From Volume 5, Issue Number 14 of EIR Online, Published Apr. 4, 2006

World Economic News

Asian Development Bank Official Warns of Dollar Collapse

"Any shock hitting the U.S. economy or the global market may change investors' perceptions, given the existing global current account imbalance," said Masahiro Kawai, the ADB's head of regional economic integration, the Philippines Inquirer reported March 29. "Our suggestion to Asian countries is: Don't take this continuous financing of the U.S. current account deficit as given. If something happens, then East Asian economies have to be prepared."

"The possibility of a U.S. dollar collapse or sharp decline may be small at this point, but it would generate very significant turmoil, so East Asian economies ... ought to be ready for that," Kawai said.

The ADB is proposing to coordinate their currency fluctuations, to "allow their currencies to collectively appreciate against a tumbling dollar." The idea of an Asian Currency Unit (ACU) is being promoted to help establish a functioning bond market in Asia, but could also help exchange coordination.

Kawai played down suggestions that the ACU could foreshadow a single Asian currency like the European Currency Unit (ECU), which existed for two decades before the creation of the euro in 1999. "The ECU had an official status but the ACU has no such official status," he said.

The ADB had hoped to launch the ACU—a weighted basket of Asian currencies—before the bank's annual meeting in May, but Kawai said this would not be possible, in part because they cannot resolve the issue of the role to be played by Taiwan's currency.

Iceland Establishes Financial Emergency Committee

On March 10, "an ad-hoc committee of six people appointed by the Central Bank of Iceland, the Financial Supervisory Authority (FME) and three ministries has submitted proposals on how to coordinate government actions in the event of a financial crisis," Iceland Review online reported March 19.

The article continued: "Morgunbladid [Iceland's leading daily] reports the committee has recommended, among other things, that the FME be given greater powers to seize control over financial institutions in certain circumstances by replacing board directors, managers or auditors.

"The committee also recommends greater cooperation with the institutions of the European Union.

"The committee has examined several contingencies, including how to react if the Icelandic banks are unable to finance themselves abroad."

Last week, Fitch rating agency downgraded Iceland's economy from stable to negative. (They are keeping their rating for Iceland's banks as stable. For now.) The country rating "take[s] into account Iceland's macro-prudential risks, including rising inflation, rapid credit growth, buoyant asset prices, a steep current-account deficit and escalating external indebtedness," Fitch said.

'Euro-sion' of German Economic Power

The fact that Germany's economy is being bled out by the Maastricht system, was hinted at in an article in the Frankfurter Allgemeine Zeitung March 27, which noted that, whereas in 1995, Germany still accounted for 35% of total EU economic power, today that has shrunk to 28%.

While identifying the wrong predicates (alleging it is due to a lack of "reforms"), the article had a point when forecasting that the shrinkage will continue, under the present system. Not just erosion but euro-sion, one might say.

IMF Tells Beijing To Revalue or Face Social Upheaval

China's economic growth is not sustainable unless the leadership abandons its commitment to "cautious reform," especially a too-slow revaluation, said the Fund's chief economist, Raghuram Rajan, and its head of financial markets, Eswar Prasad, in a report to be published in the American Economic Review, as reported in The Australian March 27. "The investment boom in recent years has been fuelled by cheap credit and over-optimistic expectations of future demand growth in sectors that are doing well at present," they wrote, complaining that investment had accounted for more than half of nominal GDP growth and might now total almost 40% of GDP. They said that building new plant was a "time-honoured path to growth," but threatens "a resurgence of non-performing loans [and] more unemployment. In the absence of better social spending, that would create unrest."

Carry-Trade Collapse Signals Wider Crisis

The New Zealand and Icelandic crises "could provoke a wider drop in foreign-exchange markets, threatening the currencies of Australia, South Africa, Turkey and Hungary," the Financial Times of London and The Australian both warned March 28. They note that both New Zealand and Iceland are suffering 22-month lows in their currencies, and massive current-account deficits—8.9% of GDP in the case of New Zealand and 15.5% in Iceland.

"Carry is no longer king," said Jens Nordvig, currency strategist at Goldman Sachs, to the Financial Times. "Investors were almost blindly seeking returns in emerging markets, now they will be scrutinising the fundamentals." They note that "Japanese investors pumped US$450 billion into overseas bond markets in the four years to 2005, while ... hedge funds borrowed in dollars and yen to fund a buying spree that has seen the MSCI (Morgan Stanley's benchmark operation) Emerging Markets equity index jump 186% in the past three years.... As carry trades unwind, those currencies that rose most sharply may fall just as fast."

Precious Metals Spike to New Highs

Due to hedge funds buying of precious metals contracts, gold hit a new 25-year high of $592, while silver hit a 20-year high of $11.48 March 30. Other precious metals like platinum and palladium hit a four-year high.

Housing Bubble Overextended, Bankers Will Defend Currency

The Danish National Bank Director warned that the housing bubble is about to burst, and that homeowners are on their own to deal with it, Copenhagen's Soendagsavisen reported March 25. Home prices have risen by 22% in Denmark during the past year. National Bank Director Neils Bernstein said recently, that people cannot expect the prices to continue to rise; they may start declining soon, and interest rates are on the way up. If the European Central Bank raises its rates, Bernstein said he will raise the Danish rates. He stated that the responsibility of the National Bank is to defend the currency, and not homeowners.

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