Dollar Debasing from Gold Standard : President Nixon

President Nixon declaration of debasing dollar,

It was on this vary day, when President Nixon ended the Age old ‘Gold standard’ valuation of dollar and debased it, to the Fiat Dictate of the Political Rulers. He claimed for 7 International Currency Volatile situations in as many Years and Blamed all that, on the International Monitory Speculators and justifies the action for American Jobs and Inflation. He added an 10% Import tax, to benefit, the American Producers.

The Background for this action was ‘ Vietnam ‘ war and the Misery, And protest ensued.

Well ! The debasement of currencies saw big Volatility in the Gold Prices and bottom in the 2004, there about. The many wars and Alan Greenspan’s Policy tweaking saw Gold rising and falling in a Narrow Grove for many Years.

It was always ignored and Dollar Importance remained. More so due to American Dominance.

International Monitory Fund, remained on the side walk. All Countries followed this ‘ Disorder’ in Great Happiness. The International currencies Trading has now become the Trading Bets and Currencies traded in Derivatives, ETF’S and All Kind of Fictitious Products, for so Called ‘ Hedges’.

The Clock is slowing turning Back to 14Th August 1975…?

US Debt is Gold Standard ...? Asks Neel Kashkari.

 ( PIMCO, the biggest Debt fund Managing company, has many ' super Brains'  one of its catch is Neel Kashkeri, son of Indian Kashmiri Immigrants to US.    The Blue eyed Boy, profile on P.I.M.C.O: (Mr. Kashkari is a managing director and head of new investment initiatives in the Newport Beach office. Prior to joining PIMCO in 2009, Mr. Kashkari served in the U.S. Treasury Department from 2006-2009, first as senior advisor to Secretary Henry Paulson and then as Assistant Secretary of the Treasury. In the latter role, he established and led the Office of Financial Stability and oversaw the Troubled Assets Relief Program (TARP). Before joining the Treasury Department, Mr. Kashkari was a vice president at Goldman Sachs in San Francisco, advising technology companies on financings and mergers and acquisitions. Previously, he was an aerospace engineer at TRW Corporation. He holds both bachelor's and master's degrees in engineering from the University of Illinois at Urbana-Champaign and an MBA from the Wharton School at the University of Pennsylvania)

Neel, has raised the basic question, Whether value lies in the Hands of Beholder..?

Surely, Gold is Gold, because all call it Gold and are ready to pay for it. 

The removal Gold Standard in 1972.

When President Nixon, removed Gold standard and Forced $ in.1972 .  World was put to test, by explosion in Crude prices, The $ became entrenched in international trade, as a corridor and US Bonds the prize.  The International development heaved on Crude, which remained undervalued through out 80-90's. The 'Camp David',  agreement in 1979, between Israel and Egypt cemented the ' Crude' revolt. Simultaneously, the OIL Producing nation were galvanized under the umbrella of O.P.E.C.and Monarchy's were set up in Egypt, Syria, Libya, Iraq.to counter the threat of Khomeni in Iran and also as Allies against USSR. NOW the whole Edifice is crumbling across the Middle East and Libya. The recent OPEC meeting showed the deep fissures, and soon OPEC may will have its count.

 Does all this politics have further bearing on 'Fall Of $' and vis a vis.?

Could a U.S. debt downgrade trigger a financial crisis?

We approach Treasury’s debt-ceiling deadline, attention has shifted from the risks of a default on Treasury debt to the risk of a downgrade of U.S. credit. Many are asking whether a downgrade could itself lead to a financial crisis. With the example of 2008 still fresh in many minds, the question has become: Would it be as bad as the Lehman Bros. bankruptcy?

Some market observers speculate that a downgrade would be a non-event: Japan, for example, went from a rating of AAA to AA without much drama. Others suggest that a downgrade would increase Treasury’s borrowing costs by $100 billion a year or more, making our already unsustainable deficit trajectory even worse.

There are no rules to define what is systemic and what isn’t — or to accurately predict the consequences of an economic shock. Each crisis is unique. How exactly it will affect financial markets, companies and our economy is impossible to know. Nonetheless, recent examples offer guidance.

In 2008, a number of once-cherished beliefs were turned upside down: (1) that home prices in America would never fall; (2) that AAA-rated subprime securities are sound; (3) that a major investment bank would never fail. Consumers, investors and companies allocated capital according to these truths. When the beliefs were revealed to be false, massive shocks were inflicted on the economy as financial markets rapidly adjusted to account for these new risks.

Banks had to reduce their leverage and rein in lending. Companies froze investment. Consumers cut spending and started saving. As a result, the economy plunged into recession, and millions of jobs were lost.Unemployment shot to 10 percent.

The question now is whether U.S. Treasury bonds, which anchor the global economy, really are the gold standard, the risk-free financial instruments they have been trusted to be. What will happen if that truth is revealed to be false?

Four factors in particular can help assess the magnitude of the financial impact from an undermined truth:

(1) How strongly is the belief held?

In 2008, investors around the world generally believed that major U.S. investment banks were so large they would never be allowed to fail. In the six months leading up to Lehman’s bankruptcy, however, it came under increased funding pressure and its stock price slowly collapsed. Markets were not completely convinced that the government would have the will or the ability to save Lehman; otherwise investors would have continued lending to it, as they did to Fannie Mae and Freddie Mac, which had no trouble borrowing money before they were rescued only days ahead of the Lehman bankruptcy.

By comparison, U.S. Treasurys have been defined for decades as the risk-free financial instrument throughout global financial markets. Faith in Treasurys is far stronger than it ever was in Lehman Bros. This suggests a far bigger shock than Lehman if this truth is proven false.

(2) How big an asset class does the belief support?

U.S. Treasurys are a $14 trillion market — the single biggest security market in the global economy. In comparison, Lehman had approximately $600 billion of liabilities before it failed, less than 5 percent of the size of the Treasury market. Treasurys are held by virtually all 8,000 banks in America and nearly all insurance companies, corporations, pension plans and millions of individuals’ 401(k)s. This scale suggests a far larger shock than Lehman.

(3) How wrong was the belief?

Here, Treasurys are not as bad as Lehman. Even if the U.S. credit rating is downgraded, almost no one believes we will actually default on our debt. The United States is not entering bankruptcy, and its debt is not junk. Lehman debt ultimately proved to be worth a fraction of its face value. To some, this suggests a U.S. downgrade would produce a more modest shock than Lehman. But a small deviation from a cherished belief can be as shocking as a large deviation from a weaker belief.

(4) What is the economic context in which the shock is taking place?

Although the United States is technically no longer in recession, the U.S. economy is growing slowly. Unemployment remains at 9.2 percent. Europe is awash in its own fiscal crisis, and much of the developed world is struggling. When Lehman collapsed, U.S. unemployment was at 6 percent, but the economy was contracting and housing markets were plummeting. The global economic context in September 2008 was probably worse than today, but our economy remains vulnerable.

These factors suggest that a U.S. downgrade has the potential to be as bad or perhaps worse than the Lehman shock. The more strongly held a belief, and the larger the asset class it supports, the greater the potential damage to the economy when the belief is turned upside down. We may not be certain what will happen if U.S. credit is downgraded, but there is no upside to finding out.

 ( Tip : What is a Gold Standard : The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold.-- wikipeadia.

 2) The U.S. used a gold standard from its inception in 1789 until 1971, a stretch of 182 years. In 1965--not that long ago--all major countries in the world participated in the worldwide gold standard system known as the Bretton Woods arrangement.)

India's foreign exchange reserves decline-Reserve Bank Of India

 India's foreign exchange reserves declined by $112 million to $314.507 billion on the back of a dip in foreign currency assets (FCAs) for the week ended July 15. 

1. Reserve Bank of India - Liabilities and Assets
(` crore)
Item	2010	2011		Variation
	Jul. 16	Jul. 8	Jul. 15 #	Week	Year
	1	2	3	4	5
Loans and advances
Central Government	—	33,672	39,232	5,560	39,232
State Governments	—	247	629	382	629

2. Foreign Exchange Reserves
Item	As on Jul. 15, 2011		Variation over
			Week		End-March 2011		End-December 2010		Year
	` Crore	US$ Mn.	` Crore	US$ Mn.	` Crore	US$ Mn.	` Crore	US$ Mn.	` Crore	US$ Mn.
	1	2	3	4	5	6	7	8	9	10
Total Reserves	14,00,972	314,507	5,301	–112	39,958	9,689	68,618	17,173	82,074	32,606
(a) Foreign Currency Assets +	12,57,079	282,299	5,137	–115*	32,196	7,969	57,002	14,485	60,511	26,622
(b) Gold $	1,10,317	24,668	—	—	7,745	1,696	9,631	2,198	17,613	4,774
(c) SDRs @	20,414	4,584	100	2	13	15	–2,339	–494	–2,927	–403
(d) Reserve position in the IMF**	13,162	2,956	64	1	4	9	4,324	984	6,877	1,613
+ : Excludes ` 1,113  crore /US$ 250 million invested in foreign currency denominated bonds issued by IIFC (UK). * : Foreign currency assets expressed in US dollar terms include the effect of appreciation/depreciation of non-US currencies (such as Euro, Sterling, Yen) held inreserves. For details, please refer to the Current Statistics section of the RBI Bulletin. ** : Reserve Position in the International Monetary Fund (IMF), i.e., Reserve Tranche Position (RTP) which was shown as a memo item from May 23, 2003 to March 26,2004 has been included in the reserves from the week ended April 2, 2004 in keeping with the international best practice. @ : Includes SDR 3,082.5 million (equivalent to US$ 4,883 million) allocated under general allocation and SDR 214.6 million (equivalent to US $ 340 million) allocatedunder special allocation by IMF done on August 28, 2009 and September 9, 2009, respectively. $ : Includes ` 31,463 crore (USD 6,699 million) reflecting the purchase of 200 metric tonnes of gold from IMF on November 3, 2009.

3. Scheduled Commercial Banks - Business in India
(` crore)
Item		Outstandingas on Jul. 1 # 2011	Variation over
			Fortnight	Financial year so far		Year-on-year
				2010-2011	2011-2012	2010	2011
		1	2	3	4	5	6
Liabilities to Others
	Aggregate deposits	54,88,682	1,43,981	1,44,022	2,80,712	6,05,882	8,51,833
			(2.7)	(3.2)	(5.4)	(15.0)	(18.4)
	Demand	6,03,035	53,637	–30,134	–38,670	1,05,421	–12,440
	Time	48,85,646	90,343	1,74,156	3,19,382	5,00,461	8,64,274
Bank Credit		40,86,326	84,806	1,63,357	1,44,244	6,12,578	6,78,181
			(2.1)	(5.0)	(3.7)	(21.9)	(19.9)
	Food Credit	79,607	2,279	5,961	15,324	–3,224	25,157
	Non-Food credit	40,06,719	82,527	1,57,396	1,28,919	6,15,802	6,53,024

5. Accommodation Provided by Scheduled Commercial Banks to Commercial Sector in the form of Bank Credit and Investments in Shares/Debentures/Bonds/Commercial Paper etc.
(` crore)
Item	2011 – 2012			2010 – 2011
	Outstanding as on		Variation	Outstanding as on		Variation
	2011		(2) - (1)	2010		(5) - (4)
	Mar. 25	Jul. 1		Mar. 26	Jul. 2
	1	2	3	4	5	6
3. Total (1B+ 2)	40,25,401	41,48,581	1,23,180	33,14,370	34,81,866	1,67,496
Note : Data on investments are based on Statutory Section 42(2) Returns.

 India's foreign exchange reserves declined by $112 million to $314.507 billion on the back of a dip in foreign currency assets (FCAs) for the week ended July 15. 

The reserves had declined by $1.10 billion in the previous week to $314.62 billion. 

FCAs, the biggest component of the foreign reserves, were down $115 million to $282.30 billion for the week under review, the Reserve Bank said in its weekly data released this evening. 

FCAs, expressed in US dollar terms, include the effect of appreciation or depreciation of the non-US currencies such as the euro, pound and yen, held in the reserves, it said. 

The country's gold reserves remained unchanged at 24.668 billion, the apex bank data said. 

Both the special drawing rights (SDRs) and reserve position in the International Monetary fund showed an increase during the week, RBI said. 

The SDRs were up by $2 million to $4.584 billion, while India's reserve position in the IMF increased by $1 million to $2.956 billion, the RBI data showed.

Inter-National Data Summary: US, Europe, Asia-Pacific

U.S.

• Housing starts jumped 14.6% over May to an annualized 629,000 units in June, the highest level since January. Housing starts are up 16.7% over last June. The reading was much stronger than the consensus expectation of 575,000, though after May starts were downwardly revised to 549,000 (previously 560,000 units). Multifamily starts surged 31.8% over May to 170,000 units. Single-family starts were up 9.4% to 453,000 units. Building permits, a leading indicator for future construction activity, were up 2.5% to 624,000 in June.
• U.S. existing home sales fell for the third straight month by 0.8% month over month to an annualized 4.77 million units in June, weaker than consensus expectations of an increase to 4.9 million. The 7.0% month-over-month drop in condo/co-op sales to 530,000 units largely explains the overall decline. Single-family sales were flat for the month. Condo/co-op sales are down 18% year over year while single family home sales are down 7.4% year over year. The months' supply of unsold homes rose to 9.5 from 9.1 in May and is still above the six-month historic average. The sales price jumped to $184,300 from $169,300 in May and is up 0.8% over last June.
• The S&P/Experian consumer credit default rates decreased in June to 2.14% from 2.23% in May and 3.44% a year ago. All loan types saw declines.
• Industrial production edged up 0.2% month over month in June, which is the first rise seen in two months, offsetting the 0.1% decline in May (previous 0.1% gain). Auto production remained weak again, down 2.0% in June after dropping 1.5% the month before because of continued Japan-related weakness. Manufacturing capacity utilization remained at its May level of 74.4%, and it is still less than the 80-point benchmark rate.
• Consumer prices (CPI) fell by 0.2% month over month in June, which was a larger drop than the 0.1% decline that the consensus expected, after a 0.2% month-over-month increase was seen in May. Core CPI, excluding food and fuel, was up 0.3% over May, the same rate as in May, though stronger than the 0.2% increase that the consensus expected. On a year-over-year basis, overall CPI is up 3.7%. Core CPI is up 1.6% over last year and is still within the Fed's implicit 1% to 2% comfort zone. Energy prices fell 4.4% month over month but are up 20.1% over last June.
• The New York Fed Empire State index climbed four points to a disappointing negative 3.8 reading in July, partially offsetting the near 20-point drop to negative 7.8 in June, and still less than zero, indicating contraction, for a second time. New orders edged down to negative 5.6 after plummeting to less than zero (negative 3.6) in June. The employment index dropped again in July to 1.1 from its 14-point plunge to 10.2 the month before. The price readings also weakened.
• The initial jobless claims fell 22,000 to 405,000 in the week ended July 9 from an upwardly revised 427,000 the week before (was 418,000). Continuing claims climbed 15,000 to 3.727 million for the week ended July 2, though after the week before was upwardly revised to 3.712 million (previously 3.681 million).
• The U.S. Treasury budget deficit was $43.1 billion in June and narrower than the $68.4 billion deficit seen in June 2010 and the consensus expectation of $65.5 billion. Receipts edged down 0.6% over last June to $249.7 billion, Outlays fell 8.4% year over year to $292.7 billion. The deficit now stands at $970.5 billion for the first nine months of the fiscal year, narrower than the $1.004 trillion deficit for the same period in fiscal year 2010.
• Oil prices increased to $100 per barrel on (Thursday- midday) from $97.37 per barrel the previous week on rising speculation that debt problems on both sides of the Atlantic would be resolved soon and signs that crude stocks and Natural Gas are shrinking in U.S. The Energy Information Administration (EIA) inventory data showed a 3.7 million-barrel fall in crude stocks, which was larger than the 1.5 million-barrel drop that markets expected. Total product demand was up 1.6% year over year.
• U.S. bond yields edged down two basis points (bps) to 2.93% on Wednesday (midday), after a disappointing existing home sales report increased worries that the recovery is losing steam. Mortgage rates slipped marginally to 4.54%. Mortgage applications increased to 15.5% during the week ended July 15 following a drop of 5.1% the previous week. The refi index increased by 23.1% from a 6.2% drop the previous week. The purchase index decreased by 0.1% this week, following a decline of 2.6% the previous week.
• The dollar weakened against most trading partners this week as signs of progress on a U.S. budget deal prompted a rise in risk tolerance. The euro rose to $1.422/€ on Wednesday (midday) from $1.404/€. The yen rose to ¥78.77/$ from ¥79.31/$.
• LEI rose by 0.03% Month over Month ( see the separate post giving the Details, Dow trading @12735 and Nasdaq@ 2838, S&P 500 @1345   
• In The Anvil :
  •  S&P/Case-Shiller Home Price Index (July 26; negative 4.2). Consumer confidence (July 26; 57.0). New home sales (July 26; 0.31 million). Durable orders (July 27; 0.5). Beige Book for FOMC Meeting (July 27). Initial claims (July 28). Advance second-quarter GDP (July 29; 1.7%). Employment cost index (July 29; 0.6). Chicago ISM (July 29; 60.0). Consumer sentiment (July 29; 64.0).

                                                                            Europe :

• Italy's lower house of parliament approved a EUR48 billion austerity package on July 15, 2011, in record time to calm the increasing contagion fears spreading from the Greek debt crisis. The mix of spending cuts and tax measures is aimed at ensuring the government reaches its target of balancing the budget by 2014.
• The minutes of the July 6 - 7 meeting of the Bank of England's Monetary Policy Committee (MPC) revealed a more dovish tone, indicating that any rises in interest rates are being put off into the future.
• Germany's ZEW index of economic sentiment slipped for the fifth consecutive month to negative 15.1 in July, its lowest level since January 2009, from negative 9.0 in June. Europe's government debt crisis weighed on optimism despite the continuing strength of the German economy.
• Russian industrial production increased by 5.7% year over year in June. The manufacturing sector, which grew 7.1% year over year during the period, led the growth.
• The eurozone trade deficit declined to EUR0.6 billion from EUR2.5 billion in April. Exports grew 1.5% month over month in May, faster than April's rise of 0.2%. Meanwhile, import growth slowed to 0.2% from 0.8%.
• The eurozone inflation rate remained steady at 2.7% in June but continues to remain at more than the target that the European Central Bank set.
• European Data update is being done separately. Greece Talks are being viewed ... European Markets Closed +ve  cac 3816.25, Dax 7290.14  , FTSE: 5899.89
•  Flash PMI's from Markit tomorrow and 
  •  EMU industrial orders (July 22). Germany Ifo expectations (July 22). France production outlook (July 22). Italy retail sales (July 22). Germany retail sales (July 25). Germany consumer confidence (July 26). U.K. GDP (July 26). Hometrack house prices (July 26). Germany import price index (July 27). CPI (July 27). Switzerland leading indicator (July 27). U.K. total orders (July 27). Germany unemployment rate (July 28). EMU, U.K. consumer confidence (July 28). U.K. nationwide house prices (July 29). France consumer spending (July 29). PPI (July 29). Spain, EMU CPI (July 29). U.K. consumer credit (July 29). France, Germany, EMU PMI manufacturing (Aug. 1). EMU unemployment rate (Aug. 1). EMU PPI (Aug. 2). France, Germany, EMU PMI services (Aug. 3). EMU PMI composite (Aug. 3). Retail sales (Aug. 3).

                                                                  Japan And Other Asia-Pacific

• South Korea's central bank left its key interest rate unchanged at 3.25% in its policy meeting held on July 13 because of rising uncertainty on the global economic recovery, including the eurozone debt crisis.
• New Zealand's economy rose by 0.8% quarter over quarter in the March quarter, stronger than the 0.5% quarter-over-quarter growth in the last quarter of 2010 and consensus expectations of just 0.4% quarter over quarter, owing to the February Christchurch earthquake. The increase was the fastest quarterly expansion since the December 2009 quarter.
• Singapore's economy contracted 7.8% quarter over quarter in the second quarter, after a 27.2% jump in the first quarter. On a year-over-year basis, the pace of economic growth slowed to a mere 0.4% in the second quarter. The manufacturing sector, where output contracted by 5.5% year over year after a 16.4% year-over-year jump in the previous quarter, led the deceleration.
• New Zealand consumer prices (CPI) rose 1% during the second quarter, increasing year-over-year inflation to 5.3%. The reading was much stronger than the consensus forecast of an increase of just 0.7% quarter over quarter and 5.1% year over year.
• India's wholesale price index (WPI) rose by 9.4% year over year in June 2011, up from 9.06% in May.
• Coming releases:  Retail sales (July 27). Trade balance (July 27). CPI (July 28). Unemployment rate (July 28). Personal income (July 28). PCE (July 28). Industrial production (July 28). Shipments (July 28). PMI (July 28). Housing starts (July 29). Auto sales (Aug. 1). Trade balance (Aug. 4). Leading index (Aug. 5). Current account (Aug. 7). Consumer confidence (Aug. 9).

US- No Credible Plan-- Ratings downgraded .S&P

BOJ, Alcoa, JP Morgan,Google, Jobs, Inflation and ECB, Moody’s, Retail sales all in Action: Next Week

The Last week ended with Weaker than weak Employment report that sunk expectation. The Chinese data of higher inflation above 6% may further hardened, the tightening Bias of Chinese Central bank towards, some more rate hikes. The Goldman’s report on Financials put more jitters. While China's Reserves grown much more than the expectations, Pressure to 'Value' Yuan may take steam. 


As, the Week Begins, Australia is expected to impose Carbon Tax of about Aus. $ 23 on Miners. while, Rio Tinto is likely to announce its result this week.


The US Treasury sales on Monday may indicate yields hardening , as first sales post QE -2
 






Tuesdays Factory Orders and FOMC Minutes will be watched for the Growth signs and the Dissent in the F.O.M.C. Infosys, declares its result on the same day. The Alcoa and Chevron result may cover up the commodity universe. Bank of Japan’s talks shall focus on recovery.

Wednesday, Begins with focus on Chinese data regarding GDP and other economic indicators. This may fix grounds for another rate hike. Smaller results in Indian markets. But, the US market will focus on retail sales i.e MBA purchase application, as Ben Bernanke starts his 2 day semi annual Testimony. Dallas FED’s  Fisher Speaks on the very day. But, the markets will close with eye on Google and JP Morgan.


Thursday, 14th : India TCS will post results. where market has high expectations. No of non Nifty companies declare results. The Inflation data is expected to carry the Diesel and gas price rises shall be again inflationary. The US market will open with jobless claims, retail sales and Business Inventories. The Bernanke’s Testimony shall rumble on the foreground. The JP Morgan and Google results  shall set the mood.

                                                
Friday the 15th : The Indonesian bank is expected to take tough call on Inflation.  The ECB shall declare the ‘ Stress Test’ results of 91 European Banks. Moody’s are expected to call on  US Bond Ratings in view of Budget Deficit. The Citi Group results will lurk in the weather. The Consumer Price Index, Industrial production followed by consumer sentiment buzz the Markets.


The sudden Infectious rise in yields of Italian Bonds in the late Friday will bear the answers, till then
The week ends again on China, whose Trade Balance will be under the Lights, as week end special.
Well, all in all  its a Joy ride , freak moments and nasty surprises seems to be packed in full. This Week will surely have its foot print for the coming Q.


US Budget is the Biggest un-discounted variable... ?


All though the tone may seem to be Bearish, but the under lying features are not so. The biggest risk are in terms US Budget. It seems to be double edged knife, If Spendings are cut, might restrain the growth derivatives for many companies and countries, simultaneously. And, if Bush Tax Cuts are not extended, may put investment vehicle on new tracks. Any how, an early solution will be rejoiced. 


The Pendulum may Oscillate fast, making lots of Noises.  

The Financial Meltdown In Europe ? Eurozone break up…? Asia is the default Saver ?

The Portugal was today downgraded to Junk by Moody’s and Greece is in a Mortgage Crisis like Lehmann .. The biggest Hit of this will be taken by French Banks, who Lent and recklessly Engineered the Greece, Portugal and Spain in the Web.

Surprisingly, euro is still holding its head well above the lower level, it sought against $, earlier, in the year. Today, Citi bank cut its earning forecast for banks. The safe heaven of Gold again saw entrants, below $1500/Ounce.

The Rise in ISM Manufacturing Index saw the hopes still pinned . The Investors preferring to ignore, what is happening in the Washington and hoping it bail out itself of the incredible warnings of Rating agency warnings. The Housing data in US again sought newer lows in construction spending.

All this are giving currencies a very diabolical and critical view. Possibly the drivers to invest lie in the Relative Appraisal of various currencies. So, here   Dr. Clarida is an executive vice president in the New York office and PIMCO's global strategic advisor. Since 2008

This what PIMCO’s Richard Clarida thinks….

End of Currency Wars?

• International capital is flowing to countries with good growth prospects and to countries with central banks confident enough to raise interest rates.
• Certain nations are placing controls on capital or intervening in currency markets with an eye to maintaining economic competitiveness.
• We see central banks in the U.S. and the U.K. winding down monetary stimulus that has exacerbated the situation. Also, we see potential for emerging market currencies to appreciate, and that may give developed nations a boost.

Nations generally benefit when their currency valuation is low enough to assist domestic industry, making their exports cheap and imports expensive. But when a trading partner intervenes in currency markets to enforce a low valuation, then international tension may arise.
In the fourth of a series of Q&A articles accompanying the recent release of PIMCO's Secular Outlook, portfolio manager Richard Clarida discusses PIMCO’s outlook on currencies and argues that global currency tensions may ease in the years ahead.
Q. Could you discuss efforts some nations appear to be taking to direct the exchange value of their currencies to favor domestic industry? Is this a source of long-term global tension (previously some media reports spoke of “currency war”)?
Clarida: Taking a step back, our secular outlook for the next three to five years is for a two-speed global recovery with emerging markets (EM) leading the way. One natural consequence is that international capital is flowing to countries with good growth prospects and also to countries with central banks that have the confidence to raise interest rates. Much of the focus, rightly, has been on emerging markets, but developed nations such as Australia, Canada and Norway have been hiking interest rates, and their commodity producers are benefiting from booming emerging growth.
Some countries are resisting the upward pressure that these capital flows are putting on their exchange rates. They are placing controls on capital or intervening significantly in currency markets with an eye to maintaining economic competitiveness. We do see this dynamic as a source of long-term global tension, but we believe it is a tension that most likely will be manageable. For example, we see central banks in the U.S. and the U.K. winding down monetary stimulus that has exacerbated the situation; rate hikes could be on the horizon in 2012.
Q. Could you elaborate on how PIMCO sees this issue playing out?

Clarida: If indeed emerging economies are to continue to be centers of global growth, then at some point we believe they will move toward more of a local-demand-driven economic model and away from an export-reliant model. We see currency adjustment as part of that rebalancing.
Let me explain this dynamic. Think of an emerging economy with very rapid productivity growth – the amount of goods and services it can produce each year is expanding. If this hypothetical country relies on export demand, it requires a relatively weak exchange rate to absorb more and more supply. If this country fears export demand is tapering off, it may shift focus and begin nurturing domestic demand – selling local goods to local customers. But if goods and services shift to domestic demand that creates scarcity on the global market and prices rise. So to maintain domestic demand the emerging nation allows its currency to appreciate, which enables domestic consumers to compete globally. Theoretically, this eases global tensions and gives developed nations a boost: since their currencies are relatively cheaper their exports become more competitive.
Q. What does PIMCO mean when it speaks of a trilemma dilemma?

Clarida: The trilemma is a fundamental concept in international finance developed by Nobel laureate economist Robert Mundell, and the basic idea is that for any national economy operating in a broader global economy, there are three desirable outcomes. National leaders want an independent monetary policy that suits domestic circumstances. They want to benefit from the free flow of capital, especially capital inflows directed toward economic investment. And they want a stable exchange rate.
This trio is called a trilemma because theory and experience suggest at most a nation can only achieve two of those objectives. Thus, international policy making is always about trading off the desirability of exchange rate stability, monetary independence and capital flows. The U.S., for example, has had an independent central bank and certainly benefits from an open capital market reflected in our current account deficit – we borrow from the rest of the world. But the dollar fluctuates not only with U.S. events but also with global ones. China, on the other hand, has a very stable exchange rate because they manage it, and their central bank has some leeway to influence domestic interest rates. But China has restricted capital mobility.
Q. Is the U.S. dollar slipping as the world’s reserve currency? Which currency or currencies will dominate global commerce in the years ahead?