	Generational Dynamics
	Forecasting America's Destiny ... and the World's

\| HOME \| WEB LOG \| COUNTRY WIKI \| COMMENT \| FORUM \| DOWNLOADS \| ABOUT \|

Generational Dynamics Web Log for 31-Jan-05
US dollar weakness and China's growing economic strength dominate World Economic Forum

Web Log - January, 2005

US dollar weakness and China's growing economic strength dominate World Economic Forum

There's always craziness when world political leaders talk about economics (the same is true of any politicians), and the crazy ideas were flowing like wine last week, as 2,250 representatives of the world's leading economies spent 5 days in a ski resort in Davos, Switzerland, discussed "Taking Responsibility for Tough Choices."

Many "tough choices" were discussed -- combatting poverty and disease, especially in Africa, reducing oil and commodity prices, and fixing global warming. But there was no taking of responsibility, however, except that most of the participants meant that someone else -- usually either America or China -- should be taking responsibility.

However, the weakness of the dollar, and China's growing political and economic strength were the two related issues overshadowing all of the meetings.

The continuing dollar weakness is caused by the American public debt, which is astromically high by historical standards, and continues to grow rapidly, with no end in sight.

Many politicians, including some in the Bush administration, have been blaming the problem on China's "fixed rate" policy, which fixes the yuan at 8.2 to the dollar. The argument is that this has given Chinese exports an unfair advantage on global markets, and Washington's position has been that the Chinese should allow the yuan's value to float against the dollar. Banking officials in Europe, which is a major trading partner with China, have also blamed Europe's troubles on the fixed peg, and are asking China to float the yuan.

The Chinese agreed this week that something had to change, but signaled that a different kind of change was in the works.

"The U.S. dollar in our opinion is no longer a stable currency, and is devaluing all the time, causing [continuing troubles]," said Fan Gang, director of the National Economic Research Institute at the China Reform Foundation. His talk attracted a large standing-room only crowd, and his remarks attracted a great deal of attention, as well as questions about whether it represented official Chinese policy.

"The real issue," he continued, "is how to change the regime from a U.S. dollar pegging to a more manageable reference, say, [a combination of] euros, yen and dollars -- a more diversified system. [In the beginning, this would cause] some kind of initial shock. You'd have to deal with some devaluation pressures."

Thus, the Chinese are signaling that they won't freely float the yuan, but they're consider revaluing the yuan upward to a new fixed value pegged to a combination of the euro, yen and dollar.

As Fan Gang indicated, any revaluation of the yuan is liable to cause a shock in the U.S. A substantial number of consumer goods in American stores were manufactured in China, and a revaluation of the yuan would increase their prices substantially.

Last year, a number of analysts predicted that there would be a recession in America this year, thanks to oil prices above $40 a barrel, so there are many factors that will be pressuring the American economy in the next few months. These factors include: oil prices that remain close to $50 a barrel; an aggressive policy by Alan Greenspan and the Fed to raise interest rates; and a potential devaluation shock for the dollar. With the stock market overvalued by 50% or more according to traditional price/earnings ratio measures, these factors could cause a substantial fall in stock prices.

Generational Dynamics predicts that America is in a generational crisis period and that we're entering a new 1930s style Great Depression. When I first predicted this in 2002, I was expecting a gradual collapse in stock prices between then and 2007, as happened in 1929. But as I wrote a few days ago, I've changed my view. The change is based on the fact many investors are expecting some kind of stock market correction, but believe that they can get out in time. Because only a few can get out in time, the logic of the situation implies that some unexpected event will a stock market collapse very quickly, with a huge fall in a day or two, too fast for almost anyone to get out in time.

Last week at Davos, Fred Bergsten of the Washington-based Institute of International Economics said that, “The US deficits are unsustainable in domestic-political and trade-policy terms, as well as in international financial terms.”

Bergsten sees the possibility of a dollar crisis "within weeks". The European Central Bank, the Bank of Japan, and the People's Bank of China have all been purchasing huge volumes of American dollars and American debt.

Bergsten sees this changing soon. Smaller Asian banks, including those in Malaysia, Thailand and Indonesia, have evidently already begun selling dollars and buying euros. Bergsten sees the larger central banks starting to do the same thing, resulting in a sudden collapse of the dollar by 20-40%. That might (or might not) be the trigger that causes the stock market collapse predicted by Generational Dynamics. (31-Jan-05) Permanent Link
Receive daily World View columns by e-mail
Donate to Generational Dynamics via PayPal

Web Log Pages

Current Web Log

Generational Dynamics Web Log for 31-Jan-05 US dollar weakness and China's growing economic strength dominate World Economic Forum

Web Log Pages

Generational Dynamics Web Log for 31-Jan-05
US dollar weakness and China's growing economic strength dominate World Economic Forum