Print Any Amount of Money


The following quote from an investment strategist in today's FT may bear thinking about:

"The euro is strengthening because the US seems prepared to print any amount of money to avert deflation whereas the European Central Bank seems unwilling to do anything," said Kit Juckes, chief strategist at Royal Bank of Scotland financial markets. Despite the strength of the euro, the majority of economists expect the European Central Bank to keep rates on hold at today's meeting.

Now the interesting thing is the logic here. People are buying euros because the US "seems prepared to buy any amount of money". So why are they prepared to spend any amount of money, to have a big party, to fight more wars? No, silly, to fight deflation. And is this a good thing to do, I mean the Europeans don't seem worried about it? No, no, it's a good thing to do, it's just that the Europeans don't take the problem seriously enough, they haven't learnt the 'lessons from Japan', they aren't acting agressively, they're busy fighting last years problem, inflation. So if the US avoids deflation, will that be good for the dollar? Oh, yes, definitely yes, the economy will grow, earnings will grow, consumption will grow, there will be more jobs, yes definately a dollar plus this. And the euro, if the ECB's appeasmanet policy with the deflation menace continues, will this be euro positive. Well............

I think the important thing here is to distinguish between the short and the medium term. Short-term people are buying euros, and European bonds, not principally for the interest rate differential, but because of the US policy of lowering the dollar in relation to the euro, and because this policy convinces them that the dollar will have to fall, and this adds to the momentum. At the same time the absence of any evident willingness to resist from Frankfurt and Brussels only encourages this process. But once we look out to the medium term (say 18 months to two years) process can only unwind. It can only unwind since the relative economic strengths of the two regions can only change in the direction of US positive. The only serious 'runner' as an argument against this is Steven Roach's forlorn hope that the pressure will force reform on Europe and Japan. To this I have only to things to say. Firstly, even were this argument a good one, things can only get worse before they get better. The 'remedies' being proposed - solving the bad-loan problem in Japan, and cutting back the social security system in Germany - ar not going to be consumption and investment positive in either case. An secondly, the argument is ill founded. If the underlying problem is a demographic transition, then all the currency pressure in the world won't get to the heart of the matter. For that we need 'unconventional tools' of the institutional kind: like - eg - immigration.

So why will the dollar continue it's rise short term. Now here things get really interesting. Remember all those silly 'conspiracy' theories about the war and petro dollars. Well, that's what they were 'silly'. But if we step back and thing about things a little, the war has had an impact here. The 'battle of the titans' between the central bankers is very much a no-contest one these days. If the US wants the dollar down, the dollar will come down. This is very different from, say, the late 80's. Now why does everyone imagine the US can get its way here (and thus why do the markets act on that supposition)? Well they have just won a war haven't they? Everyone is talking about the monopolar world, the pax Americana, now aren't they? So what self-respecting global super power, in the moment of its 'supreme' power (and just before, incidentally, its rapidly growing young rival, China, enters stage left to confuse the picture) would allow itself to be pushed around on a 'mere detail' like currency policy. So this is all about credibility and enforcement. The current US strength is undeniable, and this is the trump card. Now, what was the war about? I really have no idea: I think only hisory will tell us, and maybe not even then. But the consequences are plain to see. Was this a policy objective. I doubt it, even I don't think they have such a good grasp of the economic realities of things in the White House. Remember, you read it first in Bonobo Land.

The euro on Wednesday rose to its highest level against the pound since the European currency was launched in January 1999, adding to the strains on the Continent's exporters and intensifying pressure on the European Central Bank to cut interest rates. The move - which took the euro to £0.714 - reflected broad strength in Europe's currency, as global investors warmed to the appeal of European bonds. Although the euro eased slightly against the dollar yesterday, it has risen by 4 per cent over the past 2 weeks. Indications on Tuesday that the Federal Reserve may be prepared to ease monetary policy further to stave off the risk of falling prices have further increased investors' appetite for the euro."The euro is strengthening because the US seems prepared to print any amount of money to avert deflation whereas the European Central Bank seems unwilling to do anything," said Kit Juckes, chief strategist at Royal Bank of Scotland financial markets. Despite the strength of the euro, the majority of economists expect the European Central Bank to keep rates on hold at today's meeting.


The ECB has long been criticised for its failure to respond quickly to deteriorating economic growth in the eurozone. But economists said the ECB's inflation fighting zeal now made the euro particularly attractive. "We are back in a world where cross-border bond flows are larger than equity flows," said Avinash Persaud, head of global research at State Street, the Boston-based investment bank. "Two years ago the ECB was being criticised for reluctance to cut rates and now it is being rewarded for the same behaviour." Analysts said that many European companies had been taken by surprise by the speed of the euro's rise and had not yet done enough to insulate themselves from currency strength.The strength of the euro may be given added impetus from European exporters seeking to hedge themselves against a further appreciation of the currency. Since this usually involves buying the euro forward, it should assist the euro's rise. Volkswagen AG said yesterday that its profits had tumbled by more than two-thirds in the first quarter, dented by a weak dollar and spending on new models.
Source: Financial Times
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