We must get ready for a weak-dollar world

By Jeffrey Garten

Published: November 29 2009 20:02

The two most significant structural consequences of the recent financial debacle are the massive deficits and debts of the US and the shift of economic power from west to east. There is only one effective way for governments to address the combined impact of both: press for a sea change in currency relationships, especially a permanently and greatly weakened dollar.

The roots of this situation are well known. The American budget deficit of this past fiscal year reached 10 per cent of gross domestic product, the largest since the aftermath of the second world war. Meanwhile, the net external debt of the US nearly tripled last year to $3,500bn and it is projected to increase by nearly $1,000bn every year for the next decade. All this underestimates the problems of a country where unfunded liabilities for baby boomer entitlements are in the stratosphere, infrastructure deterioration is scandalous and many large states are out of money. To close the gaps, taxes would have to be raised to sky-high levels and spending brutally slashed. It would take a miracle if America’s political system – one rife with vicious partisanship and riddled with well-financed special interests – could do either, let alone both.

Washington will therefore have little choice but to take the time-honoured course for big-time debtors: print more dollars, devalue the currency and service debt in ever cheaper greenbacks. In other words, the US will have to camouflage a slow-motion default because politically it is the easiest way out.

There is another factor pushing America towards a weaker dollar: lacking the domestic consumer demand that came with the unrestrained credit of the past 15 years, the US is desperate to find buyers abroad, especially in emerging markets where the middle class is growing and infrastructure requirements are soaring. A cheaper dollar could make US products and services more competitive.

Meanwhile, in the coming decade, the big emerging markets of Asia will be growing twice as fast as the US and three times faster than the European Union. By 2020, China, India, Indonesia, Korea and Vietnam together could generate more wealth than the the US, Japan and the EU combined. China, India, and South Korea have all been amassing dollar reserves and will be looking to reduce them. While imports into leading industrial countries have slowed, intra-Asian trade is booming and need not be financed only in dollars. The bottom line: Asian currencies are likely to strengthen against the dollar.

A much cheaper dollar is a sad development for the US, even though it is inevitable. It will make the US poorer, since Americans will pay higher prices for everything they buy from abroad – clothes, computers, cars, toys, food, you name it. It will make the US military presence abroad more expensive, since the cost of contractors and local suppliers will escalate in dollar terms. It will slow imports, removing competition that is essential to hold down the general price level in America, thereby making inflation more likely. It will send the wrong price signals for a country that prides itself on creating sophisticated, highly valuable products, for a low dollar will encourage producers to compete on price more than quality. It will diminish the political influence and prestige that the US has had while the dollar has been king.

Moreover, the US dollar has been at the heart of the global economy for well over half a century. Its demise, if not smooth and gradual – hardly certain – could lead to an era of competitive devaluations and other mercantilist trade policies.

An alternative to a global monetary system that has been centred on the dollar is now imperative. That means a multi-currency framework including the euro, the yen, the renminbi and significant issuance of an IMF-backed currency called “special drawing rights”. This regime will take time to devise, but it should start now.

That is why Tim Geithner, US Treasury secretary, should invite his colleagues in the UK, eurozone, Japan and China to meet secretly, perhaps between Christmas and New Year, to start discussions out of the public spotlight (to avoid spooking markets). The big question: what kind of monetary system will best serve the world given deep-seated changes in the balance of economic power, and what process can be followed to develop it?

Since the late 1980s I have believed that a strong dollar was in the US and world interest. Now, however, the context has fundamentally changed. The issue is no longer whether the dollar is in long-term decline but which of two options will be taken. Should Washington and other capitals calmly and deliberately manage the transition to a new era, or, by default, should they let the market do it, with the risk of massive financial disturbances. Today, governments have a choice. Soon they may not.

The writer is the Juan Trippe professor of international trade and finance at the Yale School of Management

Copyright The Financial Times Limited 2009

DON´T BANK ON THE BANKS


Click on : http://www.sprott.com/Docs/MarketsataGlance/11_09%20Dont%20Bank%20on%20the%20Banks.pdf

In his gloomiest prediction yet, Marc Faber sees big financial bust leading to war

Published: Fri November 20, 2009 5:36 pm

INTERNATIONAL. Marc Faber, the Swiss fund manager and Gloom Boom & Doom editor, said eventually there will be a big bust and then the whole credit expansion will come to an end. Before that happens, governments will continue printing money which in time will lead to a very high inflation rate, and the economy will not respond to continued stimulus.

Speaking at a conference in Singapore on Wednesday, Faber said: "The crisis has not solved anything. On the contrary there is less transparency today than there was before. The government's balance sheet is expanding, and the abuses that have led to the one cause of the crisis have continued".

"I think eventually there will be a big bust and then the whole credit expansion will come to an end," Faber added.

"Before that happens, governments will continue printing money which in time will lead to a very high inflation rate, and the economy will not respond to stimulus".

In one of his Gloomiest predictions, Faber, referred to as Dr Doom, said "the average family will be hurt by that, and then in order to distract the attention of the people, the governments will go to war".

"People ask me against whom? Well, they will invent an enemy," Faber said.

"At some stage, somewhere in future, we will have a war - that you have to be prepared for. And during war times, commodities go up strongly,” said Faber.
"If you want to hedge against war, you don't want to own derivatives in UBS and AIG, but you have to own them physically, like farmland and agricultural commodities. That is something to consider for you as a personal safety and hedge. You have to own some commodities," he added.

In a Bloomberg Television interview in Singapore Wednesday, Faber said "What will continue to happen is that the S&P 500 and the Dow Jones will go down relative to gold.

"I think gold will go up more," he added.

“Will it go US$2,000, US$200,000 or US$2 trillion? I don’t know,” Faber said. “But if you have money printing in the world, then the price will over time rise. It will go up more for things that you just can’t increase the supply, and the supply of precious metals is very limited.”

Faber expects the US government to increase its stimulus spending should the Standard & Poor’s 500 Index fall toward 900. The US budget deficit under President Barack Obama’s administration reached a record US$1.4 trillion in the fiscal year that ended Sept. 30. Debt amounted to 9.9% of the nation’s economy, triple the size of the 2008 shortfall.

“I don’t think the S&P will drop below 800 or 900, and eventually will go higher in nominal terms, but not necessary in real terms,” he said, predicting a correction in the measure in the “near term.”

Faber has been warning about a collapse of the capitalistic system 'as we know it today,' massive government debt defaults and the impoverishment of large segments of Western society.

In a May interview with CNBC, he said central banks will continue to print money at full speed, but long-term this strategy will lead to a fall in purchasing power and living standards, especially in developed countries.

The years 2006 and 2007 were "the peak of prosperity" and the world economy is not likely to return soon to that level, he added.

Unless the system is cleaned out of losses, "the way communism collapsed, capitalism will collapse," according to Faber. "The best way to deal with any economic problem is to let the market work it through."

"I repeat what I have said in the past," Faber said. “No decent citizen should trust the Federal Reserve for one second. It’s very important that everyone own some gold because the government will make the dollar (in the long term) useless."

WHAT IS NEXT FOR GOLD ?


November 28, 2009 – In my last commentary about gold on October 25, I noted that “gold is a much different market over $1000 because of all the new players being attracted to gold.” Since then we have seen a good example of what I meant. Gold has rocketed higher, as is clear on the following chart.

Despite gold’s big gains in recent weeks, it is not yet time to take profits. The above chart remains very bullish, so it is reasonable to forecast higher gold prices in the weeks ahead.

Gold has clearly broken out from the huge base it formed over the past two years. This base is a ‘rocket pad’ that has launched gold, which I expect has the capacity over the next few weeks to climb into the $1200 to $1400 range I forecast for year-end, but it could be volatile. The $50+ trading range in gold this past Friday may be an indication that more volatility is coming.

In any case, gold is doing what I have been expecting. Namely, gold hurdled above $1000 with real power and follow-through. This powerful action is a point I made often made in my media interviews this past summer, namely, that gold would keep climbing once $1000 was hurdled.

What’s next for gold? I still think $1200-$1400 is a reasonable target for the end of this year, so I am staying with that forecast. But first, it seems likely that gold will re-test support seen this past Friday. So I expect gold to trade under $1150 some time this week. If we do see a drop into the $1140s, it will be an ideal opportunity for traders to add to their position.

Gold rush forces US to clip Eagle sales

By Javier Blas in London

Published: November 26 2009 17:12

The rush by retail investors into gold has forced the US government to suspend sales of the world’s most popular bullion coin, the American Eagle, after running out of inventories.

The shortage, the second since the start of the financial crisis in August 2008, is the latest sign of investors seeking a safe haven into bullion amid the US dollar woes. Safe-haven buying spurred by concerns about the health of Wall Street and a spike in inflation due to a lax monetary policy have also benefited gold sales.

“The US Mint has depleted its current inventory of 2009 American Eagles one-ounce bullion coins due to the continued strong demand,” the mint said in a statement late on Wednesday. It added that selling will resume “once sufficient inventories . . . can be acquired to meet market demand”.

The stoppage helped to push gold prices yesterday to a fresh all-time high of $1,194.90 a troy ounce, up 0.5 per cent on the day. Bullion later pared gains to trade at around $1,185 a troy ounce as the US dollar strenghtened.

The mint suspended sales last year after the collapse of Bear Stearns and Lehman Brothers triggered a wave of buying that depleted its stocks. Coins dealers have reported ocassional shortages of other popular coins.

Philip Newman, director at London-based precious metal consultancy GFMS, said that physical gold demand in North America had picked up in the last two months.

The US Mint has sold about 1.19m ounces of American Eagles so far this year, up almost 75 per cent from the same period last year and on track to be the highest annual volume in ten years, according to official data. Sales of American Eagle’s silver coins have hit 26m ounces, the highest level in at least 23 years.

Although gold and silver coins account for a relatively small fraction of the precious metals market, analysts see them as a good proxy of retail investor appetite.

Gijsbert Groenewegen, managing director at New York-based precious metals hedge fund Silver Arrow Capital, said that investors were shifting from paper assets to physical assets. “Bullion is the only asset without counterparty risk,” he said.

The scarcity of American Eagle coins ahead of the Christmas-period, which usually sees strong demand for bullion, pushed coins premiums higher.

FideliTrade, a major US-based coins bullion dealer, quoted the American Eagle at almost $60 above spot gold prices, much higher than quotes for other coins.

Traditionally, the American Eagle and its sister the American Buffalo are the world’s best selling gold coins, followed by the the Canadian Maple Leaf, the Austrian Philharmonic and the South African Krugerrand.

Turkey’s local gold coins sell even more that its American counterpart, but trade is limited to within the country.

Copyright The Financial Times Limited 2009.

ECB spurns IMF with early exit strategy

Published: November 29 2009 17:51

If you are a slow mover, you start early. That will be the European Central Bank’s leitmotif as it presses ahead this week with plans to unwind exceptional measures taken to combat the economic crisis.

The Frankfurt-based ECB will leave its main interest rate unchanged at 1 per cent. However, although anxious to avoid drama, expected policy tweaks will underline its determination to implement a timely “exit strategy” and return gradually to something akin to its pre-crisis way of controlling interest rates and providing liquidity.

In doing so it will put itself at odds with the International Monetary Fund, whose managing director, Dominique Strauss-Kahn, has urged policymakers to err “on the side of caution, as exiting too early is costlier than exiting too late”.

Events in Dubai have re-awoken fears of global instability. But the ECB believes the opposite to the IMF – that acting too late is as dangerous as acting too early, if not more so.

Lorenzo Bini Smaghi, an ECB executive board member, argued earlier this month that “the ‘err on the side of being late’ paradigm is potentially as dangerous as the ‘productivity growth’ paradigm of the late 1990s and the ‘fear of deflation’ paradigm of the early 2000s, which led some advanced economies to implement policy stimuli for too long, sowing the seeds of the subsequent crisis”.

A significant fear is of asset price bubbles emerging in Asian countries, which are ahead of the eurozone and US in the economic cycle. One risk is that the ECB, acting faster than the US Federal Reserve, hits exporters by sending the euro higher.

Hours after Thursday’s ECB meeting, Ben Bernanke, the Fed chairman, will speak in Washington at a hearing on his reappointment – increasing the need for Jean-Claude Trichet, the ECB president, to calibrate his message carefully.

So far Mr Trichet has been cautious about eurozone growth prospects. Continental Europe’s worst recession since the 1930s ended in the third quarter, when eurozone gross domestic product rose 0.4 per cent. But the disruption in Dubai has underlined the fragility of economic confidence globally, and eurozone growth was in any case expected to remain anaemic well into 2010.

The ECB’s exit strategy reflects both a return to more normal conditions in financial markets and worries that some eurozone banks are becoming dependent on emergency liquidity provided since Lehman Brothers collapsed in September 2008. Since then the ECB has been matching in full banks’ demand for liquidity for periods of up to 12 months.

In June, banks borrowed €442bn ($662bn, £401bn) in one-year loans – the largest sum ever injected in a single ECB operation. That has ensured that liquidity will remain abundant in the system until at least mid-2010. As part of what economists dubbed “easing by stealth”, it also drove down overnight market interest rates, which are significantly lower than the main policy rate of 1 per cent.

The ECB will not signal a revolution on Thursday and is in no hurry to bring overnight rates back up to the main policy rate’s level. But Miguel Fernández Ordóñez, the Bank of Spain’s governor, told the Financial Times this month that “if you want to be gradualist, you have to anticipate”.

Mr Trichet is expected to confirm that another auction of unlimited one-year liquidity in late December will be the last. Still to be decided is whether also to charge a higher interest rate than 1 per cent, or index the interest rate to changes in the main policy rate. Doing so might be seen as a monetary policy tightening step, although the ECB would probably deny that was its intention.

The ECB is expected to continue for some time to match in full banks’ demand for liquidity in its regular weekly operations. But the level of demand for one-year liquidity in December will, in turn, influence demand for three and six-month liquidity offered in 2010. Mr Trichet may also say this week how those operations will work in future. One option would be to test financial market reaction to a return to a bidding system for some such operations – which would mark another step back towards the pre-crisis regime.

Copyright The Financial Times Limited 2009.

Thirty financial groups on systemic risk list

By Patrick Jenkins and Paul J Davies in London

Published: November 29 2009 23:30

Thirty global financial institutions make up a list that regulators are earmarking for cross-border supervision exercises, the Financial Times has learnt.

The list includes six insurance companies – Axa, Aegon, Allianz, Aviva, Zurich and Swiss Re – which sit alongside 24 banks from the UK, continental Europe, North America and Japan.

The list has been drawn up by regulators under the auspices of the Financial Stability Board, in an effort to pre-empt systemic risks from spreading around the world in any future financial crisis.

Insurers are considered systemically important for a variety of reasons: they might, for example, have a large lending arm, such as Aviva, or a complex financial engineering business, akin to that of Swiss Re.

Supervision spotlight

Banks

US

Bank of America Merrill Lynch
Citigroup
Goldman Sachs
JPMorgan Chase
Morgan Stanley

Canada

Royal Bank of Canada

UK groups

Barclays
HSBC
Royal Bank of Scotland
Standard Chartered

Switzerland

Credit Suisse
UBS

France

BNP Paribas
Société Générale

Spain

BBVA
Santander

Japan

Mitsubishi UFJ
Mizuho
Nomura
Sumitomo Mitsui

Italy

Banca Intesa
UniCredit

Germany

Deutsche Bank

Netherlands

ING

Insurance groups

Aegon
Allianz
Aviva
Axa
Swiss Re
Zurich

AIG of the US, the failed insurance group, was proven to be a vast systemic risk last year, in large part because of its diversification from insurance into complex financial engineering.

Raj Singh, chief risk officer of Swiss Re, said: “The real interconnectivity for the insurance industry is more muffled in that there needs to be a dual trigger for there to be any big systemic effects.”

The list, which is not public, contains many of the multinational bank names that would be widely expected.

The exercise follows the establishment of the FSB in the summer and is principally designed to address the issue of systemically important cross-border financial institutions through the setting up of supervisory colleges.

These colleges will comprise regulators from the main countries in which a bank or insurer operates and will have the job of better co-ordinating the supervision of cross-border financial groups.

As a spin-off from that process, the groups on the list will also be asked to start drawing up so-called living wills – documents outlining how each bank could be wound up in the event of a crisis.

Regulators are keen to see living wills prepared for all systemically important financial groups, but the concept has split the banking world, with the more complex groups arguing that such documents will be almost impossible to draft without knowing the cause of any future crisis.

Paul Tucker, deputy governor of the Bank of England, and head of the FSB working group on cross-border crisis management, said recently that the wills – also known as “recovery and resolution” plans – would have to be drawn up over the next six to nine months.

National regulators, led by the UK, are known to have begun pilot-testing the living wills exercise with some of the listed banks in the past few weeks.

Copyright The Financial Times Limited 2009