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Yikes! A big mining company wakes up as Newmont opposes IMF gold sale plan
By John M. Berry
Bloomberg News Service
Wednesday, February 9, 2005
Federal Reserve Chairman Alan Greenspan, speaking in London last
week, put the best face he could on the outlook for the burgeoning
U.S. current account deficit.
Currency markets, perhaps misled by the seemingly hopeful tone of
Greenspan's remarks, responded by bidding up the value of the
dollar. They should have listened more closely to all his carefully
worded caveats and conditional phrases.
Perhaps the Fed chairman was wary about triggering another selloff
of the dollar similar to that which followed his speech last
November. His statements then were interpreted by some market
participants as an effort to talk down the dollar to aid in reducing
the current account deficit.
Meanwhile, at a conference at the San Francisco Federal Reserve Bank
the same day as his London speech, numerous economists predicted
that the current account deficit is likely to worsen until foreign
investors become unwilling to finance it.
For example, economists Nouriel Roubini of the Stern School of
Business at New York University and Brad Setser of University
College, Oxford, argued, "The U.S. is currently financing itself by
selling low-yielding dollar debt which offers foreign investors
little protection against a future fall in the dollar.
"Yet the United States' large trade deficit and rapidly rising
external debt to GDP ratio imply that a large future fall in the
dollar will be needed to reduce the U.S. trade deficit to more
sustainable levels," Roubini and Setser said. Eventually the
prospect of such losses will cause investors to shy away from dollar
assets, they argued.
In his Feb. 4 speech, Greenspan ticked off several major reasons why
the U.S trade deficit isn't likely to shrink any time soon. His
suggestions regarding why the trade and current account balances
might improve were all highly problematic.
The first negative, a very big one, was the fact that U.S. imports
are so much greater than exports that "exports must grow half again
as quickly as imports just to keep the trade deficit from widening --
a benchmark that has yet to be met," Greenspan said.
In the first 11 months of last year, imports totaled $1.6 trillion,
65 percent more than exports of $1.04 trillion. Exports rose 12
percent, compared with the same period in 2003, and the trade
deficit would have stabilized if the increase in imports could have
been held to only 8 percent. In reality, imports jumped by 16
A second negative he cited is the U.S. tendency to import more than
its trading partners do when their respective growth rates are the
same. On top of that, of course, is the fact that the U.S. economy
lately has been growing much faster than its industrial nation
partners, he said.
A third negative from Greenspan was that the surge in world oil
prices has also helped deepen the trade deficit.
So what seemed upbeat in the speech?
Well, the selling prices of European exports to this country have
gone up hardly at all, compared with the big rise in the value of
the euro against the dollar. That's because European exporters have
been willing to see their profit margins shrink rather than raise
their prices and lose market share in the United States, though that
may be coming to an end.
"We may be approaching a point, if we are not already there, at
which exporters to the United States, should the dollar decline
further, would no longer choose to absorb a further reduction in
profit margins," the Fed chairman said.
Note the "may be." And note the further cautionary
sentence, "Increases in import prices lower the quantity of imports
but leave the resulting value of imports uncertain."
That is, even if the real value of imports were to fall, their
nominal values might not. If the nominal trade deficit did not fall,
the need for foreign financing would not either.
In the case of Europe, which was the focus of this part of
Greenspan's speech, his point could be moot because profit margins
of exports may be expanding again. Late yesterday, the value of the
euro had dropped to $1.2767, about 6.4 percent from its peak of
$1.3537 on Dec. 30. The Fed's raising its target for the overnight
rate by a quarter-percentage point to 2.5 percent last week also
lent support to the dollar, of course.
As positive developments, Greenspan also mentioned the possibility
that the federal budget deficit may be about to decline and that
household saving may turn up again as the huge wave of home mortgage
refinancing begins to ebb.
Actually, any noticeable reduction in the federal budget deficit
appears to be a remote possibility for either fiscal 2005, which
ends Sept. 30, or fiscal 2006, given the negative reaction in
Congress to many of the spending cuts proposed this week by
President George W. Bush in his 2006 budget.
Certainly equity extraction by homeowners when they have refinanced
mortgages to take advantage of lower interest rates has given
households more cash to spend. And since that cash, the result of
capital gains or past payments to mortgage principal rather than
part of current income, isn't part of current income, the spending
reduces saving as a share of disposable personal income.
The implication of Greenspan's analysis on this point is that such
spending will fall as refinancing ebbs. He doesn't venture to
suggest by how much.
The whole speech stresses the large number of uncertainties in any
analysis regarding trade and current account deficits.
"The interaction of a wide range of economic forces, which adjust at
national borders to create what we call the current account balance,
has proved difficult to predict with any precision, primarily
because of the difficulty of forecasting exchange rates," he
said. "These same forces have lessened our ability to anticipate the
consequences of a buildup of either a surplus or a deficit."
"Numerous issues that have arisen with respect to the adjustment of
the U.S. current account remain unresolved," Greenspan
concluded. "One is the effect of Asian official purchases of dollars
in support of their currencies. Such intervention may be supporting
the dollar and U.S. Treasury bond prices somewhat, but the effect is
difficult to pin down."
Pin it down or not, Chinese authorities have shown no willingness to
stop interventions to keep their currency tightly pegged to the
Over the weekend, Zhou Xiaochuan, governor of the People's Bank of
China, said in Hong Kong, "We are doing the preparation work to
reform our currency regime. Of course the preparation work is
subject to evaluation and the right time."
That "right time" isn't likely to come this year, and maybe not in
2006 either. In any event, it's not going to help reduce the U.S.
trade or current account deficit any time soon.
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