Controlled devaluation of the dollar increasingly seems like official policy

10:21a ET Saturday, January 4, 2003

Dear Friend of GATA and Gold:

If the London Times remains the mouthpiece
of the British establishment, it may not be
hard to see the column appended here as a
clue about the objective of official
Anglo-American economic policy: a controlled
devaluation of the dollar.

CAN the central banks control the devaluation
that is under way when the world figures out
what is going on and tries to get ahead of it?

Maybe and maybe not. But lest you surmise that
the gold price suppression crew is dead,
consider the chart of Friday's gold price in
New York (still posted at www.Kitco.com), which
looks exactly like the daily chart for other
recent spikes in the gold price: Suddenly
straight up for an hour or so and then
flatlined for the remainder of the trading
day, as if gold had hit the ceiling, or as if
someone had thrown a switch.

Do unmanipulated markets trade this way?

All this may give the impression of a
controlled retreat by the forces suppressing
gold, which would match very nicely what The
Times muses about below.

Note that the author is a member of The
Times' quot;Monetary Policy Committee.quot; Maybe
the newspaper has a quot;Foreign Policy Committee,quot;
a quot;Transportation Policy Committee,quot; and a
quot;Public Health Policy Committee.quot; How nice to
rule a country, just like its parliament!

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

US dollar faces year of living dangerously

By Richard Lambert
The Times of London
January 4, 2003

a href=http://www.timesonline.co.uk/article/0,,630-531381,00.htmlhttp://www.tim...

In a very uncertain financial world, there is
one thing about which most people agree: the
US dollar is overvalued, and on a downward
slope. The drumbeats have been getting louder
in the past few weeks. The price of gold has
risen sharply as investors have looked for
safer places to park their funds; the new
year forecasts from the world's currency
analysts were almost universally pessimistic
about the dollar; the gloom-and-doom
merchants have been dusting off their
sackcloth. The only real debate seems to be
about whether the currency is set for a
gentle slide, or for something more dramatic.

This time last year the dollar was
approaching the end of an extraordinary
seven-year run, during which it had climbed
by more than a third in trade-weighted terms.
Everyone in the world wanted to buy US assets
during that period, pushing up the value of
the dollar and in turn making US investment
seem even more attractive. But when the US
financial bubble burst, the dollar began to
look exposed. The exchange rate slipped
sharply in the second quarter of last year,
rallied for a few months and then started to
ease down again in the late autumn.

There are three main reasons for this
weakness. The most important is to do with
economics. America's export performance has
been deteriorating rapidly for the past four
years, with the result that it is now running
an enormous deficit on its current account.
That's no problem so long as foreign
investors are happy to finance the deficit by
buying more dollar assets. But if they decide
for whatever reason that they have had
enough, the deficit will have to shrink by
a fall in domestic demand, taking the
pressure off imports; by a fall in the
dollar, or most likely by a combination of
the two.

Another big worry is political. President
Bush has a new and untried economics team,
with John Snow at the Treasury and Stephen
Friedman as the White House's chief economics
adviser. Their every word will be scrutinised
in the next few weeks, and the big question
will be whether they are as committed to a
strong dollar as was Treasury Secretary
Robert Rubin in the Clinton era. As a matter
of fact, in today's very different economic
circumstances it would make sense for the
Administration to have a more neutral
position on the currency. But in a jumpy
marketplace it would be difficult to get that
message across without scaring the horses.

Then there is Iraq. The dollar declined for
several months back at the start of the first
Gulf War, but more than recovered as soon as
the ground operations got under way and the
scale of the allied victory became clear. The
same might happen this time round but the
moment of maximum uncertainty is probably
close at hand. What are the chances of a
dollar crash, and how much damage would one
cause? The answer is that a spectacular fall
is not the most likely outcome, but it is
certainly possible and it would be bad news
for us all. America's current account deficit
is continuing to climb despite its slower
economic growth rates, and the worry is that
international investors are now showing
themselves less willing to plug the gap.

Foreign companies are not nearly as keen on
buying US businesses as they were a couple of
years ago, and portfolio investors are much
more nervous about Wall Street. During last
year's second quarter, when accounting
scandals and profit worries were at a peak,
Europeans actually took money out of the US.
Foreign central banks, notably from Asia,
have taken up the slack by buying dollar
assets; if they were to step back, the dollar
would nosedive.

At the same time, every month of rising
deficits increases America's already very
large financial liabilities to the rest of
the world. This just cannot go on for ever.
And if the dollar is so obviously overvalued
just now, why won't the correction take place
overnight?

The answer is to be found in the sorry state
of the world's second and third biggest
economies, Japan and Germany. The US may look
a risky place to invest today. But with a bit
of luck, its economy could still grow by
upwards of 3 percent this year, which is
well beyond the reach of the other two.
International investors can see that the
dollar looks high in trade terms, but dollar
assets may continue to look relatively
attractive so long as other big economies are
so uninviting. Pessimists used to say that
the current account deficit would be
unsustainable once it passed 4 percent of
gross domestic product. Now it is at around 5
percent, and there is no iron rule that says
the figure could not go higher still.

Moreover, Japan and Germany would be in even
bigger trouble if the dollar did decline very
sharply. Both are counting on exports for
what little growth they can hope to achieve,
and the last thing they want is for their
currencies to appreciate against the dollar.
The Japanese authorities are already
grumbling that the yen is too high, and if
you want to become really gloomy you can look
up the history books for what used to be
called quot;beggar thy neighbourquot; policies of
competitive devaluation.

That's why the consensus forecasts point to a
relatively gentle decline in the dollar over
the coming months, and this would be the
ideal outcome. America's exports would in
time become more competitive, which would be
a useful new source of growth for its
economy. A gradually strengthening euro would
allow the European Central Bank to cut
interest rates, and encourage European
businesses to become more efficient. In fact,
the main problem with this scenario is that
it sounds too good to be true.

What if everyone is wrong and the dollar
actually picks up this year? President Bush
is launching his new tax package next week,
and his Treasury team will be on display
shortly afterwards. That could resolve some
of the doubts. Add to that a clear and rapid
outcome to the Iraqi conflict, and the mood
in the currency markets could improve
rapidly. Admittedly, the day of reckoning for
the dollar would simply be postponed, since
the trade imbalances would still have to be
unwound at some stage in the future. But that
would be fine by President Bush, who won't
want any distractions during the run-up to
the election campaign of 2004. And it may be
that the real test for the dollar will not
come until economies around the world finally
start to pick up steam, and suck capital back
from the US.

The dollar has fallen by roughly a sixth
against the euro in the past 12 months, and
the best bet is that it will be measurably
lower still in a couple of years' time. But
it won't move in a straight line, and there
will be some fireworks along the way.

-------------------

Richard Lambert is a member of The Times
Monetary Policy Committee.