Wednesday, November 17, 2004


Clowns of Madness

I came across Brad DeLong's Semi-Daily Journal: A Weblog and he has listed as required reading a paper written by Nouriel Roubini and Brad Setser (2004), "The US as a Net Debtor: The Sustainability of the US External Imbalances" (New York: NYU).
I agree it is required reading and it led to Nouriel Roubini Global Economics Blog and on October 8th he posted BW2: Are we back to a new stable Bretton Woods regime of global fixed exchange rates? He argues that a yes, a new Bretton Woods Agreement II, of fixed exchange rates has emerged but that it is not sustainable and is very unstable for five (5) reasons:
1. Internal dislocations in the United States.
2. The strains placed on Europe.
3. The strains placed on China’s domestic financial system.
4. The financial risks associated with continuing to provide low-cost dollar denominated financing to the United States.
5. Incentives to free ride and opt out of the cheap dollar financing cartel.

Then on November 8th, Roubini posts Speculative Central Bank Reserve Diversification as the End Game Trigger for BWII?
The news today...that some central banks - India, Russia and "other petrodollar-rich Middle Eastern investors" - are starting to dump dollars to avoid the capital losses from further weakening of the U.S. dollar, may be the starting trigger...the end of the so-called Bretton Woods Two (BWII)regime.
The US Dollar hit the lowest in relation to a basket of currencies since 1995. With our trade deficit ecpected to grow further in 2005 and some saying the US Dollar could fall another 35%, those countries that hold upwards of $2 Trillion USD may be getting antsy. The door is not big enough for all to avoid massive losses on their reserves. We are also getting to the point that the EU and Japan will want to intervene massively to keep their currencies from appreciating more. They would do that by buying US Dollars.

The world keeps spinning faster,
like that steel Merry-Go-Round
filled with playmates
on a playground of my youth,
pushed faster and faster
by the neighborhood bullies,
today's clowns of madness,
until we're horizontal, barely holding on.
And, the clowns are convulsed with laughter.

Mover Mike

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