Worst Tres. Sec. since Jim Baker???

Discussion in 'Politics & Religion' started by AAAintheBeltway, May 1, 2002.

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  1. WASHINGTON, May 1 (Reuters) - U.S. Treasury Secretary Paul O'Neill said on Wednesday that governments cannot permanently sway currency values with rhetoric or market intervention, but his own words sent the U.S. dollar plunging against the world's major currencies.

    O'Neill, in an impromptu statement at the beginning of testimony before the Senate Banking Committee, flatly warned that he was not about to give currency speculators any "ammunition" by implying any change was forthcoming in the strong-dollar policy of the United States.

    He said only speculators benefit from swings in foreign-exchange values and "I don't want to give them any ammunition to say that there's a basis for roiling the world currency markets out of our conversation here this morning."

    That "conversation" brought turmoil as markets were disappointed that O'Neill did not call for a strong dollar more forcefully. The U.S. dollar fell sharply against other currencies as a result, and also because markets inferred that O'Neill's comment that intervention was not effective meant he had no intention of opening his tool kit to counteract the recent slide in the dollar.

    I thought Jim Baker, by virtue of having pretty much personally instigated the 1987 stock market crash, had locked up the title of "Worst Tres. Sec." in the Modern Era. Now this guy Paul O'Neill seems determined to try to take that title himself. He got off to a good start by doing his best to undermine the administration's central economic policy initiative, tax cuts.

    As the former CEO of Alcoa, he had little credibility from the get-go with the strong dollar crowd and has done his best to forfeit that. Today's testimony might seem innocuous on the surface, but the market's sharp reaction belies that. A ritual developed during the reign of Bob Rubin that any question about the dollar was met with a rote recitation that the US policy was to maintain a strong dollar and a strong dollar was good for America.
    There waas a good reason for this ritual. Market observers are constantly on the watch for the slightest hint of a policy change. Any off-the-cuff wording could be misinterpreted. So you go by the script.

    Of course O'neill knows all this. So when he goes off on a tangent, market players sense blood, particularly as the weak dollar whiners from the NAM were testifying. What's wrong with a slightly weaker buck? We have a humongous current account deficit to finance every month. Any hint that the administration is going to play trade politics with the world's reserve currency could create huge problems financing that deficit. See 1987, as in market crash.
  2. I think it's possible- not a definite, but possible- that the current administration is playing it smart by playing dumb, both in middle east policy and at the treasury.

    By acting like a bunch of bumblers, they leave themselves more room to make cold calculations and maneuver. When the fit hits the shan, the "reason" will be old news- if Paul O' Neill was an idiot six months ago then it's not news he is an idiot today- and it will allow Bush to ride to the rescue with a well thought out decision AFTER everything has been made clear. Setting up minor players of the administration to take flack in the confusion so that key players- Bush, Cheney etc.- can ride in and gain credibility. Buying time w/ scapegoats and stepping in at the end once it's obvious what to do and the "bumbling" is yesterday's news.

    My theory could be completely wrong, but I think this whole "fell off the turnip truck" appearance is a ruse. Those guys have shown that they are smart and ruthless when it comes to screwups. If Clinton was the most brilliant politician of a generation (too bad such talent was wasted on an amoral directionless scumbag), then I think that Bush may have one of the most brilliant and clever backroom strategy teams in a generation.
  3. What did Baker exactly say about the germans that october 87 weekend?
  4. Kicking,

    I forget the details but it was basically that we were prepared to let the dollar find its own level. The Bundesbank of course followed a strong DM policy and held interest rates too high for our tastes, as we had to finance a big deficit. A falling dollar complicated matters for us, and our efforts to bolster it were undermined by the Germans. Of course, the idea that we would let the dollar free-fall precipitated a worldwide panic.
  5. darkhorse,

    I tend to agree with you and that is the scary aspect of this. If O'Neill were just a dumbass who didn't appreciate what the effect of his words would be, it would be one thing. Clearly, that is not the case. As with steel tariffs, the administration says one thing but does another. Too clever by half in my view.
  6. Babak


    I'll never forget the time he was on CNBC last year calling for higher stock prices in the near future. Dumbass is a compliment to this guy.
  7. jem


    I start these comments by stating I know I do not know. But I find darkhorse's logic compelling. If he were a dumb ass and the administration did not want to look like it had dumb asses then everything would be scripted by a non-dumbass and ari fliescher. Like on the west wing. So whatever we are seeing must be done for effect. Besides how could he have been president of a large multinational if he were a dumbass, it is not as if the guy has a magnetic public persona.

    I just heard the tape on cnbc and he ended his statement with a strange almost emphasis on "nothing should be construed as a change in policy TODAY. Almost as if they were contemplating a change in policy just not that it was being announced today. Which is different than what rubin said.

    I would like to see a discussion or links to whether a stronger or weaker dollar relative to now would be good for the economy or bad. as an econ major in college and a reformed attorney I think I could argue both sides of the argument but I would like to know which argument is stronger.

    For instance one might argue that the strong dollar and our apparent policy of letting the federal reserve keep the price gold down and encouraging central banks to sell gold masked real inflation-which allowed our government to over spend. And that in the long run letting the dollar go to real levels might help exports and cause our countries leaders to get self control over spending or get thrown out. ( I put this up for controversy not because I endorse the argument).
  8. Kinda reminds me of my friend who has the southern accent...Everyone assumes he is dumber than the rest cause he inflects that twang and it sort of eases their suspicion...Then when he knows they trust him he can put the heavy sale on...We had Bubba Clinton, now we have dubya...these guys can work an audience better than anyone, and what better audience that the mass populus...

    I think Darkhorse is right...What better way to give themselves wiggle room than to appear undecided and aloof...
  9. A strong or at least stable dollar is important because we have to attract enough foreign investment to finance the current account deficit. This has been done recently through foreign buying of bonds, both governments and corporates. No one buys bonds in a foreign currency if they are afraid they will lose the coupon through cuurency devaluation.

    Now the other side of it is the equity side. A falling currency can coexist with a big stock market rally. 1987 for example. The idea is that manufacturers are more competitive and also that repatriated earnings buy more dollars, hence reported earnings get a double kicker.

    Unfortunately, currencies tend to stay in a trend and overshoot. Kind of like inflation, a little can be pleasant, too much is awful. When your currency goes into freefall, everything starts getting very expensive. Rates have to go up. Recession looms. If foreign investment slows to a trickle or reverses, it can take sky-high rates to turn your currency around. Then you get Black Mondays, etc.

    We can live with a strong dollar. Why play around with it? But if we decide to do so, it will be a good idea for everyone here to learn to trade the currencies and the interest rate products.
  10. bone

    bone ET Sponsor

    O'Neil comes off as a regular Einstein compared to the clowns Duisenberg and Issing at the EU. Ever listen to one of their rants after an ECB meeting?

    What O'Neil says or does at this point bears little relevance to the long-term strength or weakness of the dollar. What George Bush and the NYSE say and do moves the globe and the dollar, my friends.

    China holds $ 50 Billion in CASH U.S. dollar reserves. It's better than gold (Commercials don't want to sell dollars).

    With the exception of Iraq, all OPEC partners insist upon being paid in dollars.

    The stock prices of BMW, Daimler, Sony, Nissan, Erricsson all rise and fall based upon their ability to manufacture goods and appreciate their value when converting to dollars.

    The United F...ing States of America is the strongest, most dominant military and economic country or empire in relative terms that has ever existed on this earth. (Think Rome 2,000 years ago for a clue).

    Do you know why the European or Japanese fund managers buy so many T-Bills? Not for the 2.5% coupon. It's a free currency play with a bounded downside return.

    Look at the spreads. Just look at the spreads.
    #10     May 1, 2002
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