Wednesday 27th of april 2011 : First FED Press Conference

Easy money is not finished

The world needs a strong dollar

Most Asian Stocks Decline, Led by China; Gold Climbs to Record

April 22, 2011, Bloomberg Businessweek

Most stocks fell in Asia as Chinese shares slipped on speculation the country’s central bank may let the yuan strengthen to cool inflation. China’s currency touched a 17-year high against the dollar, gold climbed to a record and shares in Russia rose.

(stephen Kirkland)

Breaking News : S&P aims to whip Congress into debt action

A spokesperson for Standard & Poor’s said on Monday that there was a one-in-three

likelihood that the rating agency “could lower” its long-term view on US debt within two years

By Brad DeLong

Published: FT April 19 2011 09:17

July 1944 : The Bretton Woods conference

July 1944 : United Nations Monetary and Financial Conference at Bretton Woods

Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the

planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and

Development (IBRD), which today is part of the World Bank Group.

1 ounce of gold = 35 $

The exorbitant privilege to transform deficit in reserve

The offer to buy back the dollars for gold was only extended to official creditors not to the market

The « adjustable peg » was a theory more than a practice

BUT central banks did not buy gold in fear that this would precipitate the crisis

They did not revaluate either (because of exports)

Incentive to speculate

Only two ways to accumulate reserves : dollar or gold

Before 1971, the gold market is a one-way bet. No probability that the dollar price of

gold will fall.Incentive to speculate.

October 1960 : Kennedy wants to get American economy moving again

“I believe it incumbent upon the next President of the United States to get this

country moving again, to get our economy moving ahead...”

http://www.hark.com/clips/mrqxkxccpt-get-america-moving-again

To everybody, this means an expansionary

monetary policyFrom Yugoslavia to Australia, everybody buys

gold to prevent from dollar devaluation

1971: Nixon Takes US Dollar off Gold Standard

On August 15, 1971, President Nixon imposed a 90-day wage and price freeze, a 10 percent import surcharge, and, most importantly, “closed the gold window”

http://en.wikipedia.org/wiki/Nixon_Shock

Was a counterfactual scenario possible ?

More taxes = less consumptionDevaluation (higher price for gold) = more

exportation

It would have been longer to play out but remember the

TRIFFIN DILEMMA.

THE TRIFFIN DILEMMA

The global reserve currency causes trade deficit to its country (because it must

provide reserves to the rest of the world)

John Bowden Connally, Jr. (February 27, 1917 – June 15, 1993) :

The dollar : "our currency but your problem."

How long can it continue like this ?

Is the asymetric position of the US sustainable ?

Is the « informal Bretton Woods » likely to prove

durable ?

The core of the system is still the US

They issue the currency used as international reserve and have balance

of payments deficit.

The periphery has an export-led growthwith undervalued currencies.

… but the periphery has changed

It used to be Europe and Japan.

It is now a much more numerous and heterogeneous group of countries.

What has changed since the 60s ?

Asian bond funds : no European equivalent in Europe during the 60s

The US current account were positiveSavings were high and the investments abroad were bringing money back (more savings than

domestic investments)

No more capital control (= it is costly for central banks to maintain status quo)

Deregulation changes the situation : no funnelling of forced savings into capital formation in traded

goods sector

Saving rate in the USA

What makes it more dangerous for the dollar today ?

In the 60s there were monthly meeting because there was no real alternative to

the dollar.

Today : Euro, Asiatic bund, Sino-xx agreement to trade in local currencies...

The Gold Pool 8 central bank agree to control the price of gold

(1 november 1961)

1962-1965 : Gold Pool has taken all the fun out of currency speculation

BUT things begin to change in 1965

De Gaulle wants a new gold standard

Vietnam war costs more and more money

Labour wins the poll in Great Britain

1967 : Six-days war

1967 : France withdraw from Gold Pool

http://www.time.com/time/magazine/article/0,9171,840572-1,00.html

Perhaps never before had a chief of state launched such an open assault on the

monetary power of a friendly nation. Nor had anyone of such stature made so sweeping a

criticism of the international monetary system since its founding in 1944. There was Charles

de Gaulle last week proclaiming that the primacy of the dollar in international dealings was finished, calling for an eventual return to

the gold standard

Time, friday, Feb. 12, 1965

March 1968 : end of the Gold Pool

Gold Pool is not all-encompassing

A competitive fringe of countries speculating on gold market raises the cost for the Gold

Pool members

US threats to take unilateral action if banks continue to buy gold

but... everybody buys gold

Japan : another voluntary exit from a peg

A story China is studying very closely

August 1971 : after two decades of pegging at 360 yen for a $, Japan let the yen float and repegged after 18 months.

Similarities with the Chinese situation today

1955 – 1971 : 9.3% growth rate17% annual growth of export

End of the 60s : 40% gross national saving35% investment to GDP ratio (= China

today)

Elastic supply of cheap laborLabor relocation (agricultural jobs paid half

the price of industrial jobs)

What was different from nowadays China

Japan was a much richer and developed country than China today

China relies on FDI for technology transferJapan was licensing and used to block FDI

Japan had a strong banking systemchannelling funds toward industry

with artificially low rate and no bad loans

But Japan had also an undervalued currency

1949 : yen overvaluedlate 60s : undervalued

(calculation is subject to discussion but it relies on prices index, wholesale, export...)

1958 : Ludwig Erhard visits Japan and speaks in favor of yen revaluation

Finance minister Eisaku Sato : Though economy minister Erhard said that one of the causes for extremely cheap prices of Japanese goods is the level of exchange rate, the current exchange rate of 360 yen per dollar is not undervalued. If Japan revalued its exchange rate, Japanese trade industries could not cope.

Easy credit ...Bubble economy (1 millions $ a square meter in Ginza in 1989)...

In the 80s the financial deregulation broke another bedrock of the Japanese system : the strong link between banks and industrial groups.

Market capitalization jumped from 60% to 153% of GDP between 85 and 89.

… Lost decade or 失われた 20 年 , Ushinawareta Nijūnen

...

Will China face the same problem ?Jim Chanos: China = Dubai X 1000

http://www.forbes.com/2010/01/11/china-bubble-

chanos-leadership-managing-rein.html

China seems to be cooking its books. For instance, it reports that car sales are surging

while gasoline consumption is flat. Is that realistic? Or are state run Chinese companies just stock-

piling cars?

Empty city in Inner Mongolia

China’s Bad Growth BetNouriel Roubini

source : http://www.project-syndicate.org/ 2011-04-14

When net exports collapsed in 2008-2009 from 11% of GDP to 5%, China’s leader reacted by further

increasing the fixed-investment share of GDP from 42% to 47%.

The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing

loan problem.

China will suffer a hard landing.

… meanwhile the Chinese are reading

The Goldman Sachs conspiracy (Li Delin)

WILL THE DOLLAR REMAIN THE MAIN RESERVE ?

It is still largely dominant

Commodities are invoiced in dollar

Huge debt

Euro and Renminbi could be possible

reserve

In the past the world already changed its reserve-currency

1860 : England was the leading exporter and 30% of world exports were absorbed by

England

But 3 currencies were used : Mark, French Franc and Sterling (no dollar before 1914)

in the 20s : Franc, £ and $

Post WWII : for the first time a currency is the dominant reserve

This was also caused by the other countries capital regulations (liquidity is the key)

Today USA is borrowing short and lending long

Because of a better banking system US sells bonds to China and finance FDI (with longer

return)

England used to do the same when it was the bank of the world (before 1914)

A strange theory

Foreign countries (China) used as a collateral for American investments

A financial terror where debts plays the role of the gunboat of the XIXth century

The G20 must look beyond Bretton Woods II

By Robert ZoellickFT November 7 2010

A new Gold Standard ?

http://www.ft.com/cms/s/0/5bb39488-ea99-11df-b28d-00144feab49a.html#axzz14dKEeR16

Texas University Takes Cue From Kyle Bass to Hold $1 Billion in Gold Bars

Source : Bloomberg.comBy David Mildenberg and Pham-Duy Nguyen - Apr 16, 2011

China's new five-year plan shifts priority to national consumption

When export-led growth countries change their policy, the dollar will fall.

The rising value of the Chinese currency will put emphasis on local market

If China current account surplus diminishes, who is going to buy American bonds ? Who is going to save Greece ?

Greek debt yields reach 25%CBC News Posted: Apr 27, 2011

China calls for new reserve currency

By Jamil Anderlini in BeijingFT March 23 2009

To replace the current system, Mr Zhou [Xiaochuan] suggested expanding the role of

special drawing rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime

but became less relevant once that collapsed in the 1970s.

Guess Who Owns the Most U.S. Debt?