Today, while addressing a European Banking Congress in Frankfurt, Alan Greenspan stated “Given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point.” Maybe the Chairman hasn’t noticed, but that train has already left the station.
Greenspan further stated that “International investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing the U.S. current account deficit and rendering it increasingly less tenable.” If the Chairman were paying closer attention to actual market activity, he would know that the former process is already underway, and that the latter can not be too far off.
Perhaps the Chairman didn’t have a chance to read the article in yesterday’s Wall Street Journal that described the long lines of Chinese citizens waiting to unload their U.S. dollars, and a currency black market where the Chinese now exchange dollars for yuan, instead of the other way around . Or perhaps the Chairman hasn’t noticed that interest rates on Honk Kong dollars (another pegged currency) are now negative. The last time this happened to a currency was the Swiss franc during the 1970’s, when people all over the world were fleeing dollars. In other words, depositors would rather pay to own Honk Kong dollars than get paid to own U.S. dollars. What more need be said.
Greenspan tried to put a rosy glow on the otherwise bleak picture he painted by stating that “Market forces should over time restore, without crises, a sustainable U.S. balance of payments.” Such a statement is wishful thinking at best, but the words “without a crises” do not necessarily imply without significant economic pain for Americans. I wonder just what type of economic conditions the Chairman would consider to be a crisis?
When asked to predict the dollar’s future level, Greenspan was far more disingenuous, stating “Forecasting exchange rates has a success rate no better than that of forecasting the outcome of a coin toss.” I don’t know about the Chairman, but when a coin comes up tails every time its flipped, its a pretty easy call to make. Perhaps he should check with his former colleague, retired Dallas Federal Reserve bank President McTeer, who recently stated “when it comes to the dollar there is only one direction it can go, and that direction is down,??? or his predecessor, former Federal Reserve Chairman Paul Volker, who put the chances of a dollar crash sometime within the next five years at 80%
Meanwhile, as Greenspan spoke the dollar continued its decline, with the U.S. dollar Index again hitting new lows, trading within 4% of its all time record low set in 1992. Dollar weakness was pronounced and widespread, partially against the Japanese yen, the Swiss franc, and the Canadian and Australian dollars. In other markets, gold rose five dollars an ounce, oil rose over two dollars per barrel, and both U.S. stocks and bond prices fell sharply. I don’t care what Greenspan says, when it comes to the dollar, my money is on tails all the way.