Friday, March 28, 2008

Banana Dollar — Part 4

The dollar continues to decline. Chinese exporters are increasingly quoting prices in renminbi (China’s currency, also known as the yuan, CNY). The yuan has steadily appreciated from $1=CNY 8.28 in July 2005 to CNY 7.01 in late March 2008, and is projected to appreciate further to CNY 6.30-6.40 by December 2008.

The Financial Times of March 28, 2008, reported that the vast majority of 700,000 Chinese suppliers to international companies no longer use U.S. dollars to settle non-U.S. transactions. Chinese exporters are also encouraging clients to pay in euros instead of dollars.

Since January 1, 2008, many foreign currencies, some previously weak, have markedly appreciated against the dollar: Japan, Switzerland, Chile, Colombia, and the Czech and Slovak republics more than 10 percent; Poland, 9.5 percent; Israel, 9 percent; and Hungary, in the midst of a budget crisis, 6.2 percent.

In the same issue of the Financial Times, Professor Martin Feldstein of Harvard, former chairman of the Council of Economic Advisers under President Reagan and former chairman of the National Bureau of Economic Research, writes that "the value of the dollar is not weak but is actually very strong." He goes on to say that "it takes a very large fall of the dollar to shrink the net [trade] deficit." He credits the weaker dollar for an increase in exports and a reduction of 11 percent in the trade deficit from its 2006 peak. (The current account deficit is running at an annualized rate of about $800 billion, due largely to high-priced oil imports.) In his analysis the dollar should continue to decline to reduce the large trade deficit. Given his words, that it takes a very large fall of the dollar to shrink the trade deficit, one can infer that he is willing to see another 30 percent or greater decline in the U.S. currency.

As I mentioned in "Banana Dollar" (January 21, 2008), the day will soon come when renminbi and Russian rubles will become hard currencies and the U.S. dollar a softer currency. The consequences for U.S. global status and power will be enormous and irreversible for years to come.

Wednesday, March 19, 2008

Banana Dollar — Part 3

Would you believe that Vietnamese now prefer their own currency, the dong, to the dollar. A Wall Street Journal story of March 19, 2008, reported that Vietnamese have suddenly lost confidence in the dollar, a currency that has been widely used in Vietnam as a matter of confidence and utility given that the largest denomination 500,000 dong bill is worth only about $31.

What happened? To curtail inflation, the Vietnam government has relaxed its exchange rate to allow the dong to fluctuate more freely against the dollar, from a daily range of 1 to 2 percent. In response, the dong has steadily appreciated since January 1 of this year from over 16,030 to about 15,855 against the dollar. In the gold shops and cafes, the dong is valued at a still higher 15,500.

Given the expectation of further gains, bank tellers have been turning away visitors trying to exchange dollars for dongs. Digital displays of exchange rates have been turned off. Vietnamese have been withdrawing money from dollar accounts to make dong deposits. Exporters are having trouble repatriating dollars for dong.

As noted in an earlier posting, India no longer accepts dollars at the Taj Mahal and other museums. Kuwait has abandoned its dollar peg in favor of a currency basket. Other Gulf States are contemplating similar adjustments. King dollar has fallen off its pedestal.

Secretary of the Treasury Henry Paulson keeps repeating the mantra that the U.S. wants a "strong dollar." As he continues to utter the phrase, if and when there is a real run in the dollar, he may find himself as the secretary who cried wolf once too often.

Thursday, March 6, 2008

Banana Dollar — Part 2

In a previous post (January 21, 2008) I noted that the term "banana dollar," a $10 occupation currency issued by the Japanese in Malaya during World War II with a picture of a banana tree on the obverse side, also came to signify a rapidly depreciating currency. The $1, $5, and $10 occupation notes retained their purchasing power during 1942-44. Rising prices led Japan to issue a $100 note in 1944 and a $1,000 note in 1945.

The history of U.S. currency since the Federal Reserve Board (fed) was established in 1913 is the opposite. Notes of $10,000, $5,000, $1,000, and $500 were first authorized in 1918, primarily for use in interbank transactions, but they also circulated in the hands of the public. The largest note ever printed was the $100,000 gold certificate, series 1934, featuring Woodrow Wilson. This series was issued only to Federal Reserve Banks against an equal amount of gold bullion held by the Department of the Treasury for certain credits established between the treasurer of the United States and Federal Reserve Banks.

On July 14, 1969, the Treasury and the fed announced that currency notes in denominations of $500, $1,000, $5,000, and $10,000 would be discontinued due to lack of use. Although they were issued until 1969, these notes were last printed in 1945. They remain legal tender and some still circulate, but most are in the hands of collectors. Since 1969, all high denomination notes that have been deposited at the fed have been destroyed. However, the secretary of the Treasury retains the authority to have printed, and the fed the authority to issue, all four high denomination notes. The fed’s web site displaying the volume and value of U.S. currency in circulation excludes data on denominations larger than $100.

Travelers to Europe learn that the European Central Bank issues euro notes in denominations of €5, €10, €20, €50, €100, €200, and €500. At current exchanges rates, it takes $760 to purchase a €500 note. From the dollar’s peak on October 26, 2000, when $0.88 was worth €1, to its low on March 6, 2008, when it took $1.54 to purchase €1, the euro appreciated 75% against the dollar.

Perhaps its time for Secretary Paulson to instruct the fed to reissue the $500 bill. However, the fed might consider commissioning a new design with bananas on the obverse side. Unless, that is, it decides to save bananas for the reintroduction of a the $1,000 bill.

Tuesday, March 4, 2008

Goolsbee Goofed

Chicago professor Austan Goolsbee, Barack Obama’s chief economic adviser, just learned a valuable lesson about politics. Be careful what you say. In a meeting with Canadian consular officials in Chicago. Goolsbee suggested that Obama’s anti-NAFTA stance was more about domestic political positioning than a clear articulation of policy plans.

It seems improbable that one ill-advised statement by an economic adviser will derail a presidential candidacy. If Obama wins his party’s nomination and the general election, Goolsbee is likely to join him in to Washington, D.C. In that event, I recommend that Goolsbee keep handy two works of literature.

One is a letter entitled "A Single Spark can Start a Prairie Fire," written on January 5, 1930, by Chinese Communist party leader Mao Zedong criticizing certain pessimistic views then pervading the party regarding the seizure of Jiangsi Province. The other is the conclusion from an old nursery rhyme composed by an unknown author about nails, horseshoes, horses, riders, battles, and kingdoms. "For want of the nail a kingdom was lost."

My advise to Goolsbee is simple. Trust no one in politics or the media, stay out of the limelight, and be content to work behind the scenes.