[Micki]

Heather Stewart, economics correspondent
Sunday May 14, 2006
The Observer

The International Monetary Fund is in behind-the-scenes talks with the US, China and other major powers to arrange a series of top-level meetings about tackling imbalances in the global economy, as the dollar sell-off reverberates through financial markets.

Amid tumultuous trading, which sent the dollar to its lowest level in a year against the euro in late trading on Friday and gave the FTSE its worst day for three years, the IMF was working privately to exercise its new powers to bring decision-makers together.

At the IMF's Spring Meetings last month, its managing director, Rodrigo de Rato, was handed new responsibilities to carry out 'multilateral surveillance', assembling groups of relevant countries to discuss critical issues in the global economy. With the long-predicted dollar bear market sending ripples throughout the world, the IMF is keen to use its powers as soon as possible.

Analysts believe the weakening of the dollar is the beginning of a long-awaited readjustment in the global economy. After the Federal Reserve appeared to hint last week that it could pause in its series of interest rate rises, attention in the markets switched to the weaknesses of the US economy.

David Bloom, currency strategist at HSBC, described the switch of focus as a 'regime change'. 'I'm saying don't use the philosophical methodology you used last year: chuck it away. The market has wholesale changed the way it looks at the world,' he said, predicting that the euro could rise to $1.40 over the next 12 months, from its current level close to $1.29.

Few analysts expect IMF discussions to result in a concerted deal on stemming the dollar sell-off; but governments and central banks will want to avoid a crisis.

'We are in meltdown mode,' said David Brown, chief European economist at Bear Stearns. 'It's all being whipped up into a bit of a selling frenzy. The dollar has a massive portfolio of negatives against it: it's the long-term problems of the trade deficit, and the government's budget deficit.'

Bloom warned that 'phase two' of a sell-off would cause turmoil in the equity markets, as on Friday, when both the Dow Jones and FTSE saw sharp losses. 'I'm expecting an increase in volatility and uncertainty across the board,' he said.

Brown added that the dollar's woes were likely to be exacerbated by central banks shifting their reserves towards other currencies, including the euro. 'Asian central banks have been buying fistfuls of dollars as the flipside of their massive current account surpluses. They're long dollars.'

He added that with the US current account deficit with the rest of the world worth 7 per cent of its GDP in 2005, the White House and the Federal Reserve would probably be happy to watch the dollar decline. 'I don't think Washington's going to be concerned,' he said.

[DantesPeak]

The G-8 wants a lower US dollar, so this is an attempt to manage the dollar down without a crash.

Under certain conditions, there is nothing they can do to stop a dollar meltdown. But being that the US has significant borrowig ability from the IMF which can be used in a crisis, the dollar could be eased lower if there were no new military conflicts.

The weekend devaluation of the dollar vs. Kuwauit and SA (albeit minor ones) are only the beginning of OPEC joining the long, ongoing trend of dollar devaluation.

[shortonoil]

.

$15 trillion in US issued bonds are now held by foreign interests. When the dollar hits $.80 there is going to be one very big race for the fire escape!


.

[lutherquick]

Maybe the IMF could ask Russia for help...
Maybe the World Bank could ask Russia for help...
Maybe Nato should ask Russia for help...

[Micki]

OK lutherquick, we know now that you love mother russia.
I don't think they should ask anyone for help. They created the mess themselves and obviously the only way to learn is to get hurt.

[grabby]

Can anyone tellus WHY the people in charge would WANT the dolar to crash? that sounds not good to me.
Highest deficit in history, cutting taxes, each year sounds like a planned crash to me.

Its like a person with 5 credit card s topped out goes to see a counselor and after the meeting he gets another credit card to celebrate.

any theories would be appreciated, in how this could help the peak oil crisis.

Is it a low dollar will prevnet others from cashing out?
it will prevent massive sales of dollars? who knows about economics?

thanks.

[Micki]

Well, they don't want it to crash. Just to go down...a bit.
As long as the US$ is strong, interest rates are kept down and people keep buying imported stuff, further increasing trade deficits.
They need to address issues with:
Account deficits, trade deficits, low savings etc.

It is a careful balance game (not likely to work without a fall and and serious headache.)
The risk as you may know is the bond market collapsing, gold/silver taking off, need to pump more liquidity into the system => hyper inflation.

The party is OVER for US. The question is just if it will be inflation, deflation or stagflation. Most likely the last as it "looks best in the books".

[emersonbiggins]

The best most Americans can hope for at this point is that massive hyperinflation will allow them to pay off their 30-year fixed mortgages (on mostly worthless houses, I might add) 15 years early. This assumes, of course, that wages will inflate accordingly (not a given), that there will continue to be near full employment (are you kidding?), and the prices of other goods do not inflate at rates out of line with wage increases (definitely not a given).

[jdumars]

Grabby, devalued dollar = devalued debt. The dollars I owe you today turn into 90 cents I owe you tomorrow.

LQ, everyone can complain about your espousal of love for Russia, but I find it endearing.

[Colorado-Valley]

I wonder if the IMF could do something irritating like freeze the price of gold to protect the dollar?

[Carrie]

More fun. Looks like the chickens are finally coming home to roost...
$this->bbcode_second_pass_quote('', 'G')lobal markets are bracing for turmoil today after an ominous slide in the US dollar and a slump in equity and bond prices late last week sent tremors through the global financial system, evoking memories of the 1987 crash...

Analysts said there were now clear signs that monetary tightening by the world's central banks was starting to crimp growth. Lombard Street Research warned the US was now heading into outright recession, with China also facing a hard landing...

It raised the risk of "an impending financial crisis" caused by excess credit and leverage across the global economy. The group advised investors to liquidate stocks and move into cash yen until the storm has blown over.

[Micki]

How would a freeze of gold price be done practically?
A lot of nations would have to agree to this and some lawchanges would have to be made to prevent privately owned exchanges from allowing market prices.

Another reason this is not likely is that fiat currency and particularly US$ wouldn 't be any more attractive just because gold price was frozen. Investments would just move on the silver, palladium, platinum etc. All metals would have to freeze the prices.

The only way to protect the dollar is to make it attractive again.
i.e. restore faith in the governments practising fiscal diciplin etc.
Don't hold your breath....

[grabby]

ah more interesting happenings:
Dollar teetering(same article)
Did you notice that they said OMINOUS and 1987 in the same article?
______

Keynesian economics was disproven in the 70's and likely we will follow monetaristic development with hyperinflation. (wikipedia is great)

also hyperinflation stagflatin is most likely according to definitions: I would guess. (from wikipedia)


Stagflation is a term in macroeconomics used to describe a period characteristic of high inflation combined with economic stagnation, unemployment, or economic recession.

Stagflation is thought to occur when there is an adverse shock (a sudden increase, say in the price of oil) in a country's aggregate supply curve. The effects of rising inflation and unemployment are especially hard to counteract for the central bank. The bank has one of two choices to make, each with negative outcomes. First, the bank can choose to pursue a loose money policy to stimulate the economy and create jobs by increasing the money supply (by lowering interest rates) and exacerbate the inflation problem further. Or second, pursue a tight money policy (by increasing interest rates) to try and rein in inflation at the cost of perhaps increasing unemployment further.

In the 1960s it was thought that the Phillips curve, which was associated with Keynesian economics suggested that stagflation is impossible because high unemployment lowers demand for goods and services which lowers prices. This results in low or no inflation. However, in the 1970s and 1980s, when presented with actual stagflation, it was realized that the relationship between inflation and employment levels was not a constant, but could be shifted, and that the Phillips relationship was better seen through payroll surveys (Current Employment Statistics) of employment rather than household surveys (Current Population Survey) ([1]).

By contrast, quantity theories of inflation, such as monetarism, argue that inflation is due to the money supply rather than demand and predict that inflation can occur with high unemployment if the government increases the money supply in a period of rising prices.

Stagflation occurred in the economies of the United Kingdom in the 1960s and 1970s and the United States in the Nixon administration of the early 1970s as reported by various news and financial sites. The difficulty in fitting its existence within a Keynesian framework led to a greater acceptance of monetarist theories in the 1970s and 1980s. The pendulum has, to some extent, swung back in the other direction as monetarism had increasing difficulty predicting the demand for money and the long period of low inflation and high employment of the 1990s - a kind of reverse of stagflation.

As of 2004 and 2005, global stagflation may be making a comeback with the price of oil well over $50 a barrel, the US government slowly increasing interest rates, and employment rates stagnant. Monetarists and Keynesian economics continue to have difficulty explaining the phenomena.

Supply-side economics emerged as a response to US stagflation in the 1970s. It largely attributed inflation to the ending of the Bretton Woods system in 1971 and the lack of a specific price reference in the subsequent monetary policies (Keynesian and Monetarism). As a response most governments today compile consumer price indexes as part of their monetary policy.

Supply-side economics asserts that the contraction component of stagflation was caused by the inflation induced rise in real tax rates (see bracket creep). In addition certain states in the USA had laws against nominal interest rates being above a certain level and in the midst of inflation this forced real interest rates to be negative. In some places this caused a collapse in finance for business.

The coinage of the term, which is a portmanteau of stagnation and inflation, has been claimed for the UK Chancellor of the Exchequer Iain Macleod who died in 1970.

[grabby]

My grandpa remembers the hungary event:
Rates of inflation of several hundred percent per month are often seen. Extreme examples include Germany in the early 1920s when the rate of inflation hit 3.25 × 106 percent per month (prices double every 49 hours) and Greece during its occupation by German troops (1941-1944) with 8.55 × 109 percent per month (prices double every 28 hours). The most severe known incident of inflation was in Hungary after the end of World War II at 4.19 × 1016 percent per month (prices double every 15 hours). More recently, Yugoslavia between 1 October 1993 and 24 January 1994 with 5 × 1015 percent during this period.

they actually took a sack of money to buy bread and walked at night before the prices doubled, true story.

As noted, in countries experiencing hyperinflation, the central bank often prints money in larger and larger denominations as the smaller denomination notes become worthless. This can result in the production of some interesting banknotes, including those denominated in amounts of 1,000,000,000 or more.

By late 1923, the Weimar Republic of Germany was issuing fifty-million-mark banknotes and postage stamps with a face value of fifty billion marks. The highest value banknote issued by the Weimar government's Reichsbank had a face value of 100 billion marks (100,000,000,000,000) {100 Trillion US/UK}. [1]. One of the firms printing these notes submitted an invoice for the work to the Reichsbank for 32,776,899,763,734,490,417.05 (3.28×1019, or 33 quintillion) marks.
The largest denomination banknote ever officially issued for circulation was in 1946 by the Hungarian National Bank for the amount of 100 quintillion pengő (100,000,000,000,000,000,000, or 1020). image (There was even a banknote worth 10 times more, i.e. 1021 pengő, printed, but not issued image.) The Post-WWII hyperinflation of Hungary holds the record for the most extreme monthly inflation rate ever — 41,900,000,000,000,000% (4.19 × 1016%) for July, 1946, amounting to prices doubling every fifteen hours.
One way to avoid the use of large numbers is by declaring a new unit of currency (so, instead of 10,000,000,000 Dollars, a bank might set 1 new dollar = 1,000,000,000 old dollars, so the new note would read "10 new dollars".) While this does not lessen actual value of a currency, it is called revaluation and also happens over time in countries with standard inflation levels. During hyperinflation, currency inflation happens so quickly that bills reach large numbers before revaluation.

[grabby]

The trick to surviving hyperinflation is to spend your money before it devalues, the same day.If the US just prints 1000 and 10,000 dollar bills, effectively all the floating dollars out there become worthless and all the counterfeited dollars are worthless.
i get it, thanks for the answer there.

Yes yes, the on ly way to survive the multiple billions of dollars coming back in exchange for euros is hyperinflation. by an order of 3 magnitudes then the extra dollars become essentially nothing.

[grabby]

And here is the icing on the cake!
Now I understand why they say inflation is 4 % (right!)
when our same dollar buys half as much gas as two years ago:

Governments will often try to disguise the true rate of inflation through a variety of techniques. These can include the following:

Outright lying as to official statistics such as money supply, inflation or reserves.
Suppression of publication of money supply statistics, or inflation indices.
Price and wage controls.
Forced savings schemes, designed to suck up excess liquidity. These savings schemes may be described as pensions schemes, emergency funds, war funds, or similar.
Adjusting the components of the Consumer Price Index, to remove those items whose prices are rising the fastest.


M3 was removed, think about that.

Yes I am sure hyperinflation is the way of the future.
Trading dollars for euros might be a good idea.