Bush or Kerry, same threat: the fall of the USD

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Benoist_Shanghai
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Posted: Nov 03, 2004 - 03:28 PM
Post subject: Bush or Kerry, same threat: the fall of the USD

AUTOMATED TRANSLATION

Chronicle of the economy by Eric Le Boucher
http://www.lemonde.fr/web/article/0,1-0@2-3208,36-385249,0.html

That Bush or Kerry gains, the threat is the same one: the fall of the dollar
LE MONDE | 30.10.04 | 13H25? UPDATED 30.10.04 | 20h09

The world economy rests on a very great alliance between the
United States and China: the American households precipitate on the products made in China, feeding a strong growth but digging an abyssal trade deficit; this deficit is financed by the purchase of dollars by the central Bank of Beijing.

Giving giving: "I buy your productions, you finance me."

The system functions with wonder since nearly three years: these two coupled engines drew the American growth (4,5 %), Chinese (9 %) and world (5 % this year), the best performance since thirty years. But it is intrinsically wobbly. The American deficit exceeds 650 billion dollars now, that is to say 5,7 % of the GDP: its financing is fragile and more and more in the short run. As for China, it only represents 60 % of the increase in the world investments!

The EAGLE And The DRAGON

Solid up to now in spite of these imbalances - and the statements of Cassandre -, this system cannot however last. But how to make land the eagle and the dragon with sufficiently of flexibility to avoid a crash landing? Is this possible? The dollar lies in the middle of the answers to these questions.

In China, the government took various measurements to cool the machine at the beginning of year, with an insufficient success. The central bank has just taken over by raising (of 0,3 %) its interest rate for the first time for nine years. A first step, according to Andy Xie, of Morgan Stanley, who estimates that one will need a rise ten times bigger to really
cool the real boom, who is, according to him, with the c?ur of current overheating. Then, the economists question themselves to know if the following step will be the unhooking of the bond which fastens the yuan with the dollar.

This catch of monetary autonomy, by a revaluation, will arrive one day, but is this the moment? If the rise of the rates of the central bank is enough, the answer will be not. If it is not enough, it will be yes. The dollar in this case will be posted with the fall.

What will happen in the United States? The election campaign will have been surreallistic from an economic point of view. It resembled a race with the big lie. American growth now returned, it would be time to deal with the twin deficits, commercial and budgetary, and of saying to the Americans that they live very largely above their means. But none the candidates spoke about frugality, on the contrary: Bush promised to perennialize the three enormous tax gifts which it made during its first mandate; Kerry promised to set up a social security for all, inter alia expenditure. Like if, like affirmed it the vice-president Dick Cheney, the deficits did not count.

Alas, once elected, the president, whoever he is, will have to surely put aside his promises to occupy itself of the debts.

EFFECT RICHNESS

What can it make? It will need much tact to cure financial imbalances without breaking confidence, growth and very great alliance with China. All rests on the unrestrained household consumption nouveau riches not
by their wages but by an effect of richness had, in particular with the rise in the price of the real estate (there too, definitely...). The households more than doubled their debt (compared to their income) to invest into housing: as long as this one takes value, the load of refunding appears light. But this mechanics is at the mercy of a raising of the interest
rate considered to be too heavy or of a prospect for loss of income. In other words, of an economic deceleration too sharp.

To avoid a dreadful spiral - the fear of the future consumption blocks, what ruins the growth -, this growth must remain above 3,5 %, according to calculations of Anton Brender, Dexia bank. Lower than this level, the bicycle loses too much speed and falls. To ensure this growth can be obtained various manners. That is to say to let spin the deficits, but the debt explodes. That is to say to lower the dollar. Here we are.

The fall of the green ticket is the least painful method to lead the
American economy towards better balances without risking to block it.

This policy thus has all the chances to be chosen by the future president. George W. Bush, at the time of its first mandate, did not give of clear sign that it believes in a strong dollar. John Kerry will see the good means there of supporting American industries which suffer from the imports and which are threatened of delocalizations.

A fall, but which fall? The economists of UBS estimate that the value of the dollar must drop by 20 % to 30 % so that the American trade deficit returns on a reasonable level. The euro which already gained 30 % since 2001, will have to go up then to 1,70 dollar, strongly penalizing exports European. Germany, whose weak expansion holds very of its sales abroad, would not resist it, and France then which would be touched by by-effect. To solve the American problem, the fall of the green ticket is likely to put in danger the growth in Europe. It will be there a large subject of discussions America-Europe.

G5 + CHINA

To avoid making pay Europeans, it would be necessary that the Americans agree to consume less or to save more. Or, that in the event of adoption of a strategy of fall of the dollar, this one is carried out only with regard to the Asian currencies.

These two last years, monetary authorities of China as of Japan and dollars bought refused to be able to continue to export in mass. China, as one saw higher, still test another strategy. Can the Asian countries change attitude? It will be there a large subject of America-Europe-Asia discussions.

Whether it is with Bush or Kerry, G5 + China of the year to come have all the chances to be animated.

Eric Le Boucher
ARTICLE PUBLISHED IN the EDITION OF The 31.10.04

Monk

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Posted: Nov 04, 2004 - 08:45 AM

Nice article. At this point I'd settle for any solution to the debt/deficit issue. But in the end, as long as the yuan is pinned to the dollar, those of us working in China are going to be hit the hardest, since we don't benefit from the unnaturally low prices China's goods go for on the world market when the dollar is low.

"To avoid making pay Europeans, it would be necessary that the Americans agree to consume less or to save more. Or, that in the event of adoption of a strategy of fall of the dollar, this one is carried out only with regard to the Asian currencies. "

I don't think either is likely to happen. We have a consumerist/consumption culture, and Americans don't like to be told they can't have something. This is also why the whole "Made in the USA" movement is basically dead -- people b1tch about jobs leaving but then buy the "Made in China" DVD player or tennis racket because it's 30% cheaper, meaning they can have even more stuff.

And I doubt any Asian country is going to be willing to take a hit, having just started to recover from the monetary crisis and all -- of course, except for China, which wouldn't take a hit because they have to keep the economy going to keep the populist pot from boiling over.

So I guess that means Europe's screwed, eh? At least in the manufacturing sector... but hey, you'll get super-cheap imports!

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