I don't want to search for the topic where You Know predicts that the world banking system is about to self-destruct. Once again we have a false alarm. Consider the latest:
"MOSCOW TRIBUNE", 24 AUGUST 2001
EXPECT THE DOLLAR TO SLIDE FURTHER
But Not in Russia
By Stanislav Menshikov
Those interested in the future of their currency holdings should
take in
stride the recent bru-ha-ha around the dollar. Apocalyptic
forecasts tied
to the anniversary of the 1998 rouble default or to other crisis
dates need
not be taken seriously. Unlike many other issues, this is one where
the
fundamentals are well known and pretty clear.
The US dollar is certainly not another financial pyramid with a
shaky
foundation that is about to fall. Claims that it has no solid
material
foundation are not true. As any international currency widely used
beyond
its country of origin, there are substantially more dollars in
global
circulation than is necessary to serve the needs of the US economy
proper.
The dollar is widely used as a medium of exchange and savings in
many
countries whose national currencies are not fully adequate for
these
purposes. Like any other currency in the world today it has no
direct gold
backing. However, it is backed by the productive capacity of a
nation with
the largest GDP in the world and also by the enormous amount of
financial
capital centred in the US. Because the dollar is easily converted
into any
other currency, it is also indirectly backed by their economic
potentials.
This is a mechanism that helps redistribute global riches in US
favour, but
changing the system will not come fast or easy.
According to the IMF, the dollar at its recent peak was overvalued
vis-a-vis other principal world currencies by about 20 percent.
Since then,
it lost about 8 percent of its relative value. The margin
separating it
from the equilibrium is therefore another 12 percent. That would
make the
dollar slightly lower in value than the euro. This need not
necessarily
happen either soon or at all. But that is a realistic minimum below
which
any further slide or fall is highly unlikely. Historically, it has
rarely
been below that level. Its historical peak has been much higher
than the
recent one.
Working against the dollar today is the current recession in the US
economy. Because both interest rate and tax cuts have so far failed
to
bring about a recovery, dollar devaluation is now the only
remaining policy
instrument to promote US exports and total aggregate demand. But
dollar
devaluation also undermines attractiveness of foreign investment in
the US
and thus works against the growth of its economy. Therefore, it is
reasonable to assume that dollar devaluation will proceed slowly
rather
that precipitously.
Also working against dollar weakening are other factors. First,
there is
simply no substitute that can take its place as a global currency,
at least
not until the euro proves to be an effective contender. Second,
recession
is a fact also in Japan and spreading in Europe. These countries do
not
want their exports to suffer from their currencies' revaluation.
Third,
most globally traded commodities like oil are quoted in dollars,
and while
prices for them are high dollar will be high, as well.
The effects of dollar devaluation on the Russian economy are mixed.
The
dollar is for all practical purposes a second national currency
with the
rouble tied to it as its main base. When the dollar slides, the
rouble is
also devalued versus all other non-dollar currencies. This makes
Russian
export goods more competitive in all trading zones, except America
and may
even help boost Russian GDP. For the same reason the government and
the
Central Bank are not interested in revaluing the rouble against the
dollar.
Rather expect a further moderate rise of the dollar in rouble
terms.
On the other hand, Russian individuals and businesses have large
holdings
of dollars both inside the country and abroad. Dollar devaluation
does not
negatively affect the value of these holdings in Russia or in the
dollar
zone. As to Europe which is Russia's principal trading partner,
offshore
accounts here are not necessarily denominated in dollars but rather
in
local currencies. These accounts are now being automatically
converted into
euros and are rising in terms of their dollar value. One might
expect some
movement from Russian offshore dollar accounts into euros, this
will not be
a stampede.
Russian exports of fuels and metals will not feel the pinch unless
world
prices go down. This means that superprofits of the export oriented
industries will be retained, as well as their investment resources.
Other
industries will also gain profit-wise if the rouble keeps sliding
against
the dollar and other foreign currencies. The higher the import
prices, the
easier it is for domestic producers to raise internal prices.
Government
finances largely depend on rouble revenues, but the important
supplement in
export and import duties should remain large if world prices are
high.
The optimistic signals as to the fate of the dollar coming from
Alexei
Kudrin, the Finance Minister, show that the government is well
aware of
these facts. The Russian economy is now relatively less dependent
on world
economic conditions than in 1998. This is another reason why there
should
be no panic caused by apocalyptic predictions