Wednesday, December 29, 2004

Bue Kismus

Hope that you and your's had a wonderful holiday season. Obviously I haven't posted in a long while, primarily due to the holidays.

We had a really wonderful week for Christmas - we even had a snow while in Dallas on Wednesday that gave us more of a seasonal feel. And Noah received so many wonderful toys and books and clothes. We've been packing up loads of older stuff to take down to goodwill to make room.

One small anecdote from our Christmas season. On Dec. 17th Shana had to go up to Dallas, so Noah and I had a boys weekend together. That Friday night, I decided to take him up to Hermann Park to see the Holiday Festival of Lights display. On our way in I had the Christmas music station on, and while we were parking, Elvis' Blue Christmas was playing. When I got Noah out of the car and he and I were walking up to the park Noah was singing/shouting over and over:

Bu-bu-bue Kismus

He really couldn't say blue or Christmas...but it is one of my best memories of Christmas 2004!!!

Thursday, December 16, 2004

Barnes Foundation on the Move

Judge authorizes major art collection move to downtown Philadelphia
In a ruling much anticipated by members of the philanthropic community across the United States, a Pennsylvania court has ruled that the private art collection owned by the Barnes Foundation - said by some to the most valuable in the country worth somewhere between $6.5 and $30 billion - may be moved from its current home in suburban Merion, PA to a new location in downtown Philadelphia. Albert Barnes, who died in 1951, had specified that his collection was to remain in Merion, and was to be displayed in a particular fashion, but the court essentially overruled his intentions in the name of preserving the Foundation and the integrity of the collection over the long term. In a press release the Foundations' Board of Trustees expressed "great excitement" over the ruling, which was also applauded by Pennsylvania governor Ed Rendell. A group of Barnes Foundation art students who had sought to block the move may yet appeal. The President of the Foundation Board offers his perspective on the move and the circumstances of the Foundation here [PDF]. A 2002 summary of the Foundation's original petition to move is online here. The New York Times has more.

This Times story (from the International Herald Tribune) is really interesting reading to get some of the back story behind this move:

"Barnes would never have imagined the constraints the foundation is currently facing." He had described the foundation as a place for "plain people, that is men and women who gain their livelihood by daily toil," she said. By moving the collection from an affluent suburb to downtown Philadelphia, she said, more of those "plain people" will be able to enjoy the art.

Tuesday, December 07, 2004

What Happened to the Dollar? II

More today with the print edition of the Economist going on-line:

The Disappearing Dollar
Many American policymakers talk as though it is better to rely entirely on a falling dollar to solve, somehow, all their problems. Conceivably, it could happen—but such a one-sided remedy would most likely be far more painful than they imagine. America's challenge is not just to reduce its current-account deficit to a level which foreigners are happy to finance by buying more dollar assets, but also to persuade existing foreign creditors to hang on to their vast stock of dollar assets, estimated at almost $11 trillion. A fall in the dollar sufficient to close the current-account deficit might destroy its safe-haven status. If the dollar falls by another 30%, as some predict, it would amount to the biggest default in history: not a conventional default on debt service, but default by stealth, wiping trillions off the value of foreigners' dollar assets.
The dollar's loss of reserve-currency status would lead America's creditors to start cashing those cheques—and what an awful lot of cheques there are to cash. As that process gathered pace, the dollar could tumble further and further. American bond yields (long-term interest rates) would soar, quite likely causing a deep recession. Americans who favour a weak dollar should be careful what they wish for. Cutting the budget deficit looks cheap at the price.

The Passing of the Buck?
Mr Greenspan may not be the only central banker to have become bearish on the dollar. Markets have been rattled by concerns that foreign central banks might reduce their holdings of American Treasury bonds. Last week, officials at the central banks of both Russia and Indonesia said that their banks were considering reducing the share of dollars in their reserves. Even more alarming were reports that China's central bank, the second-biggest holder (after Japan) of foreign-exchange reserves, may have trimmed its purchases of American Treasury bonds.
The current-account deficit is now being financed by foreign central banks and short-term money. In the year to mid-2004, foreign central banks financed as much as three-fifths of America's deficit. The recent purchase of reserves by central banks is unprecedented. Global foreign-exchange reserves (65%, remember, are denominated in dollars) have risen by $1 trillion in just 18 months. The previous addition of $1 trillion to official reserves took a decade. These purchases of dollars have nothing to do with the prospective returns in America, but are aimed at holding down the currencies of the purchasing countries.
The dollar did indeed fall sharply in the late 1980s, but with few ill effects on the economy. So why worry more now? One good reason is that the current-account deficit, currently running at close to 6% of GDP, is almost twice as big as at its peak in the late 1980s, and on current policies it will keep widening. Second, in the 1980s America was still a net foreign creditor. Today it has net foreign liabilities and these are expected to reach $3.3 trillion, or 28% of GDP, by the end of 2004.
In any case, the current-account deficit cannot be corrected by a fall in the dollar alone: domestic saving also needs to rise. The best way would be for the government to cut its budget deficit. That would reduce America's need to borrow from abroad, and so mitigate the fall in the dollar and rise in bond yields that will otherwise be demanded by investors. If combined with stronger growth abroad, then the current-account deficit could slowly shrink. America's growth would be depressed by tax increases or spending cuts, but there would be no need for recession. If, on the other hand, the government fails to cut its budget deficit, the dollar will fall more sharply and bond yields will rise. America's housing bubble might then burst and consumer spending would certainly slow sharply.

Exchange rates against the Dollar

These are not positive signs. It's a good thing that our government is focused on tackling these difficult problems...oh, wait...

Monday, December 06, 2004

What Happened to the Dollar?

American monetary policy has been getting a lot of mainstream press of late due to the falling dollar. This is unusal, because monetary policy is geneally not something that the average 'current events follower' would care about. But that seems to have changed a bit of late. Now, I'm not an economist - nor did I stay in a Holiday Inn Express last night - but I have been doing some reading of late due to the increasing oil prices and decreasing dollar, and what I read is not exactly encouraging.

Let's start with the following articles:
The Dollar's Demise
It does not help when the chairman of your central bank, Alan Greenspan, ..., has said the day before that the dollar seems likely to fall: “Given the size of the current-account deficit, a diminished appetite for adding to dollar balances must occur at some point,” were his exact words. The foreign-exchange market immediately decided that it was sated, and the dollar fell to another record low against the euro.
At the heart of the central banks’ calculations is a trade-off: intervening to keep your currency down can be costly, but it is good for exports. Though the costs of intervention are hard to quantify, they are potentially big. Because the domestic money supply is expanded—those dollars must be paid for with something—it can cause inflation (though this can be neutralised through “sterilisation”, ie, bond sales). But the big potential cost is in amassing a huge stash of dollars with precious little exit strategy. Quite simply, Asian central banks now own too many of them to exit en masse, for their exit would cause the dollar to crash and American interest rates to soar, which would cause huge losses on their holdings of Treasuries.
And what will then happen to the dollar? It is hard to imagine its hegemony remaining unchallenged when so many will have lost so much. And doubly so given that America has abused the dollar’s reserve-currency role so egregiously that its finances now look more like those of a banana republic than an economic superpower.

Folks - that's The Economist, as reputable and high-end as objective media comes. And they used a term like 'banana republic'.

Economic `Armageddon' Predicted
Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish. But you should hear what he's saying in private. Roach met select groups of fund managers downtown last week, including a group at Fidelity. His prediction: America has no better than a 10 percent chance of avoiding economic ``armageddon.''
In a nutshell, Roach's argument is that America's record trade deficit means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates further and faster than he wants. The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded. Less a case of ``Armageddon,'' maybe, than of a ``Perfect Storm.'' To finance its current account deficit with the rest of the world, he said, America has to import $2.6 billion in cash. Every working day. That is an amazing 80 percent of the entire world's net savings. Sustainable? Hardly.

Yes, that's the chief economist at Morgan Stanley - long time bastion of American capitalism.

Being John Snow
The market scoffed at Snow. As he spoke, the dollar plunged to a new record low against the euro. Snow's performance worsened during question time. When an audience member had the temerity to ask why Snow persisted in discussing the strong dollar policy while the greenback was plummeting, he simply responded "because it's our policy." Challenged again, he reiterated: "The policy is the policy."

Snow is the Treasury Secretary.

Economic Crisis a Question of When, Not If
"So if you ask the question do we look like Argentina, the answer is a whole lot more than anyone is quite willing to admit at this point. We've become a banana republic."

Krugman is an Professor of Economics at Princeton.

Wow - the falling dollar looks to hold a lot of problems. My understanding is that there is two general schools of thought about the falling $:
1. It is good for the economy in the short term - because a weak $ and stronger foreign currencies mean that our trade deficit goes down. Suddenly, foreign products are more expensive, domestic products are cheaper which means that, on whole, we import less and export more. Because of the $'s weakness, Europe and Asia want to buy our products, not sell their products to us in $. What does that mean - well it could mean lower trade deficits, more exports, and more jobs here in the states.
2. It is bad for the economy, period - because a weak $ means higher inflation (because there are not as many cheap, foreign products in the market). Higher inflation means either prices are going up across the board, or the Fed has to raise intrest rates to control inflation - which means that debt becomes more and more expensive - which kills US households because, in general, we live in so much debt, and kills US lendors due to the potential of more defaults due to a sluggish economy paired with expensive debt.

An overriding concern in the Good/Bad debate is that the $ is propped up by so much foreign investment. As one of the articles pointed out - 2.6 billion per DAY. That's an unbelieveable rate. What happens if China decides to stop buying US dollars or US Treasuries? Or - worse - start selling. Of coure, the counter argument is that they can't. Europe and especially Asia has so much invested in the US that to see the dollar tank or Treasuries tank would mean huge losses for them. So they hold on, or buy more...but at what point does the United States become beholden to those foreign investors?
Maybe now? "One China" Policy Stabilizes Asia-Pacific Region, Powell Says

This is pretty scary stuff overall. There are so many variables - but a weak dollar presents a MYRIAD of long-term problems. These are real issues that are going to have to be addressed sooner or later. Unfortunately, our short-term driven "leaders" (I call them that only for lack of a better word) refuse to take the bold steps it takes to actually improve the fundamentals affecting our monetary policy. (I direct you back to my 8:42am post of October 18, 2004 - Fiscal Gap Estimated as high as $72 Trillion.) Until then - we creep every closer to the brink of an economic disaster, and the only way to avoid it is allow foreign investors to prop up the US dollar - which presents it's own frightening questions.