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Warning: Forecasts IEE

The forecast of IEE #6 (45). Exchange risks of the world in 2006

Analysts are afraid, that in the second half of 2006 the dollar exchange rate in the world exchange markets can fall to 30 % - 45 % in relation to euro. These fears are caused by growth of double deficiency, and in particular, the external payments deficit of the USA, which in 2005 has reached $790 billion.

 For the information.

The balance of payments of the country is a balance of the values, of sold goods and services and values of the money received for it. If on results of year, the country has received a huge external payments deficit it means, that value of its own currency much more exceeds value of the goods it sold abroad. To balance these both values, the central bank should lower a rate of the national currency up to the significance providing zero significance of balance on results of year. If it will not make this, it can make the market instead.

Net-export of the goods and services, plus pure transfer deeds name the current account or the current account position. The current account should be counterbalanced by the account of the capital flow. The last makes a difference between national savings and investments. Equality of these two accounts - current and capital flows also makes a basis of the balance of payments.



One of the important factors causing the growth of an external payments deficit of the USA is the underestimated exchange of their important trading partners and first of all - China and Japan. Only one China has introduced "mite" to problems of Americans for the sum more than 200 billion dollars. In its turn, for Japan and China to achieve these results it was required to redeem actively the American currency at the exporters that should affect the growth of their first line reserves. 

In February 2006, Japan has established a new world record on the sum of gold and exchange currency reserves, which have made nearby $ 852 billion dollars. The Basic part of the reserves - from above $ 710,5 billion dollars - Japan keeps in foreign securities. More then $ 122 billion dollars accounts on investments in various currencies.

On the second place in a world rating China sticks to confidently. Its reserves amount $ 818, 9 billion and in 2005 have grown on 34 %.

However, if to consider Hong Kong and Taiwan Chinese, China unequivocally wins the first place in the world on the sum of the reserves as together with Hong Kong $ 122,4 and Taiwan $ in 253,3 billion the sum of its reserves will make $ 1194,6 billion. 

The Asian macroregion as a whole keeps world superiority on gold and exchange currency reserves. The total sum of Japanese, Chinese, Taiwan, Hong Kong and South-Korean, Indian, etc. reserves makes more than $2, 6 bln. that becomes comparable to the gross national product of the countries-leaders of the euroregion.

It is interesting, that the USA, unlike Ukraine, Russia, Japan and China, do not very much disturb by the sum of the reserves. By estimations of experts their reserves makes only nearby $ 60 billion dollars.  By other words, the USA, with their huge economy, on first line reserves do not enter even in ten countries of leaders.

Well it or badly unequivocally, to answer it is impossible. If to judge the sum more than $700 billion, external payments deficit with their sum of reserves it is already possible to recognize the FRC of the USA the bankrupt. It is possible to agree with judgements, that such situation cannot  proceed long and, thus, the dollar already now represents the big risk factor for economic.

Perfectly understanding this problem the Asian countries, the greatest holders of the first line reserves, aspiring to diversify risks, actively buy up the American debt securities of the state, thereby supporting on them a high market price. For the American economy it is plus as the account of capital flow thus increases, reducing an external payments deficit.

Reflecting on it Jean-Michel Siks, an analyst of S&P, confirms, that « … while the deficiency (of the balance of payments of the USA) is financed due to sale of the American assets - shares, bonds and the real estate and while the cost of these assets grows more fast, than the deficiency, to worry to Americans there is no need ". « However, - as this analyst believes, - two-place growth of the value of assets cannot proceed too long - in long-term prospect they cannot grow faster, than the economy as a whole. Therefore, - argues Siks, - as the growth of the gross national product of the USA for a long time did not come nearer to a mark in 10 %, than, … if players will understand, that the system cannot support (payment) deficiency in 6,5 % of the gross national product, and it is indeed, there is a question of firmness of the exchange of dollar, - he is confident. - In this situation, probably, that dollars will start to dump, and it will cause the collapse of its rate ".

It would be quite possible to agree with these reasons, but the matter is that in this situation Americans, actually, have nothing to fair. In fact if there will be a collapse of a dollar exchange rate, the American crisis will be paid by the Japanese and Chinese central banks - they have the highest significances of the first line reserves and the lowest significances of the shares of gold (1,2 %, 1,3 %) in the structure of these reserves. In this situation the sum of depreciation of the first line reserves placed in US dollars, will correspond the sum of payment by the Asian countries of the American crisis.

Confirming to this thesis, Harold James - the professor of history at Pringstone University (USA) and the author of the book « the End of Globalization: Lessons of Great Depression », confirms, that the National Bank of China, the Bank of Japan, other central banks of the countries of Asia are in complex position. The huge reserve monetary funds; accumulated by them exceed 2,6 billion dollars, and supposedly the large part of their first line reserves are contained in US dollars - risky currency. James considers that all possible ways of exit from the developed situation are equally unattractive for central banks of the countries of Asia. If they will undertake nothing and will keep the dollar reserves as it is, their losses only will increase. However, if they will start to

purchase more, trying to strengthen a dollar exchange rate, they will receive larger version of the same problem. If, on the contrary, they will try to diversify the first line reserves in favor of other currencies, it only will accelerate dollar downing and will lead to even greater losses. Moreover, they, possibly, will face a similar problem and with other potential reserve currencies. And as an example brings the similar problems which have arisen after the First world war with the British pound sterling.


In 1920th the economic has been restored around the system of the fixed course of exchange, in which many countries kept the reserves not in gold (that was a usual practice before the First World war), but in a foreign exchange, especially in the British pounds sterling. Central banks of other states have taken an interest, whether the English Bank thinks to change the item concerning the exchange rate of pound. Naturally, it has been told to them, that the English Bank has no intentions to refuse a binding of pound sterling to gold and is going to support in future a strong pound (in the same way as the Secretary of exchequer of the USA John Snow supports today the idea of "a strong dollar ").

When on September 20-21st, 1931 there was an inevitable devaluation of the British pound, - Harold James speaks, - central banks of many states bore considerable losses and were accused of maladministration by surplus funds.

Thus, turns out that neither Americans, nor Asians are interested in bear movements of dollar. For the American economy, it would threaten with destabilization, and Asians (Japan and China) stimulate dollar with the supersoft monetary policy, achieving growth of the export.

Today, - as Harold James confirms, - the countries with an active trade balance do not require large surplus funds. They should reduce the stocks of a foreign exchange before they will make any nonsense with an accumulated wealth. Moreover, it is difficult to disagree with this.

Who will win in this situation?

Harold James as the historian does not consider a very important circumstance. In 1931, the prize or loss on courses of exchange was not after those countries, which carried out successful maneuvers with first line reserves, but after those countries, which before others had time to carry out innovative updating of the economy. Exactly this factor became decisive in strengthening economic, financial and currency systems of the country-victress, which became the United States of America.

For the today's moment the economy of China, however much it made the impression from its growth, nevertheless has no own breaking innovations, and all available innovations at its order - only the result of activity of the same Americans, Europeans, Japanese. Thus, in the economy of China now take place adaptable processes, to the innovations created in other macroregions. Therefore, China is not ready yet to a possible falling of a dollar exchange rate and, as though it did not sound unexpectedly, should be interested in stability of a dollar exchange rate.

The same is possible to tell about the economy of Japan depending on the American seller's markets of production. Therefore, no matter how the events in present year were developed, the Asian macroregion is interested in stability of world economic processes, and largely compensates negative influence of an external payments deficit of the USA. If they will not manage it to carry out to the full, consequences are difficult for presenting themselves - all in the world can come to movement. 

Makarenko I.P. 

Institute of evolutionary economy



Posted on the website: 2006-04-07

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