For those who are not on the inside of the current debates about US economic prospects, Stephen Roach (Chief Economist Morgan Stanley) has been arguing that there are three key aftershocks to the US post-NASDAQ bubble environment: the collapse in business spending on IT, the meltdown of the telecom sector, and thirdly, the overvaluation of the US dollar.
In Monday's piece, Roach argues:
"One aspect of this bubble that could well be most disconcerting is the disproportionate role that the dollar still plays as the world’s reserve currency. As of year-end 2000 (last official data point as tabulated by the Bank for International Settlements), dollar-based reserves amounted to $1.450 trillion -- fully 76% of the world’s total of $1.909 trillion in official foreign exchange reserves.....
To be sure, the share of currency reserves held in dollars has fallen since the dollar was floated in 1973; prior to that point in time, the dollar accounted for close to 90% of total currency reserves. But the fact remains that the dollar’s portion of total world currency reserves is more than three times America’s 21% share in the global economy (as measured by the purchasing-power-parity metric of the International Monetary Fund) and even more in excess of the roughly 15% share that the United States has in global trade.......
.A few years ago, Federal Reserve Chairman Alan Greenspan stated, "It has become a general principle that monetary authorities reserve only those currencies they believe are as strong or stronger than their own" (see his speech at the World Bank’s conference on Recent Trends in Reserves Management, Washington D.C., April 29, 1999)......If we’re right, and the dollar is now in the early stages of a multi-year decline that could amount to at least a 20% depreciation, then it seems reasonable to expect that central banks would follow the "Greenspan principle"....... According to that script, their more sober assessment of US economic prospects should prompt them to begin paring back significantly the portion of their currency reserves they hold in Greenbacks."
and in today's post he finishes up with:
"Suddenly, all that looked so virtuous about America now looks increasingly vicious. The odds of a dollar crash scenario, while still low, suddenly look higher. Normally, we would assign a 5% probability to such an outcome. Today, we would raise that probability into the 10% to 15% zone. For an overvalued currency, the increased odds of a hard landing spells trouble -- not just at home but elsewhere around the world. If the dollar crashes, the global economy could be in serious trouble. Let’s hope it won’t."
Now far be it from me to differ with someone whose work and tenacity I greatly admire, but I think you may have got it wrong here Stevie boy. Not that the story about the overvaluation of the dollar is wrong, far from it there seems to be a general consensus that this is the case, due not least to the excessively exaggerated view of the above normal profitability of US companies that was fairly common currency in the later part of the 90's.
No the problem here lies in another quarter. For the US dollar to come down significantly, then something else has got to go up, and herein lies the difficulty. As another rising star in the MS galaxy - Andy Xie - never tires of pointing out, an important part of the money sitting in US dollars right now comes from SE Asia, and until they get their capital markets fixed that money isn't going home in large quantities anytime soon. So this is one avenue of rational exit which appears to be blocked.
On another front, both Steve Roach and Paul Krugman (economists who in other moments I find myself agreeing with) tend, in my humble view, to exaggerate the dangers of a return to protectionism 1930's style in the global decoupling thesis. Not that Bush's protectionist approach to steel tarrifs, and the spate of farm subsidies aren't complicating things for free traders. But the problem is that you can take the comparison between pre 1920 globalisation, and the post 1990 variety too far. Things really are importantly different this time, and the dynamics are much more powerful (this point remains to be argued and developed in later blogs). You only have to look at Argentina to see what happens if you stay outside.
So back to the point about what can come up to help the dollar down. Well not the Yen for starters. Only the most cursory browse through the zero bound literature inspired by Krugman/Svensson should suffice to confirm that the last thing the Japanese government wants right now is a revaluation of the Yen. That would only lead to an exaccerbation of the deflation problem, growing indebtedness, and fast track, as opposed to slow drip bankruptcy.
As for the Euro, I'm here in Europe, and I just don't buy it. Many are the reasons why, as they say, that I can't see this one, among many others the Dynosaur like movement of the ECB, and the problems of the German enterprise. But much, much more important are likely to be the ageing and population problems which Europe is about to go through, and the impact of all this on market growth expectations. So tired old Europe pulling the global train. I don't think so (more on this in later blogs).
Which brings us back to the dollar and its overhang. Well it looks to me pretty much like, for the time being, we may have to learn to live with it.
NEW MEDICINES AREN'T SO NEW
"Two-thirds of the drugs approved from 1989 to 2000 were modified versions of existing drugs or even identical to those already on the market, rather than truly new medicines, according to a new study.
The report also said that most of the increased spending on new prescription drugs was on products that the Food and Drug Administration had determined did not provide significant benefits over those already on the market."
This article in the New York Times cites a recently published report from the National Institute for Health Care Management Foundation. Apparently many new drugs are simply recycled versions of existing products, pleasingly re-packaged, and heavily marketed. For example, Nexium, a recently approved ulcer medication, is a modified version of Prilosec, which is about to lose its patent protection, while Clarinex, an allergy drug, is a reformulation of Claritin. Sarafem, a drug for premenstrual irritability, is, surprise, surprise the same drug as Prozac but has been renamed and attractively repackaged in capsules of pink and lavender.
In today's Yahoo, on the other hand, we are informed that this year US drug spending is set to rise 15.9 percent. Or in other words we're getting less for more. Part of this comes from inflation and part, in fairness, from our increasing tendency to need to medicate. This latter increase is driven by both demographics and our increasing need to medicate. Apparently the predictions are that the this will slow up a bit in the years ahead but still:
"Overall drug price inflation totaled 5.5 percent in 2001, topping 5 percent for the fourth consecutive year.... future price increases for prescription drugs are expected to remain at more than 5 percent in the future.....
The average wholesale price of prescription drug spending per member per year is expected to reach $686.19 in 2002, up $94.14 from the $592.05 reported in 2001, said Express Scripts, which manages prescription plans for more than 50 million members....
By 2005 and 2006, the spending growth rate is expected to drop to 13.5 percent from increased use of generics and thin product pipelines from branded drug companies.........In 2001, prescription drug spending was focused on a limited number of drug classes.
More than 50 cents of every dollar spent on prescriptions went for drugs in just 10 of 99 therapeutic categories: antihypertensives, antidepressants, cholesterol reducers, gastrointestinal drugs, antidiabetics, antirheumetics, antiasthmatics, antihistamines, calcium channel blockers and dermatologicals.
Medicines used to treat ulcers, depression and high cholesterol levels accounted for 25 percent of all prescription drug spending in 2001 and also 28 percent of last year's total spending increase.
Meanwhile the NYT reports that "Cheaper Body Scans Spread, Despite Doubts". Apparently with the prices of the necessary technology tumbling, whole body scanners are about to become as accessible as your local supermarket.
Body scans for healthy people were once the exclusive province of the rich, part of the gold-plated annual physical for executives. But with the endorsement of celebrities like Oprah Winfrey and a rush by radiologists, medical centers and entrepreneurs to offer them, the scans are available to the masses.
As a result of competition, prices are dropping, from $1,000 or more to a few hundred dollars. New centers are springing up in cities and strip malls across the country. They advertise in newspapers, including The New York Times, on the radio, on billboards and in fliers sent by mail.
One organisation - which proudly calls itself the Wal-Mart of scanning - has trailers touring the US offering scans of any one of three regions of the body for $199. Of course, this is a godsend for hypocondriacs. But it does raise some serious questions for the medical care systems. There has been a rush of protests that so much early diagnosis could be a bad thing - but didn't they really let the genie out of the bottle when they started recommending this for the top execs as part of the annual medical. It's a bit rich to try to tell the yearning masses that what was good for the upper brackets isn't appropriate for them. Then there's the question of the inbuilt hypocrisy of our medical systems: effectively controlling diagnosis is what rations medical care. Now diagnosis is going to be cheap and widely available. The problem is that the scan may only run at $200 dollars, but the treatment will obviously be much more expensive. So you put all these things together, soaring drug costs, better informed and more demanding patients, and populations that are ageing extraordinarily rapidly, and we seem to have an extraordinarily unstable situation. (Those in any doubt on the long term budgetary implications of all this should keep their noses duly pinned to Paul Krugman's NYT column - go on Paul, sock it to them).
Discuss medical nemesis