. March 25, 2008 SouthAmerica: It is interesting that other economists have started talking about this subject. Here is what I wrote about it on an article published in July 1999. (You can read the entire article in the beginning of this thread.) âIt will not take twenty-five years this time around for this process to develop. This will occur at a very fast pace. It would be a smart move for Brazil to apply for membership in the European Union and to adopt the euro immediately as the new currency in Brazil. Today, countries around the world have official reserves as follows: Percentage share by currency: U.S. Dollar = 60 percent of market Euro Group = 20 percent of market Yen = 6 percent of market Other = 14 percent of market Most people should not be surprised if in ten years the breakdown of official reserves of the countries around the world will be as follows: U.S. Dollar = 35 percent of market Euro Group = 35 percent of market New Asian Group = 25 percent of market Other = 5 percent of market ** My prediction will not come to past by July of 2009, but I have a very good chance that it will come through by 2014. I expect that by that time the New Asian currency is being traded, and the Pound Sterling is finally part of the euro. Brazil should adopt the New Asian Currency when that currency becomes reality. The euro it will reach very easily the 35 percent market share (today the euro already account for 25 percent share, plus British Pound accounts to about 5 percent share). The big shift in foreign currency reserves it will be a decline of the US dollar and a similar gain in the foreign currency reserves of the New Asian currency. Brazil should adopt the New Asian Currency when that currency becomes reality. ***** âThis crisis could bring the euro centre-stageâ By Wolfgang Münchau Published: March 24 2008 Financial Times - UK We know the credit crisis is a clear and present threat to the global economy. But its most important long-run legacy may not be economic, but geopolitical. I was reminded of that possibility when reading a recent analysis by Professors Menzie Chinn at the University of Wisconsin and Jeffrey Frankel of Harvard*. They ran a simulation showing that the euro would replace the dollar as the world's largest reserve currency within the next 10 or 15 years. Their analysis is not based on this crisis. But the crisis could easily accelerate the trends they have identified. Do not dismiss this research as some anti-dollar propaganda. Professors Chinn and Frankel started with the opposite notion - that the euro would not overtake the dollar for a long time. After all, the world does not change reserve currencies very often. Sterling held pole position until the second world war, but lost it because of the UK's imperial overreach. The US economy had already overtaken that of the UK in the 1870s. One of the factors that delayed the dollar's rise was lack of a sophisticated financial sector, which did not develop until the establishment of the Federal Reserve System in 1913. Global reserve currency status is due to many factors such as the size of the economy, the country's share in international trade and the depth of the financial markets. Inertia is another. If yours is a global reserve currency today, it is likely to be one tomorrow too. But this works only up to a point - a tipping point. Professors Chinn and Frankel state two underlying reasons for the decline in the international role of the US dollar. The first is persistent current account deficits combined with a long-term decline in the dollar's exchange rate - and perhaps imperial overreach, too. The second is the emergence of a genuine alternative to the dollar. Neither the yen nor the D-Mark had a realistic chance of replacing the greenback. But the euro is a real alternative. The eurozone economy is almost as large as that of the US and may surpass it as it continues to enlarge. London is the eurozone's de facto financial centre, even though the UK itself has not adopted the euro. Also, the eurozone bond markets are now almost as deep and liquid as their US counterparts. The projected speed at which the dollar will lose its predominant position as a global reserve currency obviously depends on your assumptions. The work of Professors Chinn and Frankel shows that this could happen shockingly fast. Some of those trends are accelerating right this minute. The reckless monetary policy of the Federal Reserve has speeded up the dollar's decline and caused a rise in inflationary expectations. I would expect US inflation to pick up significantly once the present recession ends. Future inflation will weigh heavily on the global role of the US dollar. An immediate consequence of high inflation is that many developing countries will find it harder to maintain their dollar pegs. They may be reluctant to drop them now but there will come a point when the rise in inflationary pressures becomes unbearable. If and when they drop their pegs, they will almost certainly rebalance their reserve portfolios as well. Another factor that pushes in the same direction is the weakening of the US financial sector. This has been a crisis of Anglo-Saxon transaction-based capitalism. Not too long ago, it was considered to be vastly superior to the eurozone's old-fashioned relationship finance. I doubt that in a few years' time people will continue to assess the relative strengths of the Anglo-Saxon and continental European financial systems in quite the same way. I would also expect the eurozone economy to withstand the economic shocks of the credit crisis in relatively better shape. Inertia means that the euro will not overtake the dollar any time soon. At present the euro only accounts for a little over a quarter of world reserves, against the dollar's share of two-thirds. But to keep the euro down forever, you would need to rely on some rather far-fetched conspiracy theories. One such theory says that foreign central banks collude to hang on to dollars to protect the value of their holdings. It does not work that way. The network externalities that have favoured the dollar in the past could just as easily favour the euro in the future. The potential geopolitical implications of such a projected shift are immense. For a start, the US will lose its exorbitant privilege - the ability to achieve permanently higher returns on foreign assets than the returns paid to foreigners who invest in the US. The dollar will suddenly cease to be "our currency, and your problem". Influence in international financial institutions will wane. Losing the dollar as the world's leading international currency not only leads to a loss of political power. It constitutes loss of power. There is little politicians can do to prevent such a seismic shift. I suspect the US political establishment is not yet aware of what is going to hit it. Then again, the same can be said of European political leaders, who have not given us any hint yet that they are ready to deal with the responsibilities that come with running the world's leading currency. Source: http://www.ft.com/cms/s/0/092dc918-f942-11dc-bcf3-000077b07658.html?nclick_check=1 .
. April 22, 2008 SouthAmerica: To the people on this forum who gave me a hard time when I predicted that the US dollar was going to trade in the range of US$ 1.50 to US$ 1.60 to euro 1.00 Finally today the US dollar has reached the US$ 1.60 level versus the euro. .
Yep, good call. I guess a lot of people take it kinda personally 'cos it's basically saying their net-worth is going to depreciate by the same amount in real terms - and yes, I have at least one leg in this boat too! Any other prediction? Personally, I cannot see a reason for the USD to stage any sort of significant recovery, at least not while rates keep going down, and even when they were increasing the dollar continued to drift lower - not a good sign...
Excellent Commentary As Usual ................................................................................... Excellent foresight and commentary. One issue now being how to begin to weight the differing currencies and commodities at this stage. Commodities have become a form of currency, but yet currency must transact the commodities. Thus transacting and thus the demand of transactions are what have to be optimized at this point. The oil welfare states can sell less for more than average, thereby increasing the longevity of their stocks. However demand is certainly now an optimization of certain wealth. I would bet that the Bush/Cheney duo do not have a clue as to the damage they have caused the US and the world, simply by chasing 80 cents to $2 per barrel lifting costs in Iraq. Oil prices permeate every aspect of everyone's life in the world, and this should have easily been foreseen by any solid basic government G scale economist. What would be of interest are the individual names that can affect dollar devaluation in the marketplace, and their current positioning techniques. It is particularly interesting how oil reactions are closely inverse to the dollar....this is as if the oil welfare states have exacted hedges versus the dollar....now that they have missed out on 82/160. Certainly there must be some economists in government that have modeled this scenario.
. April 23, 2008 SouthAmerica: I posted the following information yesterday on the following forum: The US dollar and the biggest default in history. But that information is relevant for me to answer a question raised on this forum. ***** April 22, 2008 SouthAmerica: I wrote various articles over the years about how Brazil also should adopt the Fairy Tale system of US government statistics to show all kinds of meaningless information like the ones the people on Wall Street uses on a regular basis to make their investment decisions â information provided by the US government regarding the US unemployment rate, GDP, and so on⦠The world of illusion has worked well for Wall Street and for the United States economy for a number of decades now and people from around the world also have been rushing with their money and they want to participate on this massive economic world of illusion. Americans should be glad that there are so many naïve suckers around the world who believe on the illusion that are being staged as we can see by foreign lending and investments that continues to come in into the US even when these foreigners start losing their shirt as soon as the money arrives in the US. Yesterday I bought a copy of the May 2008 issue of Harperâs magazine after reading a terrific article by Kevin Phillips âWhy the economy is worse than we know.â Here is what Paul Krugman (one of a hand full of economists that I respect) said on his NYT column on April 11, 2008 regarding that article: âHave you seen the awesome article by Kevin Phillips in the latest Harpers: âNumbers Racket â Why the economy is worse than we know. ...â I 2007 alone 15 percent of GDP was based on phantom figures. The United States government has been using for a long time the Enron System of how to deceit people with cooked figures. I wonder if the Chinese government understands to what extent that they have been taken for a ride so far, and when it is better to cut your losses than continue to sinking more fresh money into the money pit. Here are some excerpts from "Numbers Racket: Why the economy is worse than we know" by Kevin Phillips, from the May 2008 issue of Harperâs Magazine, but I strongly suggest that if you have the opportunity then you should read the entire article (about 5 pages long) on Harper's magazine: ââ¦The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowings, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed. If Washingtonâs harping on weapons of mass destruction was essential to buoy public support for the invasion of Iraq, the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunities than it actually is. â¦The truth, though it would not exactly set Americans free, would at least open a window to wider economic and political understanding. Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3-4 percent range). We might ponder as well who profits from a low-growth US economy hidden under statistical camouflage. Might it be Washington politicos and affluent elites, anxious to mislead voters, coddle the financial markets, and tamp down expensive cost-of-living increases for wages and pensions? Let me stipulate: the deception arose gradually, at no stage stemming from any concerted or cynical scheme. There was no grand conspiracy, just accumulating opportunisms. As we will see, the political blame for the slow, piecemeal distortion is bipartisan--both Democratic and Republican administrations had a hand in the abetting of political dishonesty, reckless debt, and a casino-like financial sector. To see how, we must revisit forty years of economic and statistical dissembling. â¦The GDP has been subject to many further fiddles, the most manipulatable of wich are the adjustments made for the presumed starting up and ending of businesses (the âbirth/death of businessesâ equation) and the amounts that the Bureau of Economic Analysis âimputesâ to nationwide personal income data (known as phantom income boosters, or imputations; for example, the imputed income from living in oneâs own home, or the benefit one receives from a free checking accountâ¦). During 2007, believe it or not, imputed income accounted for some 15 percent of GDP. â¦"...if you were to peel back the changes that were made in the Consumer Price Index (the inflation rate) going back to the Carter years, you'd see that the CPI would now be 3.5 to 4 percent higher -- meaning that, because of lost CPI increases, Social Security checks would be 70 percent greater than they currently are. â¦The real numbers, to most economically minded Americans, would be a face full of cold water. Based the criteria in place a quarter centruy ago, today's U.S. unemployment rate is somewhere between 9 and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession. If what we have been sold in recent years has been delusional "Pollyanna Creep," what we really need today is a picture of our economy ex-distortion. For what it would reveal is a nation in deep difficulty not just domestically but globally. Undermeasurement of inflation, in particular, hangs over our heads like a guillotine. To acknowledge it would send interest rates climbing, and thereby would endanger the viability of the massive buildup of public and private debt (from less then $11 trillion in 1987 to $49 trillion last year) that props up the American economy. Moreover, the rising cost of pensions, benefits, borrowing, and interest payments -- all indexed or related to inflation -- could join with the cost of financial bailouts to overwhelm the federal budget. As inflation and interest rates have been kept artificially suppressed, the United States has been indentured to its volatile financial sector, with its predilection for leverage and risky buccaneering. Arguably, the unraveling has already begun. As Robert Hardaway, a professor at the University at Denver, pointed out last September, the subprime crisis "can be directly traced back to the (1983) Bureau of Labor Statistics decision to exclude the price of housing from the Consumer Price Index...With the illusion of low inflation inducing lenders to offer 6 percent loans, not only speculation run rampant on the expectation of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the teaser rates." Were mainstream interest rates to jump into the 7 to 9 percent range -- which could happen if inflation were to spur new concern -- both Washington and Wall Street would be walking in quicksand. The make-believe economy of the past two decades, with its asset bubbles, massive borrowing, and rampant data distortion, would be in serious jeopardy. The U.S. dollar, off more than 40 percent against the euro since 2002, could slip down and even rockier slope. The credit markets are fearful, and the financial markets are nervous. If gloom continues, our humbugged nation many truly regret losing sight of history, risk, and common sense.â Source: http://harpers.org/archive/2008/05/0082023 **************** On this website there is further information about Kevin Phillipsâs article including informative charts that were mentioned on the Harperâs magazine article. Source: http://seekingalpha.com/article/725...reep-phenomenon *********** Kevin Phillips also just published his latest book and you can see the review of it at Bloomberg News: http://www.bloomberg.com/apps/news?....W0E&refer=home .
. Omelette: Any other prediction? Personally, I cannot see a reason for the USD to stage any sort of significant recovery, at least not while rates keep going down, and even when they were increasing the dollar continued to drift lower - not a good sign... ***** April 23, 2008 SouthAmerica: Reply to omelette Here is some more food for thought, that most people it would rather ignore it than take it in consideration or even give a minimum of thought about this subject. Today, it is hard to make any predictions when the Federal Reserve will try to do anything to interferer with the workings of the free market to prevent the downside of the system from materializing. When there is Federal Reserve intervention on such a large scale then everything gets distorted and your guess is as good as mine â at this point anything goes. I posted above Kevin Phillipsâs article because it is relevant to the discussion on this thread. Even though it is not something that currency traders and Wall Street takes in consideration since they use the official Mickey Mouse inflation rate supplied by the US government on a monthly basis. Yesterday when I was looking at the chart provided by the Harperâs magazine article a number of questions came immediately to my mind regarding the impact of the real inflation rate, and the official Mickey Mouse inflation supplied by the US government that people uses for all kinds of purposes. One of the first things that came to mind is the distortion that it is causing on the value of the US dollar â since the value of the currency is supposed to take in consideration the underlying inflation rate of the US economy. After looking at the chart provided by the Harperâs magazine article I compiled a list with the official Mickey Mouse inflation rate provided by the US government from the year 1994 to the year 2008. If you add the inflation rate for this 15 year period the total Mickey Mouse rate total 41 percent increase during that time and an average inflation increase of 2.7 percent per year. When I compiled a similar list for the real consumer inflation based on pre-1983 criteria then the inflation rate for this 15 year period total 133 percent increase and the average inflation increase is 8.9 percent per year. This is the short cut version of making these calculations and if we take in consideration the compounding effect then the impact of the increase it would be even larger. Now going back to your question. The current value of the US dollar in world markets reflect the official Mickey Mouse rate of inflation supplied by the US government on a monthly basis, and if the US dollar were to reflect the real inflation rate affecting the US economy during that time then the value of the US dollar it would be probably between US$ 2.50 to US$ 3.00 to euro 1.00 And commodities price also would be much higher and the barrel of oil it would be trading closer to the price of US$ 200 per barrel to reflect the real inflation rate undermining the US economy plus the new global demand. If the real inflation rate it had been used by the Federal Reserve instead of the official Mickey Mouse inflation rate then the Fed Funds rate it would have been much higher during all these years. The use of the official Mickey Mouse rate not only for the calculation of inflation but also for the unemployment rate, and GDP â result in a make believe Mickey Mouse economy, with people investing based in all kinds of phantom information and figures and you get phantom results that translate into billions of US dollar losses. But on this world of illusion created by the US government at the end of the day there is only one thing that has turned out to be real: it is the hundred of billions in US dollar losses that are pilling up in the United States and around the world. ***** On this website there is further information about Kevin Phillipsâs article including informative charts that were mentioned on the Harperâs magazine article. Source: http://seekingalpha.com/article/725...reep-phenomenon .
Hello im a new member here and was hoping for some opinion on the Euro. Ive noticed that over the past year Euro has increased in strength considerably from £1 = 1.42 Euros in 26th October to £1 = 1.26 Euros today 23rd April. Im looking to go to Mainland europe for quite some time this summer and therefroe will need to buy alot of Euros. Do you think it is worthwhile to get some now incase euro strengthens further or sit tight and hope its value falls. This is taking into consideration that demand for Euros booms in the summer due to the high number of tourists heading there mainly to Spain, France, Greece and Italy. Also inflation fears across Europe may mean that ECB interest rates wont decrease by much. Any thoughts??