Gold Forecaster
- Global Watch
The € rising as a
reserve currency ahead of a $ crisis
Julian D.W.
Phillips
Nov 7, 2006
A crisis postponed
So much has been
written about the coming $ crisis, but the $ keeps holding on,
moving within a 5% band up and down, but not outside that band.
Why doesn't the crisis come?
The main reason is that it
is a huge global currency subject to so many influences, whether
it be in demand by all nations across the globe to pay for oil,
or in demand by say Argentina to sell to meat to China. As the
currency in which 86% of the globes transactions were denominated
the actual intrinsic value of the $ was not that pertinent. This
value, so it is taught, should reflect the entire Balance of
Payments of the nation. And it usually does. However, in the
past a currency was allowed to go further and reflect not only
the Trade Balance but the real attractiveness of the nation as
a place to put one's capital. In the seventies Germany was remarkable
with its economic strength forcing it to revalue many times,
it was in such demand. It had a surplus on its trade balance
as well as on its capital account. The main reason for either
a devaluation or a revaluation was to steady the global flow
of capital across the world leaving one nation facing a drain
[e.g. the U.K. who imposed capital exchange controls to slow
this down] and another the inflow of capital.
Today we have a remarkable
and different situation where the $ is the currency of oil and
the currency of global trade, not just the money of U.S. citizens.
On the home front the $ is the money of a country whose Balance
of Payments should be devaluing hugely, but is not, because the
persistent practice by nations receiving its currency is to re-invest
these surpluses back into the States, so balancing the Balance
of Payments through new capital investments. But this is not
because the U.S. is considered the prime place for nations to
invest their capital as the U.S. is doing nothing whatsoever
to rectify the Trade deficit except complain about the behavior
of other surplus nations particularly China. The reason is to
keep the $ strong so the capital outflow can continue! So the
expected $ crisis is averted time and time again!
The decline of
the $
But there is a
gentle and osmotic process underway, a lessening the role of
the U.S. $ in the global reserves. Alan Greenspan the ex-Federal
Reserve Chairman has confirmed that both private investors and
central banks are shifting away from the U.S. $ and toward the
€.
 On
the date that the € was born, the switch of old now defunct
European currencies to the € resulted in European reserves
in the € constituting 16% of the global reserves according
to the I.M.F. Today, and mainly in the last year, that percentage
has risen to 25%. At that time the $ accounted for 76% of global
reserves prior to 2005. Today it is reported that they account
for 65% of global reserves. The switching has begun led by Russia,
but with others beginning to follow.
In line with Greenspan's comments,
nations have begun to diversify, but sensitive to the value of
the $ on the global foreign exchanges, hoping they can retain
its value but lessen the content in reserves, a delicate and
easily upset objective. This again serves to postpone the $ crisis,
at the same time exacerbating it and ensuring it will be increasingly
detrimental to the entire global monetary system. The changes
in the structure of global reserves will be slow it seems on
the surface, but at some point in this transition the pressure
will be too great and will precipitate a $ crisis of unseen proportions.
Protectionism &
Capital Controls?
Greenspan put it
this way from the U.S. perspective, "We'll get to the
point at some point that willingness to finance it will slow,
and if you can't finance it, it won't happen," Greenspan
said of the broad trade measure. Greenspan warned, however, that
if the United States threw up barriers to isolate itself from
the pressures of globalization, "the adjustment process
could be a little bit more problematic." A little more
problematic is a wonderful understatement. Translated, this means
Trade barriers rising against nations trading with the States
and the possible use of Capital Controls to prevent capital from
leaving the States. Will this be confined to the reserves of
those nations against whom barriers are erected? If so, these
nations are rapidly getting to the stage where they will be
able to cope. As the U.S. role as a global driver wanes,
so will its ability to effect major trading partners wane with
it.
But the immediate market effect,
the effect on the global monetary system and the fear engendered
in the stability of the global economy and its future will be
far more dramatic. The isolation that the U.S. may impose on
itself will allow the U.S. economy to boom tremendously as imports
are replaced, but the inflation rate will roar alongside this
change. Of course retaliation to such moves will find U.S. goods
being replaced outside the States too, boosting the remaining
major nations but leaving minor nations to take most of the blows.
The Capital Tsunami
Such protectionism
and capital flows [that were such a threat in the seventies]
will be brought to a halt by restrictions, leaving some currencies
to plummet in value whilst other rise leaving a situation that
can rupture international trade. Central Bankers in the States
[Geithner] put this in words that at once interesting but obscure,
when they say "And the forces that have produced this
constellation of capital flows and market conditions will evolve
in ways we cannot anticipate." A look at the seventies
when such capital flows cased exchange rate havoc removes this
mysterious veil and shows that such an evolution will prove traumatic
to all across the world as they try to contain the Tsunami
of capital looking for a place of value. The size of this capital
Tsunami was commented on by the U.S. Central Banker Geithner
this way, "The dramatic increase in the foreign exchange
reserves of central banks, particularly in emerging markets,
is helping complicate how policy-makers adapt to the evolving
global economy". We would suggest that they would fare
no better than did the Central Bankers in Europe in the seventies
and probably worse!
With this wave growing rapidly
[China's official reserves will likely hit $1 trillion this year,
and some predict they will rise to $2 trillion by the end of
2010] past crises pale into insignificance against those that
lie ahead. A phlegmatic Geithner said, "large official
flows of capital in one direction adds to the uncertainty over
monetary policy, since they could mask underlying fundamental
conditions that would otherwise affect asset prices, such as
the sheer size of the U.S. fiscal and current account deficits.
Monetary policy-makers cannot ignore the international dimension.
As economies become more open, external developments inevitably
affect price and output dynamics. The world may thus be more
complex and, in some respects the conduct of monetary policy
may be more challenging."
Our comment on this is 'Brace
yourselves, lads!'
The full effect on the international
financial system of vast foreign ownership of U.S. government
debt was not fully understood,
he said.
Foreign central banks own more
than a quarter of marketable Treasury debt.
[Next week]
The importance of Marginal supply / demand in the Currency, Oil
& Gold Markets and what the Chinese are doing and could do
with their reserves.
Nov 6, 2006
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
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