FYI | Oct 22 2007
By Greg Peel
Go ahead and sell the US dollar. That’s the implicit signal emanating from the meeting of G7 finance ministers which concluded on the weekend. Markets had anticipated that the US dollar would provide the main source of debate, and some sort of action might be forthcoming. But instead, the G7 simply gave another warning to China.
Not that the US dollar wasn’t even mentioned. But when French, German and Italian ministers wanted to include a warning in the final statement that the strong euro would crimp European exports they were vetoed by US Treasury secretary Hank Paulson. What is Paulson’s problem? Is he trying to pretend there’s nothing wrong with the US dollar?
Paulson’s mantra is “a strong dollar is in our nation’s interests and currency values should be determined in a competitive marketplace”, which at the moment seems like a contradiction in terms. When the G7 failed to come up with anything in response to the dollar’s demise, Paulson’s marketplace simply sold down the currency once more. As the ex-CEO of Goldman Sachs, one would expect Paulson to be a market animal. But as Treasury secretary, he appears to be quick to shut off any suggestion that the US dollar is in any sort of trouble.
So he turned the focus back to China, which must really amuse the Chinese. Instead of addressing the problem du jour the G7 statement was all about how the Chinese renminbi should be allowed to revalue, which is something we’ve heard ad nauseum in the past. China could not care one iota what Paulson thinks, what the rest of the G7 thinks, or what the IMF thinks. The IMF also held its meeting in Washington on the weekend.
The IMF is rapidly becoming an irrelevance, if it isn’t already. Asia has certainly given up paying it any heed. The expectation was that under the reign of Rodrigo Rato reforms would be put in place to recognise the place of emerging economies in the global economy. No such reforms were ever forthcoming, and Rato has now completed his tenure. IMF members praised Ratos’ contribution, before sticking the knife in. In theory, the reform process must start all over again. In practice, the IMF – plaything of the US – probably wants to keep emerging markets out of considerations forever. It’s all about perceived global imbalances between the rich established nations and the poor emergers.
It is the IMF that is specifically leaning on China with regards to its currency, and China just keeps telling the IMF to get stuffed.
The IMF is also forever threatening to start selling its considerable gold reserves, given its activities to provide aid to undeveloped and developing nations is bleeding the coffers. Critics say that’s rubbish – the IMF is losing money from paying ridiculous salaries and running an oversized bureaucracy. Nevertheless, the IMF has threatened to sell gold for years, and never has, but as the US dollar sinks in the west, perhaps Paulson will push the IMF into acting. If IMF gold sales could stop the gold price rising, that would also support the US dollar.
In the meantime, the IMF meeting managed to resolve that all countries should have a look into their risk management systems following the credit crisis. Statesman-like stuff that. Sir Humphrey Appleby could have written the draft.
With regards to the credit crisis, Alan Greenspan – the man who bailed out LTCM – is against the US$75 billion fighting fund set up by Paulson and major US investment banks in order to avoid a collapse in asset-backed commercial paper prices. The market will continue to be worried if true price discovery by the market cannot be achieved, Greenspan suggested. It is better to let the vultures move in at low prices and the issue can be resolved once and for all. Vultures are a necessary part of the market, but they won’t act if there is artificial interference.
