U.S., CHINA and EUROPE: FINGERS ON TRIGGERS IN MEXICAN STANDOFF
November 29th, 2006Another day, another déjà vu moment for Cryptogon readers who remember this post.
Those of you who are executing your plans, just keep plugging away. As everyone else panics, you don’t have to. That’s the beauty of being through (or close to) the EXIT before the alarm sounds. That’s why you have supported Cryptogon. That’s why you took action. You knew this was going to happen. You’re going to be much better off than those who listened to “expert” advice, or are still waiting for clarity.
Was that a good pep talk? Because I’m scared shitless! Being right about the direction of things doesn’t make it any less frightening when it happens.
Via: Globe and Mail:
The sudden weakness of the U.S. dollar began late last week, soon after Chinese officials suggested that holding a lot of dollars might be a losing investment strategy. Investors read that as a signal that the massive trade and financial imbalances between Asia and the U.S. may be about to unwind.
The chief worry is that if China’s central bank — the largest foreign holder of U.S. dollars — begins to unload its reserves, the dollar will plunge. With China’s yuan effectively pegged to the dollar, other leading currencies would move higher after the realignment.
There’s no evidence yet that’s what China is actually doing. But few investors want to be the ones left holding dollars when the plunge comes. “People are getting very nervous,” said Andrew Busch, chief foreign exchange strategist at BMO Nesbitt Burns in Chicago.
“It’s a wonderful behavioural science experiment and it’s being played out with billions of dollars. The first to get out tips the scales.”
…
Also pushing the movement in currencies is the slowing U.S. economy, which could force the U.S. Federal Reserve Board to cut interest rates in the coming months. Meanwhile, the European Central Bank is looking at a possible interest rate increase next month.
The net effect is to make euros more attractive. It has also begun to encourage Europeans to buy more imported goods, and even take trips to the United States.
The British pound is rising alongside the euro, spurring a resurgence of holiday shopping junkets to New York by British tourists, according to Dee Byrne, spokeswoman for the Association of British Travel Agents.
“There has been an upturn in bookings to the States, for Christmas shopping in particular,” Ms. Byrne told Reuters News Agency. “People are going to New York to do their Christmas shopping, where they will get much more for their money: It couldn’t have come at a better time.”
But other experts see a much more ominous impact of these potentially seismic currency shifts.
The surging euro could cause permanent damage to the European economy, and even spur calls for exchange rate controls.
Peter Morici, a former chief economist at the U.S. International Trade Commission, said China is to blame for unleashing a potentially destabilizing period of currency realignment by stubbornly refusing to let its currency float to absorb its soaring trade surplus with the rest of the world.
“The long-term consequences of this could be trade chaos,” warned Mr. Morici, now a business professor at the University of Maryland.
Talk of exchange rate controls in Europe is an ominous reminder of the 1930s, when protectionism and currency controls helped trigger a global recession.
“It’s like water. There are too many dollars out there, looking for a place to go,” Mr. Morici said. “China is pushing on a wall of competitive devaluation.”
Investors are betting the most likely place for all those dollars to go is the euro — often touted as a reserve currency for the world. “The Europeans wanted a reserve currency and now they’re about to find out what it’s like,” Mr. Morici said.
if there is a rush to the Euro, that would be bad for the EU. They have completed the 1st stage of the legal inquiry into what powers the EU has, with respect to its *ostensibly* sovereign member-states, in that event. Which countries get screwed?
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/11/27/ccview27.xml
Simple. Take the top euro based U.S. trading partners. They’re the first to hit the dirt after the U.S.
Germany and France are most threatened, in that order. Germany is particularly at risk because the U.S. is running a large trade deficit there.
UK is in a similar predicament with that sterling, but far less so than Germany.
Not only is this a Mexican standoff, all the combatants are holding grenades with the pins pulled. In other words, I don’t see how anyone is left standing…. Except, maybe, China, because they are used to living at levels of squalor that are unthinkable to most of their trading partners. The Chinese seem prepared to take everyone down to their level. They’ve simply taken a page out of WalMart’s playbook and turned it into geostrategy. I admire the criminal Chinese regime, in the same way I admire cancer, or kikuyu grass.
[…] Well, if anything happens, it simply means this nonsense with the economy and the dollar went too far. Forget about that Mexican standoff with the currencies and the national debt closing in on $9 trillion…. […]
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