http://nationmultimedia.com/2008/04/18/headlines/headlines_30070965.php
Full-blown US balance of payments crisis also looms: re****t
Published on April 18, 2008
The Nation
The US is experiencing a breakdown of the dollar system that is
similar to the 1971 breakdown of the Bretton Woods system of
international monetary management, says an authoritative US financial
re****t.
"The breakdown of the US-dollar system has gone from slow to moderate
in pace, and there is a significant risk of an acceleration in the
coming months," said the re****t, which was released earlier this
month.
With extreme provisions of liquidity, investors are now extremely
bearish for the dollar, which still has ample room to fall further.
"While the global nature of financial markets means that financial
problems are affecting every major developed economy, the US consumer
is at the centre of this current crisis," it said.
"The change from having extremely easy access to credit to almost none
has been most extreme in the US. All the entities that rely on the US
consumer, from smaller US businesses to US commercial real estate to
municipalities, are under significant strain. In aggregate, the amount
of US-dollar-denominated debt that is trading at historically high
spreads is huge, and it is likely that the Fed (and the US government)
will have a lot more heavy lifting to do to keep the financial system
and the economy from a severe contraction.
"The implications for the balance of payments are very negative as
well, and the US is at the edge of a full-blown balance-of-payments
crisis."
Despite the magnitude of the financial crisis, the US faces the
daunting prospect of attracting foreign capital with its economy
contracting.
Last year, foreign and sovereign funds were quick to snap up
distressed US assets at bargain value, but they may have moved in too
quickly.
"Ultimately, the US balance-of-payments situation means that either a
combination of a deep contraction in US consumption and a much larger
decline in the dollar will occur or American households will keep
going deeper into debt. But American households can't keep going into
debt, because they can't handle the debts they [already] have, and
lenders don't want to continue to aggressively lend to them," the
re****t said.
It concluded that either an intolerable economic contraction or a deep
decline in the dollar would have to occur and speculated that the
economic contraction could be 6-8 per cent. The dollar's decline would
have to be mostly against the currencies of emerging markets.
The re****t said the gap in incomes between workers in the US (and
other mature industrialised countries) and those in emerging
countries, now about 15 to 1, would have to narrow.
The nominal value of the dollar has declined about 27 per cent since
2002, and those who save their money in dollars have lost their
savings.
"It is not hard to question the US dollar as a [means of storing]
wealth when you have lost 25 per cent or more of that wealth in as
little as six years," it said.
An implication of the US dollar breakdown is that there are
op****tunities in emerging market currencies. Thailand and other
emerging-market countries have been maintaining relatively weak
currencies in order to boost ex****t competitiveness. But the US
conditions are forcing these countries to readjust their currencies
toward the upside.
As for the baht, the Bank of Thailand has been intervening in the
foreign-exchange market to keep the nominal effective exchange rate
(NEER) of the currency stable. The NEER is calculated from a trade-
weighted exchange rate between the baht and 25 major currencies,
mainly those of Thailand's ex****t markets and its ex****t competitors.
Supavud Saicheua of Phatra Securities wrote in a re****t last Friday
that Thailand's NEER was relatively stable.
"The baht is nominally 21 per cent weaker today than it was prior to
the economic crisis in 1997.
"However, the real effective exchange rate (REER) is drifting upwards
and now only 13 per cent below the precrisis level (the REER is the
same as the NEER, except it incor****ates inflation differences between
Thailand and the other 25 trading partners)," he wrote.
"In short, the REER suggests the Thai economy has been inflating at a
faster rate than these countries over the past several years," Supavud
added.
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