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Original story about 20% dollar devaluation from The Business
8:50a ET Monday, September 27, 2004
Dear Friend of GATA and Gold:
The Newsweek story appended here, published
over the weekend, reiterates the likelihood that
currency exchange rates will get a lot of
discussion when the central bankers meet
this week. It also acknowledges ongoing central
bank manipulation of exchange rates and thus,
implicitly, gold: "It's not always clear where
legitimate dollar-buying ends and exchange-rate
manipulation or 'spoofing' begins."
In any case, there seems to be consensus that
the U.S. dollar is overvalued. If so, anyone
holding lots of dollars -- from central banks to
ordinary investors -- would seem foolish not to
hedge the risk of holding dollars by holding
more of something else. Something metallic,
yellow, and of timeless value without counterparty
risk, perhaps?
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
The Almighty Yuan:
Beijing inspires a new Asian mercantilism
By Stephen Glain
Newsweek
Edition of October 4, 2004
http://msnbc.msn.com/id/6100245/site/newsweek/
Old habits are hard to kick, particularly profitable ones.
The Asian practice of fixing currencies to the American
dollar at rates that boost exports is back, seven years
after it collapsed in the currency crises of 1997. A chain
of de-facto currency pegs have resurfaced, most
famously in China and Japan, but also in such countries
as South Korea, Taiwan, and India.
Alleged currency manipulation in Asia is likely to be the
800-pound dragon at the G7 and IMF meetings in
Washington this week. Rising imbalances between the
Far East and the United States, say economists, is
subverting the U.S. Federal Reserve's ability to manage
interest rates and could destabilize the global economy.
But neither the fund nor Washington have been able to
do much about it. In the last two quarters, foreign central
banks purchased dollars and U.S. securities at an
annual rate of $402 billion, up from $248 billion last year.
Asian governments accounted for 80 percent of the
foreign inflows, accelerating a trend led by
Chinese-government dollar-buying that keeps the yuan
cheap relative to the U.S. currency. That in turn obliges
the region's other export powerhouses to do the same.
"This all started as a way for Asian economies to
compete and do business with China," says Laurie
Cameron, head of global foreign exchange at JP Morgan
Private Bank in New York. "They want to export to the
U.S. but also to China, to participate in the China
explosion. It's as much a peg to the yuan as it is to the
dollar."
The return of fixed exchange rates to the Far East
comes with a few ironic twists. Before the 1997 crisis,
many Asian currencies were officially pegged to the
dollar, albeit with low reserves to back them up. In the
mid-1990s, speculators sensed those currencies were
overvalued given the region's high debt levels and began
to sell them short. That prompted Asian central banks
to drain their dollar reserves in defense of their
currencies, which only delayed the collapse.
Amid the wreckage, China resisted the urge to
depreciate the yuan to keep pace with its neighbor's
collapsing currencies and was hailed as a stabilizing
agent. Today Beijing is under fire as the vanguard of a
new generation of Asian mercantilism. And other Asian
governments are aggressively buying dollar assets --
the opposite of their tactics in 1997, but with the same
strategic end: aggressive export promotion.
After the crisis, many Asian governments lifted the
controls and import barriers they had used to limit
domestic spending, so capital could be funneled into
export companies. With many of those restrictions
lifted, often by IMF fiat, Asian governments are turning
to currency manipulation to revive the export-led growth
that led the boom of the 1970s and 1980s. "This is not
in keeping with the spirit of financial liberalization
because it makes these countries less efficient," says
Peter Morici, an economics professor at the University
of Maryland. "At some point the U.S. can no longer
absorb all these goods. Look what happened to Japan."
The IMF called on Asian central banks to end currency
devaluation last year. Flexible exchange rates, it said,
would ease Asia's dependence on exports, empower
Asian consumers, and lessen the odds for future
economic crises. Since then, Asia has ramped up
dollar-buying, and the cheap yuan is now being
attacked in the U.S. presidential election for inflating
America's near $600 billion trade deficit. Less
understood, say economists, is how Asia's appetite for
dollar assets neutralizes America's ability to manage
interest rates. While the Fed is raising overnight rates
to forestall inflation, long-term interest rates have
remained stubbornly low on Asian demand for U.S.
treasuries, which drives rates down. "The Fed may
decide overnight rates," says Gary Hufbauer, a fellow
at the Institute for International Economics in
Washington. "But when it comes to the long-term
money, China is the heavy hitter."
The central banks of Japan, China, South Korea,
Taiwan, and other Asian countries account for $1.5
trillion in official foreign-exchange reserves out of a
global total of $2.5 trillion, according to the IMF, a ratio
that is far beyond that of Asia's share of global trade
and global gross domestic product. Even India, which
until recently was so starved for liquidity that it
borrowed from Indian residents living abroad, has been
supporting the dollar against the appreciating rupee.
It's not always clear where legitimate dollar-buying
ends and exchange-rate manipulation or "spoofing"
begins. Asian central banks routinely deny they
devalue their currencies to gain a competitive
advantage and both the IMF and the U.S. Treasury
Department have effectively absolved them of spoofing
charges. The White House has in general turned
aside demands from lawmakers, unions, and the
steel and textile industries to retaliate, particularly
against China.
Washington holds a weak hand so long as it relies
on foreign funds to finance deficit spending. China
has met every entreaty on the value of the yuan --
from White House envoys, IMF delegations, and U.S.
manufacturers -- with the same response: studied
equivocation. "The Chinese have got the U.S. by the
throat," says William Barron, managing director of
Deutsche Asset Management in London. "When
China stops buying dollars, the age of cheap capital
is over." But China plans to move to a floating
currency at its own pace, with an eye to stabilizing
its own economy. So don't expect the gorilla at the
IMF table to make any sudden moves.
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