Saturday, March 15, 2008

no santa for the USD

sorry, USD ... there is no santa...

by this I mean, it's unlikely trichet will suddenly feel the need to cut rates when inflation remained above his target for the 12th straight month.

trichet thinks the risk to inflation remains to the upside... plus, this week's numbers exceeded the forecast, making me think they will remain strong. while many people are calling for a top in the euro, I just don't see how that's going to happen. their wages are going up along with prices ... this despite their consumer prices softened by weak-yuan imports .. if anything, their economy seems to be overheating.

it makes me ask whether europe is experiencing what we felt in the 1970s... an economy growing, yet facing several bottlenecks and running up against its own inherent inefficiencies.
they may be experiencing real "stagflation": 1.8% core cpi with 1.8% growth. that's pretty pitiful compared with the kind of numbers the US economy was generating until recently.

(italicized above, I said "real" because I don't think what we have in the USA is stagflation... we have devaluation. for proof, I point to the fact that the falling dollar, not surging wages, is fueling our inflation.)

for years, people have said europe needs to liberalize labor laws and allow more consolidation... one asks whether they might go through their own version of the reagan 80s, when taxes and regulation are eased, releasing an entirely new surge of economic growth ...

this may be the sequence:
-euro stagflation
-trichet tries to reenact volcker's legacy with high interest rates
-euro rallies
-european populations elect more pro-market politicians
-euro remains strong for years, and the zone enjoys a 10-25 year run like the 1982-2002 period for the US, with strong stock and bond markets.
-fitting into this entire cycle would be continued integration with the middle east

this scenario raises a question: will the dollar remain the global currency? I think a general basket of commodities and currencies are now replacing the dollar.. they seem the stablest store of value, and have attracted interest as the USD has weakened.

this situation may continue for several more years, given the strong demand for stuff like zinc, copper and wheat... and, the dollar still needs to get unhooked from all the little niches of official value such as commodity pricing and international trade agreements.

but commodities are not reliable enough as stores of value ... droughts and other events can effect their supply, so people will always need a fiat currency. the euro seems like a strong candidate to keep gaining importance ... it would probably be better picks than the yuan, rupee or yen...

one key thing will be its proximity to the hard-asset centers of the middle east, and its new role as the custodian of petro-money. furthermore, the euro is based on the solid old german central bank and represents what will probably be one of the world's top 2-3 economies.

so, it seem possible the euro will displace the dollar internationally ... maybe the visionaries of european integration -- who were all american! -- will finally achieve their vision of "another US". maybe one day the euro will have its own bubble just like the USD had five years ago!

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