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谢国忠

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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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谢国忠:美元向好  

2009-09-04 13:57:27|  分类: 言论 |  标签: |举报 |字号 订阅

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Dollar improving

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Andy Xie/August 29, 2009

 

The dollar is likely to remain stable over the next twelve months. Itcould stage a cyclical bull market in 2011 as the Fed raises interestrate to 5% and the lower US asset prices attract foreign capital. Thecyclical bull market may last two to three years. The longer termprospect for the dollar depends on the US’s current healthcare reform.Its direction doesn’t appear promising. The US Congress may pass partof the Obama agenda that increases spending and not the part that cutscost. The long term scenario for the dollar remains bearish.

 

Ihave changed my view on the dollar in two aspects. First, at thebeginning of the year I thought that the dollar would make a new low onsurging US fiscal deficit. The previous low was in April 2008 when thedollar index (‘DXY’) hit 71, 42% below its high in 2002. After LehmanBrothers went burst, the index rebounded by 20% quickly and peaked at89 in early March, as risk appetite collapsed and the safe haven tradefavored the dollar. When the risk appetite returned, it declined by 10%and has been range bound for three months. This has happened despitethe overwhelming bearish sentiment towards the dollar, which triggeredmassive capital flow out of the dollar-based assets into commoditiesand emerging market stocks. What’s supporting the dollar is the surgingUS household and corporate savings that have more than offset theincrease in the US’s fiscal deficit. As the US household savingscontinue to surge, the dollar is likely to remain stable.

 

Accordingto the US Bureau of Economic Analysis (‘BEA’) the US personal savingsrate rose above 5% in the second quarter of 2009 from 1% in the firstquarter of 2008. The chances are that the savings rate could reach 8%by the end of 2009. It could rise further to 10% in 2010. The USfederal deficit is likely above 10% of GDP in 2009. The householdincome is about 70% of GDP. The increase in the federal deficit isstill greater than the increase in the US household savings. The gap ismore than offset by the increase in the corporate savings. As thehousehold sector saves more and spends less, the corporate sector needsto invest less. According to the US Census Bureau, the US’s tradedeficit in the first half of 2009 was $217 billion, down from $351billion in 2009. The narrower deficit reflects smaller savingsshortfall in the US. It results in less need for foreign capital and,hence, less pressure on the dollar.

 

Second, I am nowexpecting that a cyclical bull market for the dollar begins in 2011 andlasts for two to three years, advancing it one year from my previousview. The view is mostly based on my expectation that the Fed wouldraise interest rate to 5%. Most analysts don’t expect the Fed to raiseinterest rate until the US’s economy is strong again. On that logic thedollar couldn’t recover as the weak US economy and low interest ratewouldn’t attract capital. I think that inflationary pressure will forcethe Fed to raise interest rate despite a weak economy. The US economywill remain weak despite low interest rate for three reasons: (1) theUS household sector must boost savings for many years to pay downdebts, (2) supply-demand mismatch takes time to rebalance, and (3) theUS financial institutions are still saddled with bad assets andcouldn’t boost lending for the foreseeable future. The US governmenthas changed the mark-to-market rule for the US financial institutionsso that they can carry toxic assets, possibly around $1 trillion andmore than the total equity capital in the financial system, withoutworrying about consequences.

 

The US is handling its badassets just like Japan did in the 1990s. Shouldn’t the weak economyprevent inflation just like in Japan? The difference is that thecommodity prices are sensitive to the US interest rate andglobalization isn’t helping to keep inflation down like before.Commodity prices are dollar denominated. If the Fed’s policy rate islow, it boosts financial speculation in the market. Surging commodityprices bring up inflation expectation and can trigger a price-wagespiral. At some point the Fed would need to target oil price.

 

Globalizationwas a dis-inflationary force for the past two decades. It is theopposite today. Costs are rising faster in emerging economies than inthe US. The dollar has adjusted sufficiently against other majorcurrencies but remain overvalued against emerging market currencies.However, emerging economies are holding down their currencies topromote their exports, which is causing asset inflation that in turninflates their costs. The emerging market currencies are appreciatingthrough inflation, which boosts inflation in the US through its imports.

 

Amajor difference between Japan and the US is in their exchange ratebehavior after their bubble burst: yen appreciated but the dollarcollapsed. Japan trapped itself in deflation as a strong currency andweak economy sustained a deflationary equilibrium with low interestrate. The weak dollar over the past three years has stored up a lot ofinflationary pressure. The higher US interest rate is to compensate forthe currency depreciation before.

 

In addition to theinterest rate, capital will flow from emerging economies to the USstarting in 2011. The asset inflation in the emerging economies issustained by momentum. As soon as the momentum stops, investors willrealize that asset prices in the emerging economies are much higherthan in the US even taking into account their higher growth potential.Capital flow will reverse then. It would be similar to what happened in1996-97. A long period of weak dollar before drove capital intoemerging economies and caused their asset markets to stay bubbly for along time. Most speculators thought that the bubbly situation wouldlast forever. The catastrophe came when the dollar went into a bullmarket. Virtually every emerging economy went into a crisis. I wouldn’tbe surprised that another bout of emerging market crisis may occur in2012.

 

The cyclical bull market for the dollar may lastfor two to three years. It could bounce up by 20%. The dollar index mayreach 100 during the period. It would be similar to the dollar’ssituation in the early 1980s. The Fed raised interest rate massively totame inflation. Even though the US economy wasn’t that strong and thefiscal deficit was large and increasing, the dollar rose substantiallyuntil the 1985 Plaza Accord. The coming dollar bull market may even beshorter.

 

Currency is like any commodity whose pricedepends on supply and demand. Its internal value is interest rate andexternal value exchange rate. For the past two millennia the currencyin use is either gold or silver. The size of an economy determinescurrency demand. Before industrialization economic growth wasimperceptible in human time. Hence, the demand for currency was fixed.If gold supply is stable, it is a perfect situation for pricestability. When European colonial powers brought back massive amountsof gold and silver after the discovery of Americas, it led to inflation.

 

Inthe era of industrialization the rapid economic growth led to moneydemand rising faster than supply. Deflation became the norm duringindustrialization. The appreciation of money increased incentives formoney hoarding, which could cause a deflationary spiral. Central bankwas invented to increase money supply. The usual currency system waspegging paper money to gold, the so called gold standard. Its advantageis that the total currency supply could be much larger than the actualgold reserve through the multiplier effect of the credit system.

 

Papercurrency has a tendency to depreciate, as its cost of increasing supplyis relatively small. A popular economic theory is ‘money illusion’. Itassumes that people cannot link immediately inflation to money supplyincrease. Hence, they are willing to work for the same amount of moneyfor the same amount of work when money supply increases at first, i.e.,tricking people into working for less. This assumption is the key tothe effectiveness of Keynesian stimulus. The gold standard limits moneycreation as the central bank must hold enough gold for its printedmoney. It could manipulate total money supply by changing interest rateto influence the multiplier effect in the credit system. Without thegold standard money holders can only depend on a central bank’sgoodwill for preserving the value of money.

 

The trackrecord of central banks on preserving the value of money is quite poor.Since the gold standard was abandoned in 1971, the dollar hasdepreciated from $36 to 945/ounce of gold. In terms of gold price thedollar has depreciated by 96%. The Chinese Yuan was pegged to thedollar below 2 before its depreciation began in the 1980s. It is now6.8. In terms of gold Chinese currency has depreciated by 99%. Suchmassive debasing of paper currency is unprecedented in human history.

 

Centralbanks, as they are subject to political powers that need money to fixshort term problems, are not kind to money holders. They are the onlybusiness that is bent on harming its customers. That is why centralbank governors are either very old, with beard, or scholarly-looking,because they need to project the image of gravity to fool people intoholding a depreciating asset. I don’t mean central bankers are evil.They are subject to their political masters and must please them, eventhough independence is the mantra for central banking. When push comesto shove, don’t trust your central bank.

 

The long-termprospect for the dollar remains bearish. The key is fiscal balance. Ifa government runs large and chronicle deficit, its central bank islikely to accommodate. Otherwise, the resulting high interest ratewould kill the economy. From that perspective the dollar’s futureremains shaky.

 

The US government is likely to incurfiscal deficit above 10% of GDP in 2009 and 2010. This is not the scarypart. When the US economy recovers, the fiscal revenue would too andthe deficit would decline. The biggest problem for the US fiscalbalance is its healthcare expenditure. The US’s healthcare cost islikely to be 16.5% of GDP in 2009, doubled in two decades and twice ashigh as the median among OECD economies. Its share in GDP is rising by0.5 percentage point per annum. Nearly half of the healthcare cost isborn by the Federal and local governments. Unless the trend isreversed, the Federal Reserve will be forced into printing money tofund the fiscal deficit.

 

The Obama Administration putshealthcare reform its number one priority. If the reform is successful,the US economy and the dollar will have a good future. The Obama Agendamainly has two components: (1) spending $1 trillion over the nextdecade to expand medical insurance to 15% of the population without ittoday, and (2) providing a public option for purchasing medicalinsurance. The second part is running into fierce resistance now. Asone sixth of the economy is healthcare, one can imagine how many areagainst the reform that would harm their interest. As far as I cantell, when the US Congress convenes in autumn, it would pass a bill onthe first part and ignore the second. While providing medical insuranceto those without it is a laudable social objective, it worsens thefiscal situation.

 

The root cause of the US healthcareproblem is its incentive system: patients demand expensive services asthey don’t need to pay for it, hospitals, doctors and drug suppliersovercharge price-insensitive patients, and insurance companies keepraising premium to cover escalating costs. McKinsey Global Institutedocumented in its recent report (‘Accounting for the Cost of Healthcarein the United States’, January 2007) that one third of the UShealthcare expenditure was due to high input costs -doctors, nurses,etc. are paid more than in other countries-and inefficiencies. In asystem with cost socialized and benefit individualized, overpricing andinefficiencies are inevitable.

 

The demographic trend willmake the healthcare cost more daunting in future. The healthcare costrises exponentially with age. As the US’s baby boomers retire, thehealthcare cost would rise even faster. The US fiscal balance isheading for a catastrophe. It is possible that the US could experiencehyperinflation at some point.

 

The value of a currency isrelative to other currencies. The US’s situation is not unique. Agingis a dominant economic factor in Europe and Japan. Their currencieshave been relatively strong due to their high household savings thatare sufficient to fund their large fiscal deficits. However, the futuremay not be so. Japan’s fiscal debt is already 200% of GDP. Europeancountries’ are around 100%. As long as these deficits can be funded bydomestic savings, they can keep increasing fiscal debt and hide theburden by keeping interest rate low. The low interest rate must besupported by strong currency. But the strong currency will weaken theireconomies in the long run. Hence, they will have lower income andsavings in future. At some point in the next decade Europe and Japanmay need to print money to fund their deficits, which would lead toweak currencies.

 

Aging is such a dominant force negativefor currency value. Hyperinflation may spread around the world. Whilethe long term prospect for the dollar is poor, it isn’t good for othercurrencies either. We must be vigilant in terms of holding money.However, don’t rush out to change paper money for other assets now.Stocks and properties are grossly overvalued in many countries,especially in China. Money is still cheap relative to such overvalueassets. But, don’t forget to switch money into stocks and propertieswhen the bubbles burst.

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