Commentaries
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Volatile volatility
I was struck by the phrase “volatility itself has been volatile” in the FT article this morning. It pretty much sums up both the confusion and concerns in the market about whether risky assets are at an inflection point or taking a breather before embarking on another leg up.
The central bank meetings this week certainly aren’t helping, but the FOMC, the ECB or the BOE aren’t likely to do anything that’s going to signal a shift in policy. FOMC should keep the phrase “extended period,” while ECB isn’t likely to given any new insights on the euro or interest rates. The BOE could add more fuel to its quantatitive easing program, but that would hardly be earth-shattering news given its losing streak on growth.
There is the U.S. employment report later in the week, but no one is expecting a turnaround there either. In fact, most have their eyes on the magic 10, as in 10% unemployment that seems simply inevitable given the lousy job market.
Still, the VIX – the fear gauge that measures equity market volatility – is, well, looking pretty volatile.
Chart below.
Euro at $1.50 — a disaster or an alibi?
The French can never resist blaming a strong currency for their misfortunes. So it should come as no surprise that Henri Guaino, President Nicolas Sarkozy’s influential political adviser, has said that having the euro at $1.50 is “a disaster for European industry and the economy”. Since the euro stood at just above $1.49 as he spoke on Tuesday, Guaino presumably sees the single currency area as on the edge of the abyss.
This is manifest nonsense. European exports to the rest of the world, including the dollar zone, were booming in mid-2008 when the euro stood at just short of $1.60. The euro area had a trade surplus with the United States at the time. The steep slide in exports over the last 15 months has been due to a collapse in demand, even though the euro fell as low as $1.25.
A strong currency is not necessarily an economic handicap. West Germany’s export-fuelled post-war economic miracle was built on the foundation of a strong deutschemark.
A strong euro has kept the prices of imported commodities and energy under control and thus helped moderate inflation. That in turn enables the European Central Bank to keep interest rates low, benefiting industry.
Guaino forecast that the European currency’s against strength would become unbearable and Europe would have to react, most likely by printing euros, which would lead to inflation. That too seems improbable. If it were really worried by a strong euro, the European Central Bank could start by cutting interest rates, which are stuck at 1 percent — higher than U.S. or British levels. It could also intervene on currency markets, alone or in concert with other central banks, to buy dollars.
The ECB and other central banks intervened jointly in 2000 to stop the fall of the euro. The action was successful, putting a floor under the European unit. There has been no equivalent joint action in history to try to halt the dollar’s slide. But barring a disorderly dollar rout, which would not be in U.S. interests either, that may not be necessary.
Guaino should ask his countryman Yves-Thibault de Silguy, who was the European Economic and Monetary Affairs Commissioner at the time of the euro’s launch and is now CEO of French construction multinational Vinci. The company does 90 percent of its business in the euro area. So like most other big European corporations, it is relatively little exposed to dollar risk. Vinci has been using the strong euro as an opportunity to buy assets outside Euroland, notably in Britain — not because business is good (it’s lousy) but because assets are cheap and he can buy market share and prepare for future growth.
Yep, France should get its budget deficit under control – at 8% odd of PIB its far too high…But its a lot lower than many other countries in the EU, like Spain & Italy – or the UK (whwere the deficit will hit almost 13% of PIB)
And then of course there’s the good’ol USA with a budgetary deifict close to 14% of the entire economy. Og Well, whats good for the goose can’t be good for the ganders too…Countries can remain competitive traders with a strong currency for a time – but not forever. The US is a perfect example of that. And the time its taking to balance their trade deficit despite the plummeting greenback is a pefect example of that.
Don’t worry about the weak dollar
By John M. Berry
There’s no way to shut off the incessant warnings about a weak dollar from foreign officials and some economists, but it’s perfectly safe to ignore them.
You can also yawn the next time Treasury Secretary Timothy Geithner repeats the mantra, “It is very important to the United States that we continue to have a strong dollar.”
Everybody is blowing smoke. (more…)
Back in the early fifties, when America became the biggest Mercantilist beast on the planet (like China now), a deficit debt would have been a very dirty word. America has since moved into its final “huge deficit and debt” stage now and the only economic way that fits this outright consumer model is Keynesian. This has nothing to do with a script, and everything to do with economic survival. This last is certainly not a global tenet, but is a very individual tenet that applies differently to the varying economic needs of all countries. Therefore each country’s government must do exactly what it takes to survive economically, simply because that is, undeniably, the mandate of every government in the world today.
Deficits certainly do matter to some countries that follow these Keynesian deficit ways. But to newly Mercantilist countries such as China, Russia, India and Brazil, there is simply no need for deficits simply because they have their own massive savings. Why should such countries adopt huge deficits just to feed and waste their savings to support the Keynesian debts of western countries?
As I’ve said, the mandate of every government must be to ensure the economic survival of their own country. And herein lies the greatest fault with adopting huge Keynesian deficits — America for too long has been too dependent on foreign credit, to the extent that her own government has now completely forfeited her mandate for individual economic survival because of too heavy a reliance on these outside dependencies. The US government is not therefore fulfilling its economic mandate for survival, this control has been lost because of her loose Keynesian debt and deficit policies.
America, under the guise of modern leadership, has thus become nothing more than a weak banana republic, with no individual mandate or any control over America’s economic survival, no urgency, dwindling leadership, running on empty, even now going begging to the likes of China to buy more of her IOUs to support the American economy.
Regarding the author’s disgruntled description of China’s currency manipulation, I really think this is very amusing. For decades now, the US govt has been manipulated commodities like gold and oil for the sole benefit of propping up the dollar. And when this precedent was set so many years ago, is it any real wonder that China is only now doing the same. After all, it could be said that China has only learned all this from The Master.
So, concerning America’s laughable manufacturing as well export figures as perhaps the saviour of the US economy, can we perhaps have some real and valid reasons why a weak dollar is so good for America?
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The Wall
