Talk Back

A reader responds to a recent column, “FX MATH: Bright Skies And Foreign Flows, If Italy Avoided The Euro”:

“Vincent Cignarella and Stephen Bernard’s article is highly interesting and shows the insanity of the common currency since the same is probably true for Greece.

“I would be highly interested in a similar analysis for the French, who have got a pretty good savings rate, as far as I know, but obviously very bad public spending habits, which could get worse if Hollande were to win the election and to get a comfortable majority in Parliament, events that I believe are likely to happen.

“Many thanks for your attention.”

Werner Strohmeier Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

European efforts at economic integration have not delivered sustainable prosperity in poorer nations like Greece and Portugal. Instead, they have left Mediterranean governments teetering on bankruptcy and at the mercy of Germany and other rich states who exploit European unity to live well at the expense of their poorer brethren.

The 1992 Maastricht Treat, which considerably harmonized product and safety regulations and methods of taxation across Europe, was supposed to remove untold barriers to growth. It didn’t, because it did not moderate European labor laws and social programs that discourage individual ambition and investment.

The euro, created in 1999, floats against the dollar and yen, and its value reflects an average of the competitiveness of its entire membership. This leaves higher productivity economies like Germany with an undervalued currency and trade surpluses, and lower productivity economies like Greece with an overvalued currency and in constant need to borrow from foreign investors.

With Maastricht and the euro, German manufactures and technology became more valuable in a more integrated European market. However, Greece, Portugal and others are not able to use their lower labor costs to capture assembly plants to the degree, for example, that the U.S. South attracts automotive and high-end electronics manufacturing.

Moreover, Germany and other rich states continue subtle forms of protection that discourage outsourcing even to other EU member states, and this frustrates the EU single-market promise to more effectively equalize employment opportunities and prosperity between the prosperous core and southern Europe. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Friday, economists expect the Labor Department will report the economy added 200,000 jobs in March. After adding 192,000 jobs in February, this would indicate the economy is finally accomplishing momentum.

The February gain was in sharp contrast to weaker gains the previous 13 months, and largely resulted from stronger, potentially self-sustaining private sector jobs growth.

As measured by GDP, the economic recovery began in July 2009, but the economy didn’t begin adding jobs until January 2010.

Through January 2011, the economy only gained 77,000 jobs a month, mostly thanks to stimulus spending, temporary business services, and health care and social services, which are heavily subsidized by federal and state governments. Job gains in the core private sector — private employment less temporary business services, and health care social services and temporary business services — averaged only 45,000 a month.

Core private sector jobs are so important because those have the potential to set off a virtuous cycle of hiring, consumer spending and more hiring. In February, this barometer of private sector vitality gained 170,000 new positions. A similarly strong core private sector gain will be needed to add 200,000 new jobs overall in March. If that is accomplished, we may finally be getting someplace. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

The toll in human misery wrought by the tsunami and earthquake in Japan tests the imagination of economists but the effects on Japan’s gross domestic product and wealth are a different matter.

GDP, which measures goods and services produced, will immediately dive in Japan and stay lower through the second and into the third quarters of 2011, but will then surge as construction and spending on capital equipment to rebuild drives up growth.

Overall, however, Japan will be poorer for this disaster. Lost infrastructure, factories and the like will be replaced, but wealth is the sum of what citizens and governments own–those include physical assets like those just noted and financial wealth, namely securities and cash. Rebuilding will run down Japan’s financial wealth to replace lost physical assets.

Continue reading…

    By NICHOLAS HASTINGS 
    A Dow Jones Column 
LONDON -- Once again, the International Monetary Fund has disappointed on the currency front.

There were plans a few years ago for the organization to become the currency policeman of the world, helping to prevent foreign-exchange manipulation and reduce trade imbalances.

This didn’t happen.

Instead, as the world struggled to recover from the recent financial crisis, many countries were plunged into a “currency war,” pursuing competitive devaluations to achieve export growth.

While China was seen as the main currency manipulator not so long ago, with its tight grip on any appreciation of the Chinese yuan, the U.S. is now being accused of a similar sin–keeping the dollar low by resorting to further quantitative easing.

With Fed officials acknowledging this week that they are ready to introduce more QE if needed and that exiting this ultra-easy policy will take years, accusations of currency manipulation and the risk of further currency wars could last some time.

From the IMF, however, nothing.

And now the organization has missed a second chance to show that it could be a leader on the foreign-exchange front.

Given the declining importance of the dollar both in terms of world trade and as an international reserve currency, the IMF was widely expected to reflect these changes in its five-yearly restructuring of its own reserve asset and unit of account, the special drawing right.

At the moment, the SDR is a basket of four major currencies, dominated by the dollar with a 44% weighting but also including the euro, the yen and the pound.

There had been speculation that the IMF would acknowledge not only the rising importance of China, by giving some recognition to the yuan, but also the increased use of commodity currencies, such as the Australian and Canadian dollars, as well as the growing importance of some larger emerging market currencies.

In the event, the IMF did little more than tinker at the edges.

The dollar’s contribution to the basket was cut marginally to 41.9% while the euro’s was raised to 37.4% from 34%. The pound’s contribution was largely unchanged while the yen’s was reduced slightly.

This was hardly the adjustment to the SDR that would make the fund’s lending unit more up to date, making it more attractive as the lending instrument some countries would like it to be.

IMF chief Dominique Strauss-Kahn has defended the fund’s decision not to include the yuan because the Chinese currency isn’t freely traded.

Nonetheless, there was no hint that the IMF was even looking at including the other rising currencies of the world, such as the Mexican peso, the Indian rupee or even the South African rand, for inclusion in what will probably end up being a currency instrument with as limited a future as it has had a past.

(Nick Hastings has covered the foreign exchange markets and industry for more than 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com.)

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

In November, the Federal Reserve will likely launch a second round of quantitative easing but don’t expect “QE2″ to make big waves. The failure of the Group of 20 finance ministers’ talks permits China to continue to subvert Fed efforts to rekindle U.S. growth.

More Fed purchases of Treasury and mortgage-backed securities would drive down borrowing costs and, it is hoped, boost business investment and home purchases. However, big corporations are already flush with cash and mortgage rates are near record lows, and the potential benefits from additional monetary promiscuity are limited.

U.S. businesses lack customers, and even zero interest rates won’t inspire General Electric Co. (GE) to build factories and add workers if light bulb sales are stagnant. Without more jobs, prospective homebuyers are too nervous to quit renting or purchase bigger homes.

Moreover, China’s export-oriented development policies and undervalued yuan subvert the impact of U.S. monetary policy on the demand for U.S. products, and U.S. investment, hiring decisions and housing markets.

Continue reading…

   By Bradley Davis
   A DOW JONES NEWSWIRES COLUMN 

NEW YORK (Dow Jones)–With the euro marching higher since hitting last week its lowest level since 2006, some investors wonder whether the common currency has put its worst days behind it.

Don’t bet on it, most say.

The common currency posted strong gains Tuesday, advancing around 1% on the dollar, even as euro-zone data sharply missed expectations and yields of government bonds tied to some fiscally stressed countries ticked higher.

Continue reading…

These are the personal views of Scott Mather, managing director and portfolio manager, Pimco:

Yes, the U.S. dollar has fallen in value vs. most other currencies for most of the last nine months and is now flirting with multi-year lows. But while we should expect more U.S. dollar weakness, we shouldn’t necessarily fear it.

Contrary to many proclamations from official and private sources, it is far from clear that a strong dollar is in the U.S. or collective global economic interest. Preventing continued orderly dollar declines may perpetuate global imbalances, slow U.S. economic recovery and prevent a sorely needed stabilization in the U.S. debt dynamic.

We all know how we got here: The U.S. has gone on a multi-decade-long spending binge. The amount of borrowing necessary to fund the current account deficit is truly staggering. The accumulation of deficits since 1990 totals $6.8 trillion, which is 50% of annual U.S. GDP or $22,000 for every man, woman and child in the U.S. today. This debt is financed by foreign borrowing, and foreign capital providers are increasingly demanding better pricing in the form of a cheaper dollar relative to their currency.

Continue reading…