan.  At that point, inflation or recession.  Take your pick.

:-(

>>Those countries currently pegging their own currency against the USD 
>>will either find a more stable currency or go along for the ride.
> 
> 
> That's brilliant.  All you're saying is that they'll either stay as they are
> or do something different.
> 
>

The idea of pegging is stability.  If the USD doesn't offer stability, 
they will find a currency that will.

>>You certainly provided no credible evidence to support your claim.
> 
> 
> I made no claim.  All I did was point out that the Chinese Yuan and a few
> other currencies are pegged to the US Dollar, contrary to your claim that,
> "It seems like nobody tracks to the USD".
> 

I did say "seem."  I checked about a dozen, none of which tracked.  I 
did not pick China, because I know they did not have a currency that was 
influenced by market forces.

> I will make this claim, though.  Before this is over, there is likely to be
> a round of trade protectionism bigger than ever before.  Trade wars
> sometimes lead to shooting wars.  That's the scary bit.  
> 
> MacHamish M$(D??(Br

Well, I hadn't though of that, but it could happen.  I don't think it is 
likely to be directly from the US, govern the US current commitments, 
but proxy wars are always an option.

:-/

John Mullen