What I find really ironic in teh contemporary economic world, by the by, is that capital is leaving the US, worried by corruption in the US economy, and flooding into Russia, due to confidence in the increasing professionalism in Russian business. This is too rich for words!
Chris Doss The Russia Journal ----------------- Moscow Tribune July 19, 2002 BLACK MONDAY FOR DOLLAR What comes next? By Stanislav Menshikov
The fall of the US dollar to less than parity with the euro caused a stir in
Moscow financial circles. Banks were concerned about a potential flight from
dollar to the newly created euro accounts. Government officials were busy imploring the public to stay calm. Playing the market against currency rate swings, they explained, required more sophistication in comparing effective interest rates than members of the general public normally possess. The essential message was: leave it to the authorities to solve the accompanying
riddles.
The essential problem for Russia is that while practically all of its foreign currency reserves are being held in dollars, most of its external debt was initially denominated in European currencies and is now a euro debt. A high dollar was to Russia's advantage because servicing euro debt was cheaper by using dollars. The fall of the dollar by 12 percent in the last three months means that debt payments will have to rise proportionally.
According to Alexei Kudrin, the Finance Minister, it could involve paying some $350-400 million more in 2002 than was planned in the federal budget. This would be partly compensated by a larger dollar intake in oil and non-ferrous metals export duties, which are set in euros. The remaining loss
would be covered from the budget reserve.
Other bad news is that prices of exported oil and gas are quoted in dollars while 40 percent of imports are paid for in euros. Every dollar earned abroad can now buy less European goods. If imports keep expanding, Russia's balance of payments will deteriorate creating additional pressure on the rouble.
However, if imported goods get too expensive they will not be able to compete with domestic products thus providing an additional boost for Russia
's economic growth. To estimate the overall balance of losses and benefits is not possible at this stage of the game. The proof of the pudding will be in the eating. Despite prodding from the European Union to convert its reserves into euros Russian authorities are not in a rush to do so fearing that it could only aggravate matters. However, at some point it will have to
face that fateful decision.
In the medium and long-term the fate of the dollar depends on the extremely controversial situation in the US economy. On the one hand, statistics show continuing growth of industrial production, and GDP for this year is expected to rise by 3.5 percent or more against much lower earlier forecasts. On the other hand, US stock markets keep falling, which indicates
an increasing flight from the dollar. As one keen observer put it, "The dollar and Wall Street are locked in a sort of deadly embrace". Contrary to expectations, capital investment has not recovered and capital losses in the
bourses are negatively affecting private consumption expenditures. Because of these unfavourable trends, the rosy forecast of GDP growth may fail to materialise.
Recent corporate scandals in the US have also been scaring domestic and foreign investors from US financial markets. However, Bush's police-like actions meant to curb executive cheating may have the opposite effect by marring the liberal image of the American economy. Who wants to invest in a country where corporate chieftains are now compelled to swear under oath to the profit and other figures that they publish?
Allan Greenspan talks about a greed epidemic that is the cause of recent financial troubles. That is an understatement. The long boom of the 1990s has brought about an asset price inflation that has gone wildly astray for the first time since the 1920s. Asset inflation creates what is known as "bubbles" which eventually tend to bust affecting the real economy, as well.
In Japan, this created the long-turn stagnation of the 1990s that put an end
to the country's growth miracle.
Some US experts feel that the fall in the US stock market has not been strong enough to bring the over-inflated share prices to the real capital values that these paper assets claim to represent. This concerns not only the champions of outright speculation - Enron and World.com but also a large
number of the elitist mainstay of American Big Business, including Microsoft, General Electric and others. Leading banks have also been involved in crediting the bubble and helping it grow beyond reasonable proportions. That means that there are too many bad loans that have not yet been acknowledged and written off.
It will be a miracle if the US economy recovers without first adjusting its overinflated financial superstructure. So far, the Bush administration has done precious little to even address this most serious issue, let alone start tackling it. Apparently, the feeling in some Washington offices is that a foreign adventure in Iraq might help put the problem away.
That way of thinking is extremely dangerous. When John Maynard Keynes opinionated in the late 1930s that wars are one way of avoiding economic depressions, he was not really serious. Those were bad jokes even for a pre-nuclear world. Today, that way of saving an economy is totally impermissible.