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Peter Brimelow: Is GLD as good as gold? GATA guys say no
By Steve Whitehouse
AFX News Ltd. via Forbes
Monday, June 27, 2005
http://www.forbes.com/markets/feeds/afx/2005/06/27/afx2111921.html
BASEL, Switzerland -- The Bank for International Settlements said a
further decline in the dollar is "almost inevitable" as part of the
correction of global current account imbalances.
The dollar has declined in an orderly manner so far, but mostly
against currencies that are truly free-floating, and overall it is
no lower than its average of the last 30 years, it said.
The dollar declined 22 percent between January 2002 and December
2004 but has regained some ground in recent months.
"Given how little the US trade deficit seems to have been affected
to date by dollar depreciation ... some further movement seems
almost inevitable," the BIS said in its annual report.
The BIS said the US current account deficit, which reached 6.4
percent of GDP in the first quarter, is a serious long-term problem.
"It is unprecedented for a reserve currency country to have a
current account deficit of such magnitude," it said.
And the US deficit poses serious risks.
"It could eventually lead to a disorderly decline of the dollar,
associated turmoil in other financial markets, and even recession,"
it said.
But this does not mean that such an outcome is imminent, it said.
A correction of current account imbalances has so far been impeded
by foreign exchange reserve accumulation by Asian emerging economies
in order to thwart the appreciation of their currencies against the
dollar, so greater exchange rate flexibility on their part would
help the adjustment process, the BIS said.
The Chinese yuan and Asian currencies linked to the yuan are obvious
candidates for revaluation, it said.
Greater exchange rate flexibility in China would help curb massive
capital inflows into the country and give more scope for monetary
policy to counter inflation pressures, it said.
While China is concerned that revaluation could adversely affect its
financial system and the income stream of domestic farmers, these
concerns should be dealt with through domestic policies rather than
by maintaining the yuan's peg to the dollar, it said.
On top of the current account problem, the global economy is exposed
to risks related to a series of "internal imbalances," the BIS said.
Real interest rates are close to zero, long-bond yields are
remarkably low, household savings have been declining sharply, debt
levels are at record levels and house prices in many countries have
never been higher, it said.
Any or all of these imbalances are liable to be corrected at some
stage, with consequences for global growth.
"Such an unwinding might be gradual, and possibly benign, but it
could also be rapid and disruptive," it said.
But there is probably still time to take action to avert such a
risk.
Ths BIS said deficit countries like the US need to curb spending and
allow their currencies to depreciate, while surplus countries need
higher exchange rates and more domestic spending.
Primarily, the US has to cut its fiscal deficit by trimming
expenditure and raising taxes, but it has not yet done enough on
this score, it said.
"While the administration has set a deficit reduction objective, the
specific policies required to implement this remain to be put in
place. That is a pity, since without early fiscal action, the burden
will fall more heavily on tighter monetary policy," it said.
US rate rises will be helpful in curbing consumer spending and
household borrowing, although their main purpose is to respond to
concerns about future inflation and to rising capacity utilisation
rates.
But the tightening of US monetary policy will need to be
conducted "with some delicacy," it said.
Higher rates could restrain corporate investment, and there is
considerable uncertainty about the impact of rate rises on house
prices.
There is also a risk that the tightening of monetary policy will
cause disruption in financial markets if inflation pressures mean
that rates have to rise more rapidly than currently expected, it
said.
The BIS said Europe and Japan have no room for rate increases
because of weak economic growth, but raising rates in other parts of
Asia would be easier.
China is trying to deal with overheating in its economy through
administrative measures, but higher interest rates might be a better
solution, it said.
"As in the United States, the concern in Asia must then be that an
inadequate degree of monetary tightening will lead to either
inflation or growing internal imbalances, or both," it said.
The BIS said the world economy appears to be well into the boom
phase of a cycle which started in the mid-1990s, with the upward
momentum having transferred from equities into the housing market in
recent years.
Global growth is expected to be robust again in 2005, with inflation
remaining subdued, but further rises in oil prices would weigh on
economic activity, while rises in bond yields would curtail
household spending.
And inflation could still accelerate, as a result of the significant
monetary stimulus of recent years and growing debt levels, it said.
"A continuation of steady, non-inflationary growth might seem the
most likely outcome ... however, it is by no means guaranteed," it
said.
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