Sunday, November 28, 2004
Don't Fight The Market
Asian Central Banks Face Reality. Stephen Ceccehtti (of The FT) highlights the realities facing Asian central banks:Institutional ECONOMICS goes on to say
We can start to see why governments with large dollar reserves would be concerned about both keeping the dollar from depreciating and ensuring that US treasury bond interest rates do not go up. Both of these would result in capital losses for the entities holding the foreign exchange reserves. Given that these reserves are huge - more than $800bn in Japan and more than $500bn in China - the potential losses are big, as is the potential embarrassment. A 10 per cent appreciation of the renminbi means a capital loss of $50bn for Chinese authorities. Assuming the duration of their bond portfolio is three to five years, a 2 percentage point increase in US interest rates means another loss of $30bn-$50bn.
The massive foreign exchange reserves of East Asia are a sign of economic weakness, not strength. The mercantilist mindset that thinks it can buy its way into world markets through manipulating exchange rates is about to face a massive reality check care of flexible exchange rates.The East Asian countries have made a massive bet that is counter to market forces which seek equilibrium. Greenspan warned of this, first, that the "game" can't go on forever and second, anyone who is still long bonds has a death wish. We will soon see the giant compressed coiled spring that is the pegged currencies market explode. Once again, it will not pay to fight the market.
The Gold price is another case of forces fighting equilibrium. They, also, will find the market, ultimately, works as it should.