Thanksgiving Week's Dollar Decline

In these last few days, the US dollar has broken out on the downside of its comfortable 1.25-1.28 range against the euro where it had been for the previous five months or so.

The dollar's erosion is slow because there are indeed countervailing forces around the world: other countries have structural problems too.

We have to give due consideration to the fact that markets on Thursday and Friday were thin and also that the most recent low point for the dollar was December 2004/January 2005, reaching 1.36 vs the euro, and then it recovered somewhat, up to around 1.18.

So we'll have to see whether in December 2006/January 2007 it breaches the 1.36 level vs the euro. Beyond that is 1.46 going back to 1995. These are the significant levels. See article Erosion Of The US Dollar? (http://tinyurl.com/y98fcr).

In my view, relative productivity growth is a key driver in long-term foreign exchange rates, though little talked about.

What is more worrying this time around is that productivity growth ground to halt in the US in the third quarter. This is a sign that the potential growth rate of the US economy will be lower for years to come, on par with Europe's anemic growth rates in these past 15 years or so, not to mention Japan.

I agree with those who expect that, in view of high debt levels and historical performance, inflation/stagflation camouflauged as growth is a more likely scenario than deflation/recession, regardless of how salubrious a relatively short period of deflation/recession would be for the structure of the US economy.

But history shows that neither political leaders nor society at large have enough discipline for that; they usually need to be hit over the head.

Anyway, let's wait for at least mid-January before declaring a debt/inflation-induced dollar melt-down endgame: countervailing forces, combined with intervention - mostly
verbal, (see http://tinyurl.com/yyb8a9) -, may indeed give the dollar another year of respite, with slow, orderly erosion as we've seen in the past several years.

The Meaning Of Inflation

Inflation can be a double-edged sword, can't it?

And it has been throughout history since ruling groups have imposed a supply of money - the means of exchange, unit of account, and store of value - on societies that they govern.

Enlightened when used to help keep a society moving, producing new income, insidious when used to otherwise usurp wealth.

In the US and Europe in the last few years, consumer price inflation has been moderate, but asset-price inflation has been "through the roof".

The rest is up to you.

G20 2006 Summit – More Muddling Through

Not exactly the long called-for energy summit leading to a resolution of armed conflict, the G-20 meeting did release a communiqué (http://tinyurl.com/y3my49), one-fourth of which devoted to global energy and minerals markets.

In all fairness, the G-20 is an informal annual meeting of the finance ministers and central bankers of twenty of the world’s key countries – Canada, United States, Mexico, Brazil, Argentina, European Union, Germany, France, Italy, United Kingdom, Russia, Turkey, South Africa, Saudi Arabia, India, Indonesia, Japan, South Korea, China, and Australia – and not of the actual key “business” players around the world’s hot spots with decision-making powers to affect such a resolution.

Instead, we receive some useful information on what to expect on the global economic outlook in general, economic policy, energy policy, immigration policy, and several other issues: in short, more muddling through, onward with economic globalization.

I. Global Outlook

Along with the usual projections on economic growth rates, there are three noteworthy points.

First, finance ministers and central bankers recognize that free trade is still of fundamental importance to economic growth and globalization, protectionism needs to be avoided, and talks to extend trade must be revitalized.

Second, upward pressure on inflation continues and inflation rates in many G-20 countries will remain stable at current levels or increase, implying steady or increasing interest rates going forward.

Third, we can expect further immigration flows from developing countries with young populations to countries of early industrialization with aging populations.

II. Global Energy And Minerals Markets

In short, the path to long-term energy security for this set of policy-makers is to let price signals, i.e. free market forces, and domestic and international competition to determine investment and research in the effort to increase supplies as global demand for energy and minerals commodities is set to increase significantly over the coming decades, driven by a strong world economy, rising incomes, and ongoing industrialization and urbanization in many economies.

In this context, cooperation means domestic policy coordination to favor investment, expanding global trade, and efficient management of both private and state-owned energy production firms. Well-functioning markets, they argue, will support investment in new supply, generate efficiency and new technologies, encouraging the use of renewable and alternative energy sources, and allow knowledge and resources to flow.

Two further points to note in this regard: 1) the recent new energy law in the US is a hodgepodge of subsidies for a far-flung array of initiatives; 2) The Economist recently ran a special report (http://tinyurl.com/ydfvjp) on such initiatives and the dubiousness of subsidies to support them: take away the subsidies, and many of these initiatives are simply not viable.

The conclusion is that we are going to muddle along for the foreseeable future with a mix of conventional fossil fuels and investment in increasing their supply, amidst armed conflict or the threat of it in several regions where such supplies are abundant but probably peaking, nuclear, coal, renewable (hydroelectric, solar, wind, waste) and alternative sources, all the while hoping for technological breakthroughs, and that policy-makers are satisfied with that.

III. Demographic Change

In terms of demographic trends, countries of early industrialization and many developing countries are moving in opposite directions, so we can expect current migration trends to continue. In this context, the G-20 recommendation is to focus policy adjustment on financial markets and further aspects of labor mobility.

As mentioned in the previous post, the function of financial markets is to facilitate the movement of goods through space and time, assuming efficient energy, storage, and transportation. This also means, according to the G-20 communiqué, emphasizing to people, especially in the early industrialized countries, the need to be aware of their retirement income needs and that international policy and financial flows with respect to migrant labor remittances, pension payments, and healthcare payments must be flexible, low-cost, and efficient.

In conclusion, do not expect the new US Congress to pass a strict new immigration law, if any. Do expect a continuation of the shift in the burden of pension and health expenses from US corporations to individuals privately. At the same time, also expect inflation to continue to devalue government pension payments and healthcare payments, accompanied by a general lower quality of healthcare in both the US and Europe, on the one hand, while the citizens of developing countries start to receive some kind of pension and healthcare benefits from their governments: in short, the two sides are slowly converging towards a mediocre middle somewhere; there are simply not enough resources to go around to provide everyone with a top quality education, healthcare, and pension.

IV. Several Other Issues

The communiqué also had sections on reforming the IMF and the World Bank, advancing growth-oriented domestic economic reform within member countries, aid commitments and effectiveness, exchange of tax information, sovereign borrower/private-sector relations, and money laundering and terrorist and illicit financing. Of these, probably the most important are the exchange of tax information and money laundering and terrorist and illicit financing, for various reasons.

The Meaning Of Finance

Finance means transferring goods, ultimately, across space and time.

There is no finance without physical storage, energy, and transportation.

A financial system, then, can only go as far as an economy’s capacity for storage, its energy, and transportation.

We must be productive in this sense. Anything beyond that is inflation.

The Long Called-For Energy Summit?

Since 2003 and the debacle at the UN over how the big power groups should divvy up Iraq's oil resources, Latin & Hellas has been arguing in favor of a world energy summit to decide on the what is probably the most import issue facing the global economy in a relatively more peaceful manner.

Now that some of the countries of early industrialization may be heading into a recession in 2007, perhaps such a summit is about to take place.

The full article, "Host Says G-20 Summit To Discuss Energy Security" was released by Reuters on Saturday, 9:30 p.m. EST
(click on post title for direct link).

Here is a summary below.

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The Group of 20 meeting of finance ministers and central bankers will discuss ways to ensure energy and resource security in light of strong demand from China and India, Australian Treasurer Peter Costello said on Sunday.

Mr. Costello will host the G-20 summit in Melbourne on November 18 and 19, with finance ministers and central bankers from the world's biggest economies, including China and India, the United States, Japan and Britain.

Mr. Costello said the meeting would bring major oil producing nations Saudi Arabia and Russia together with major customers, including China and India, which are experiencing growing demand for energy and resources.

"How does the world satisfy those economies that there will be continuity of supply at realistic prices, with no need to lock up supplies, without cartel activity which would rig those international markets?", Mr. Costello told Australian television.

"If we can get an agreement on adequate supply, adequate security, proper international pricing, then I think we can actually ensure that what could otherwise become jostling and instability over resources over the next couple of decades will be taken out of the system."

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At least it may be a step in the right direction.

Warriors For Globalization

It is clear that many of those who have not been warriors for globalization, in the business sense, have missed out on the economic growth of these past fifteen or so years, in some cases causing disruption in their local circumstances.


It is equally clear that many of those who have been warriors for (or against) globalization, in the military sense, have been maimed or died.

But was it any different in other episodes of globalization in the past?

Some scholars estimate that a career Roman soldier had a 25% chance of surviving twenty years of service before being eligible for retirement when he would be rewarded with some farmland and perhaps a house.

I leave further analogies to the reader.