As much as I sympathise with Warhol's torpid cinematic tendencies, I nevertheless accept that something has to give. Allow me to suggest that instead of us witnessing nothing of importance, the last few months may have demonstrated more price evidence of the US dollar having finally formed a bottom with the last low at the end of 2009 exceeding the previous low in March 2008. If true, this would conclude a chapter of historic dollar depreciation that began way back in 2001. This could presage an under-appreciated but potentially troublesome tightening of monetary policy in China, that in turn may be a portent of difficulties that lie ahead. I ask you to heed the warning given by China's Vice Commerce Minister Zhong Shan, as cited by the Wall Street Journal. Worried that many Chinese exports have a profit margin of less than 2%, he noted that, "water doesn't boil if it is heated to 99 degrees Celsius. But it will boil if it is heated by one more degree.", In other words, "a further rise in the yuan by a very small magnitude might cause fundamental changes." We should consider ourselves forewarned.
'History can repeat itself with a vengeance' -Henry Kaufman
As you may be aware, I have a keen interest in the economic parallels of today and the policy mistakes of the past. Perhaps like the Italian lawyer in Arthur Miller's A View from the Bridge, "I am inclined to notice the ruins in things." So let us consider the period 1992 to 1997 to see the damage wrought by a change in the dollar's direction. Back then, the dollar succeeded in finally arresting another precipitous fall this time initiated by the 1985 Plaza Accord, an aggressive trade intervention aimed at preventing the loss of more American manufacturing jobs to the Japanese. Over these years, the dollar lost 15% of its value applying the Fed's broad trade-weighted series and dropped 45% using the major trade-weighted index. That is to say, the dollar, just as it has been since 2001, was very weak and Asia's fixed currency regimes benefited from inappropriately low interest rates in the US as investors adopted a fawning admiration for the Far East. Does this sound familiar?
'The great enemy of the truth is often not the lie — deliberate, contrived and dishonest — but the myth — persistent, persuasive, and unrealistic.'
-John F. Kennedy, Commencement Address, Yale University, New Haven, Connecticut, 11th June 1962
With their currencies pegged to the weak dollar, South Korea, Taiwan, Hong Kong and Singapore, the group of countries dubbed The Asian Tigers by an overconfident financial community, all witnessed a dramatic transfer of income from the household to the corporate sector. And again starting in 1985, and mirroring in reverse the dollar's decline, their stock markets all rose nearly sevenfold.
