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Wednesday, May 21, 2003

Why the US Government Should Be Doing This is a Mystery

Brad is also worried about the dollar and what John Snow may (or may not) be doing:

The problem is that for decades the Treasury Secretary's words on the dollar have been taken at an extreme discount. So whenever the Treasury Secretary says, "It is the policy of the U.S. government to drive up the dollar," markets say, "Ho, hum." But whenever the Treasury Secretary says something other than, "it is the policy of the U.S. government to drive up the dollar," markets say, "Good God! The U.S. government is trying to drive down the value of the dollar!! Sell!!! Sell!!!! Sell!!!!!"

Why financial markets do this is a mystery. But they do. And the result is that--whatever else the Treasury Secretary says--he must precede and follow it by a declaration that a strong dollar is in America's interest and is the policy of the United States. And whatever else the Treasury Secretary says must not contain any quotable sound bites that undermine the "strong dollar" quotes.

Many Treasury Secretaries resist taking on this formal, hieratic role. They think it makes them look like idiots. They would rather be coherent, and appear to be intelligent people with a grasp of economic issues, rather than mere parrots that repeat, "A strong dollar is in America's interest! Squawk! A strong dollar is in America's interest!" Tough. They need to learn to deal with it.
Source: Semi Daily Journal

Trouble is, I think that what Brad is arguing was more or less true in the era of the managed float, but I suspect the rules of the game have changed. The US is trying to force the Europeans and the Japanese to reform at gunpoint (not of course using 'the big hammer', but certainly metaphorically speaking see my Advantages of Being Close to Death post). In order to do this it is trying to 'manage expectations', thus I suspect Snow's words (unlike Duisenberg's) were well chosen. All of this may really be dicing with something not too far from death (certainly for Germany, and who knows what will be the consequences for Japan: I don't). Now earlier today I referred to the fact that there was one other 'crazy' member of my family: my brother, the anarchist banker. In response to my request for advice and help with the arguments from Joerg and Richard Duncan he has just sent me a mail. Now the damn thing is so long I've had to open a dedicated page on my website just to accommodate it.

How it takes me back! It was one of the scariest and most exhilarating times of my life at the beginning of the 1970s, when things started to happen in the currency markets. I was running the currency payments desk in Water Street, Liverpool which being the old Martins Head Office Branch was frenetic with all the trading and shipping companies in the old port. With the markets being in flux you had several places to deal, dependant on currency, amount, type of payment, and destination or where it was being received from. France for example was operating a two tier currency system (commercial and financial), there were Exchange Controls and a separate Investment Currency Market, various types of currency cocktails which had all the attributes of Molotov Cocktails, things called B units, another type of light blue touch paper cocktail, the farmers were stupidly borrowing Swiss Francs because of the low interest rate and having no matched funding, nobody apart from a junior official at the Bank of England understood the Forward Market, the green pound was an enigma which people seemed to use more like a fictitious unicorn except it was real, most of the Dealers were dealing themselves in unbeknown to their employers, some dealers doing a Leeson avant le nom (Lloyds Lugano). I was only lucky, my mistakes turning into profits mostly. The partner of my first London solicitor scarpered to Marbella where he lived surrounded by gun toting body guards. He had done the Bank of England for millions on the Investment currency market but he did not consider it against the Code Napoleon so he did not come back to face the music. Rather like Wittgenstein going to the cinema to watch Betty Grable's legs, I used to go to places like the Rumford Coach House to watch topless go go dancers (new at that time, sort of 70’s lap dancing clubs and highly embarrasing because I seemed to have worked with most of the girls on stage who tended to be ex bank employees). Ah joy it was to be alive! And some Johnnies want to go back to this sort of chaos! Leave it out! ...................

But the main point I want to make is that the situation is more complex that Duncan or Joerg make out and that an essential key is the role of the dollar in World Trade. One needs to look at its use as a reserve asset and indeed as reserve assets in general as % of World Trade. And look to the future requirements. I know that the West may be hitting a recession but this calculation is made including GDP figures which include Domestic Economic Performance. What% of GDP is foreign trade related and what is the prognosis for this trade element. In globalisation Domestic economies are meant to suffer by the import of cheaper foreign goods. Thus the trading element may be less affected as regards its requirement in% terms for the trading currency. And as China, Russia, and the Indian sub continent come more into the trading fold what currency will they trade in. Remember before the fall of the Wall trade with the Eastern Bloc was done under Countertrade terms, ie Bata and Vienna was the Centre (We were swapping Xerox machines for football players!) The engine of growth before the wall was trade (Cotta used to produce interesting graphs when he gave us lectures at Bad Homburg showing the lack of importance of the Eastern Bloc in World Trade). Now all these new players will need some currency to trade in. It may well be that the dollar is needed to provide liquidity............... continued ............

I hope this overview may help but my thought is that over the long term there has to be reserve currency, this needs to be decided by the market and the dollar seems to be the only game in town. World Trade will pick up and as History has shown this problem is a part of the system, and comes and goes as the need for liquidity comes and goes. It is all part of the trading cycle. Every market needs liquidity. And in times of trouble the Europeans only exacerbate the situation when they don’t back the US. They cut off their nose to spite their face. France and Germany mark well. The Gods also punish people by making their wishes come true. Those who want the Euro as a Reserve Currency beware!

Now to get back to the real world. On Monday I gave a very badly attended talk trying to show that the key to Duchamp’s revolution in Concept Art was the alternative Geometry of Lorbachevsky and Riemann, more particularly how the questioning of Euclid’s 2 and 5th postulate fed into Einstein’s Theories of Relativity and the effects of gravity. I am at present out on the Care in the Community Programme…..

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