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Tuesday, June 15, 2010
Thursday, June 10, 2010
What will happen to currencies if the Euro collapses?
Let us start off by saying that we do not see the Euro collapsing and being shelved, at least not yet, anyway. No exit process was written into their rules anyway. But it is technically possible, so better to be forewarned. What would prompt such a collapse? The future of the Euro lies in the hands of its members, especially Germany - the richest and strongest member of the Eurozone. It would be because the leading member [Germany]) felt it to be in their national interest(s) to let it fall. There would be absolutely no philanthropy in the process should anybody exit or if the Euro disappeared. Principally, would Germany, et al, gain more by leaving the Eurozone than staying in it? It may be more in their interests to have the poorer nations ejected from the Eurozone to keep the big benefits and to lose the problems. Then they would hold onto the Euro. But what would any of these possibilities result in? [Subscribers will receive the last paragraph on the impact on gold]
Full Collapse
Simply put, the Eurozone would revert to what it was before the Euro existed. The European Central Bank would have to return all of its gold to the member States in proportion to their initial contributions. Their old currencies would have to be resurrected and Euro reserves converted back to the mix passed to the European Central banks from the beginning of the Eurozone.
Dollar & [or if by then the Yuan was internationalized] Yuan reserves would be built up again to replace the lost Euro reserves. The world’s Foreign Exchange Markets would be in chaos. Confidence in most if not all currencies would almost disappear. By extension the ripple effect through the economies of the world and business in general, would be destructive. There would be a huge scramble for all hard assets, but particularly precious metals. Briefly the U.S. Dollar would reign as king.
Partial collapse
More likely the Eurozone will shrink first. The poorer Southern countries of the E.U. would be cast out of the Eurozone and would have to revert to their previous currencies. Spain would return to the Peseta, Greece to the Drachma, etc.
The example of Argentina un-pegging from the U.S. Dollar should be seen as the precedent for this process. The wealthy of Argentina found their capital hammered when it was forcefully converted from the U.S. Dollar to the Peso in that process too. So the lifting of deposits, which is happening now, from the banks in Greece, Portugal and now Spain, was only to be expected. If they had their own currencies, either the fall in the value of those currencies would deter that capital flight, or the imposition of Exchange Controls would block it.
In the case of Europe, we would also expect to see Exchange Controls imposed immediately all countries that leave the Eurozone did so. This would prevent the capital hemorrhaging from the country that left the Eurozone in disgrace. The exchange rate of the exiting countries would initially fall heavily then take a long time to recover, if they managed to recover economically at all. By leaving the zone, these countries, would ensure they would suffer at least one, if not more, decades of growing poverty, much as is expected to happen with them remaining inside the Eurozone.
With the richer nations remaining in the Euro, the exchange rate of the Euro would soar at first, hammering its global trade competitiveness but attracting the world’s capital. It would jump against all currencies, but most decisively against the U.S. Dollar, as its indebtedness would fall and prospects would improve.
If Germany leaves the Eurozone
It is possible in one scene to see Germany recognizing no further advantage of remaining in the E.U. and opting to leave. This is unlikely, but technically possible. If it were to do so, there would be few really strong economies left behind, in the zone. This would be a disaster for the Euro, which would tumble against the U.S. Dollar. If the poor countries of the Southern part of the Eurozone remained in the E.U., then the Euro would remain on an ever deteriorating slope.
Germany would return to the Deutschmark and follow a similar currency path that it experienced prior to the creation of the Euro. This would mean repeated upward revaluations, usually preceded by denials of such revaluations from the Bundesbank.
In that event, the U.S. Dollar would be favored as the global reserve currency almost exclusively and would rise on foreign exchanges, despite so many reasons why it should fall. It would in fact be falling but slower than other important currencies, giving the impression of strength in weakness. This is until the full international appearance of the Yuan.
Globally
Resource producing currencies would soar. In an attempt to lower their exchange rates they would turn to lowering their interest rates in the hope of maintaining the export competitiveness of their locally manufactured goods. With resources having an international market price, outside their own currency, such nations would drive down their exchange rates, provided local inflation allowed it [As China is doing now and as was suggested by the I.M.F. recently].
The overall result would be a volatile and damaging use of currencies as part of trade wars. Should that happen, Protectionism and Exchange Controls would become commonplace, particularly in smaller economies.
As China grows in international importance over the next decade, we believe that the Yuan would quickly become of equal importance to the U.S. Dollar and move into center stage as a global reserve currency. This would accompany pricing of goods [imports] in Yuan and exports from China in the currency of each importer’s currencies. We believe China is very aware of this and has made plans for the Yuan to internationalize.
With Foreign Exchanges becoming increasingly volatile, confidence mercurial and uncertainty hanging over both the present and the future, assets, particularly internationally-mobile assets, such as precious metals would be increasingly sought after as a counter to all currencies.
What Will Happen to Gold in the Above Scenario?
Full Collapse
Simply put, the Eurozone would revert to what it was before the Euro existed. The European Central Bank would have to return all of its gold to the member States in proportion to their initial contributions. Their old currencies would have to be resurrected and Euro reserves converted back to the mix passed to the European Central banks from the beginning of the Eurozone.
Dollar & [or if by then the Yuan was internationalized] Yuan reserves would be built up again to replace the lost Euro reserves. The world’s Foreign Exchange Markets would be in chaos. Confidence in most if not all currencies would almost disappear. By extension the ripple effect through the economies of the world and business in general, would be destructive. There would be a huge scramble for all hard assets, but particularly precious metals. Briefly the U.S. Dollar would reign as king.
Partial collapse
More likely the Eurozone will shrink first. The poorer Southern countries of the E.U. would be cast out of the Eurozone and would have to revert to their previous currencies. Spain would return to the Peseta, Greece to the Drachma, etc.
The example of Argentina un-pegging from the U.S. Dollar should be seen as the precedent for this process. The wealthy of Argentina found their capital hammered when it was forcefully converted from the U.S. Dollar to the Peso in that process too. So the lifting of deposits, which is happening now, from the banks in Greece, Portugal and now Spain, was only to be expected. If they had their own currencies, either the fall in the value of those currencies would deter that capital flight, or the imposition of Exchange Controls would block it.
In the case of Europe, we would also expect to see Exchange Controls imposed immediately all countries that leave the Eurozone did so. This would prevent the capital hemorrhaging from the country that left the Eurozone in disgrace. The exchange rate of the exiting countries would initially fall heavily then take a long time to recover, if they managed to recover economically at all. By leaving the zone, these countries, would ensure they would suffer at least one, if not more, decades of growing poverty, much as is expected to happen with them remaining inside the Eurozone.
With the richer nations remaining in the Euro, the exchange rate of the Euro would soar at first, hammering its global trade competitiveness but attracting the world’s capital. It would jump against all currencies, but most decisively against the U.S. Dollar, as its indebtedness would fall and prospects would improve.
If Germany leaves the Eurozone
It is possible in one scene to see Germany recognizing no further advantage of remaining in the E.U. and opting to leave. This is unlikely, but technically possible. If it were to do so, there would be few really strong economies left behind, in the zone. This would be a disaster for the Euro, which would tumble against the U.S. Dollar. If the poor countries of the Southern part of the Eurozone remained in the E.U., then the Euro would remain on an ever deteriorating slope.
Germany would return to the Deutschmark and follow a similar currency path that it experienced prior to the creation of the Euro. This would mean repeated upward revaluations, usually preceded by denials of such revaluations from the Bundesbank.
In that event, the U.S. Dollar would be favored as the global reserve currency almost exclusively and would rise on foreign exchanges, despite so many reasons why it should fall. It would in fact be falling but slower than other important currencies, giving the impression of strength in weakness. This is until the full international appearance of the Yuan.
Globally
Resource producing currencies would soar. In an attempt to lower their exchange rates they would turn to lowering their interest rates in the hope of maintaining the export competitiveness of their locally manufactured goods. With resources having an international market price, outside their own currency, such nations would drive down their exchange rates, provided local inflation allowed it [As China is doing now and as was suggested by the I.M.F. recently].
The overall result would be a volatile and damaging use of currencies as part of trade wars. Should that happen, Protectionism and Exchange Controls would become commonplace, particularly in smaller economies.
As China grows in international importance over the next decade, we believe that the Yuan would quickly become of equal importance to the U.S. Dollar and move into center stage as a global reserve currency. This would accompany pricing of goods [imports] in Yuan and exports from China in the currency of each importer’s currencies. We believe China is very aware of this and has made plans for the Yuan to internationalize.
With Foreign Exchanges becoming increasingly volatile, confidence mercurial and uncertainty hanging over both the present and the future, assets, particularly internationally-mobile assets, such as precious metals would be increasingly sought after as a counter to all currencies.
What Will Happen to Gold in the Above Scenario?
Risk of Double Dip Recession in 2010
"The recovery will be slow and things will be fairly fragile," and that might be the best we can hope for in 2010, according to Nariman Behravesh chief economist at Global Insight, the world's largest economic forecasting and consulting firm.
"Any number of risk could knock us back down into recession," Behravesh tells Aaron and Henry in the accompanying clip. These risks include botched monetary policy by the Fed, a major retrenchment of consumer spending in the face of rising unemployment, and another chapter to the financial crisis.
Behravesh isn't saying it's the most likely scenario; but at 20% the probability is "too high" for his liking.
On the flip side, he forecasts an equally high probability of a strong recovery. "There's a lot of pent up demand for consumer spending for cars, for housing," he says. "And that could be released a lot sooner and lot more powerfully than anyone is talking about."
But the more likely scenario is a slow and sluggish economic recovery, Behravesh says, predicting unemployment remains high in 2010, peaking at 10% before falling back to the 9% range by year's end. That will provide a headwind for consumers, who will spend at a slower rate than in the past
"Any number of risk could knock us back down into recession," Behravesh tells Aaron and Henry in the accompanying clip. These risks include botched monetary policy by the Fed, a major retrenchment of consumer spending in the face of rising unemployment, and another chapter to the financial crisis.
Behravesh isn't saying it's the most likely scenario; but at 20% the probability is "too high" for his liking.
On the flip side, he forecasts an equally high probability of a strong recovery. "There's a lot of pent up demand for consumer spending for cars, for housing," he says. "And that could be released a lot sooner and lot more powerfully than anyone is talking about."
But the more likely scenario is a slow and sluggish economic recovery, Behravesh says, predicting unemployment remains high in 2010, peaking at 10% before falling back to the 9% range by year's end. That will provide a headwind for consumers, who will spend at a slower rate than in the past
Bill Gates Sr: Wealth is ‘not having to worry’
As the father of Microsoft Corp’s co-founder, Bill Gates Sr helps fund worthy causes and travels worldwide but says the best part of having access to such wealth is not worrying about old age.
The father of Bill Gates Jr at age 84 helps steer the multi-billion-dollar Bill & Melinda Gates Foundation, and readily admits he is lucky to have a successful family and meaningful work.
Someone unhappy with work, he joked in an interview during a promotional tour this week for his book Showing Up for Life, should “find a job in a very large foundation that’s owned by his son.
“That will take care of all those apprehensions,” he said.
Gates Sr’s folksy book, published last year but newly out in paperback, offers reflections and bits of wisdom on such topics as work, family, friendship and generosity.
An attorney by profession, Gates is co-chair of the foundation established by his son and daughter-in-law. His son’s Microsoft fortunes allow him a unique job doing charitable work, as well as peace of mind, he said.
“The business of not having to worry, being able to do things, being able to eat well and travel and buy a new pair of pants once in a while, that’s fundamental,” he said. “Any sense of angst about having a tough old age is no longer there.”
At the foundation, he focuses on its domestic work, primarily in education. He also advocates publicly for the estate tax, which he dubs the “grateful heirs” tax.
A repeal of the estate tax, he writes in his book, “would strike close to the heart of the American dream of applying one’s talent and energy to build a better life”.
The US Congress at the end of 2009 failed to extend the federal tax on estates, letting it expire for one year due to a quirk in the law.
“It’s an unbelievable indictment of our government to get in a situation where that tax just went away,” Gates Sr said at a New York appearance this week, in which he was interviewed by his son before an audience.
A mistake by those with great wealth, he said in the interview, is to be “covetous”.
“I mean an absence of a sense of charity, a sense of philanthropy, a sense of supporting the common will,” he said. “Actually I admire wealthy people who think it’s a good idea to pay taxes.”
Despite a book full of heart-warming reminiscences and life lessons, Gates Sr said he would not want to advise anyone who came into a life of affluence as he has.
“I don’t think the world is improved any by somebody going and giving somebody advice about the way they ought to live their lives,” he said.
As for his appearance exchanging memories and chatting about family and values with his son, he said, it’s simple. “I’m promoting my book.” — Reuters
The father of Bill Gates Jr at age 84 helps steer the multi-billion-dollar Bill & Melinda Gates Foundation, and readily admits he is lucky to have a successful family and meaningful work.
Someone unhappy with work, he joked in an interview during a promotional tour this week for his book Showing Up for Life, should “find a job in a very large foundation that’s owned by his son.
“That will take care of all those apprehensions,” he said.
Gates Sr’s folksy book, published last year but newly out in paperback, offers reflections and bits of wisdom on such topics as work, family, friendship and generosity.
An attorney by profession, Gates is co-chair of the foundation established by his son and daughter-in-law. His son’s Microsoft fortunes allow him a unique job doing charitable work, as well as peace of mind, he said.
“The business of not having to worry, being able to do things, being able to eat well and travel and buy a new pair of pants once in a while, that’s fundamental,” he said. “Any sense of angst about having a tough old age is no longer there.”
At the foundation, he focuses on its domestic work, primarily in education. He also advocates publicly for the estate tax, which he dubs the “grateful heirs” tax.
A repeal of the estate tax, he writes in his book, “would strike close to the heart of the American dream of applying one’s talent and energy to build a better life”.
The US Congress at the end of 2009 failed to extend the federal tax on estates, letting it expire for one year due to a quirk in the law.
“It’s an unbelievable indictment of our government to get in a situation where that tax just went away,” Gates Sr said at a New York appearance this week, in which he was interviewed by his son before an audience.
A mistake by those with great wealth, he said in the interview, is to be “covetous”.
“I mean an absence of a sense of charity, a sense of philanthropy, a sense of supporting the common will,” he said. “Actually I admire wealthy people who think it’s a good idea to pay taxes.”
Despite a book full of heart-warming reminiscences and life lessons, Gates Sr said he would not want to advise anyone who came into a life of affluence as he has.
“I don’t think the world is improved any by somebody going and giving somebody advice about the way they ought to live their lives,” he said.
As for his appearance exchanging memories and chatting about family and values with his son, he said, it’s simple. “I’m promoting my book.” — Reuters
Bursa targeting individual investors
MALAYSIA'S bourse said it's seeking to woo individual investors who have shunned the market a decade after the Asian financial crisis.
Bursa Malaysia Bhd (1818) is working with brokerages and banks to "to reach out to retail investors in various towns and cities" to open up accounts and encourage online trading, chief executive officer Datuk Yusli Mohamed Yusoff said in an interview in Kuala Lumpur.
Trading by individuals fell to as low as 20 per cent of trading value from more than half before the start of the Asian financial crisis in 1997, when the benchmark index slumped by a record 52 per cent.
"A lot of retailers lost a substantial amount," Yusli said on Tuesday. The result is that the market is now "dominated by the local institutions," he said.
Most individual savings started shifting to mutual funds and unit trusts since Malaysia's economy went into a recession in 1998, Yusli said. They haven't returned to stock trading even as the economy expanded at an annual average of 5 per cent over the past decade and the benchmark index more than doubled.
The FTSE Bursa Malaysia KLCI Index has climbed 1.4 per cent so far this year, paring a gain of as much as 5.8 per cent amid concern austerity measures in Europe will reduce demand for the Malaysia's technology and commodity exports.
The exchange aims to boost the share of trading by individual investors "closer to a third," tapping Southeast Asia's second-highest savings rate, Yusli said, declining to give a target date. Malaysians saved 38 per cent of gross national income in 2008, lagging behind only Singapore's 47 per cent, according to data compiled by the World Bank and Bank Negara Malaysia..
The KLCI's 45 per cent gain last year lagged behind Southeast Asian neighbours even after the government announced stimulus plans totalling RM67 billion to help pull Southeast Asia's third-largest economy out of a recession.
Trading slumped by half to an average US$375 million (US$1 = RM3.33) a day over the six months ended May from the same period 13 years ago, right before the start of the regional financial crisis in July 1997, according to data compiled by Bloomberg. Neighbouring Singapore's figures have quadrupled to US$1.1 billion over that time, data from the city-state's exchange show.
"People's risk appetite is not there anymore, not like those days," said Lye Thim Loong, who helps manage US$500 million at Avenue Invest Bhd in Kuala Lumpur. "Those who traded recklessly with no fundamental reasons got burnt."
The slump in trading by individuals coincided with an exodus by foreigners from Southeast Asia's second-biggest stock market, leaving Bursa more reliant on domestic institutional funds. Overseas investors have sold a net RM1.36 billion of Malaysia's equities this year, adding to RM8.57 billion withdrawn in 2009 and RM38.6 billion that flowed out in 2008, according to exchange data. In 2007, they bought a net RM24.7 billion.
The exit left foreigners holding 20.6 per cent of local stocks at the end of April, down from 27.5 per cent in April 2007, according to stock exchange data. Overseas investors held 9.33 per cent of Tenaga Nasional Bhd at the end of April, compared with 27 per cent in April 2007, according to data from Malaysia's biggest power producer.
The state-controlled Employees Provident Fund accounts for 50 per cent of daily trading volume in the equity and bond markets, Prime Minister Datuk Seri Najib Razak said on March 30. More than half of the RM417.1 billion of market value in the benchmark stock index is owned by government-linked funds, according to calculations by Bloomberg.
Retail investors' share of trading is low by comparison with at least one neighbour, Thailand, where individuals accounted for 56 per cent of turnover so far this year, according to data compiled by Bloomberg. Exchanges in neighbouring Indonesia and Singapore don't track the figures.
"There has been some increase in the total of retail account sign-ups recently, but the amount is negligible," Alex Hwang, chief executive officer of HwangDBS Investment Bank Bhd in Kuala Lumpur, said in an e-mailed reply to questions. - Bloomberg
Bursa Malaysia Bhd (1818) is working with brokerages and banks to "to reach out to retail investors in various towns and cities" to open up accounts and encourage online trading, chief executive officer Datuk Yusli Mohamed Yusoff said in an interview in Kuala Lumpur.
Trading by individuals fell to as low as 20 per cent of trading value from more than half before the start of the Asian financial crisis in 1997, when the benchmark index slumped by a record 52 per cent.
"A lot of retailers lost a substantial amount," Yusli said on Tuesday. The result is that the market is now "dominated by the local institutions," he said.
Most individual savings started shifting to mutual funds and unit trusts since Malaysia's economy went into a recession in 1998, Yusli said. They haven't returned to stock trading even as the economy expanded at an annual average of 5 per cent over the past decade and the benchmark index more than doubled.
The FTSE Bursa Malaysia KLCI Index has climbed 1.4 per cent so far this year, paring a gain of as much as 5.8 per cent amid concern austerity measures in Europe will reduce demand for the Malaysia's technology and commodity exports.
The exchange aims to boost the share of trading by individual investors "closer to a third," tapping Southeast Asia's second-highest savings rate, Yusli said, declining to give a target date. Malaysians saved 38 per cent of gross national income in 2008, lagging behind only Singapore's 47 per cent, according to data compiled by the World Bank and Bank Negara Malaysia..
The KLCI's 45 per cent gain last year lagged behind Southeast Asian neighbours even after the government announced stimulus plans totalling RM67 billion to help pull Southeast Asia's third-largest economy out of a recession.
Trading slumped by half to an average US$375 million (US$1 = RM3.33) a day over the six months ended May from the same period 13 years ago, right before the start of the regional financial crisis in July 1997, according to data compiled by Bloomberg. Neighbouring Singapore's figures have quadrupled to US$1.1 billion over that time, data from the city-state's exchange show.
"People's risk appetite is not there anymore, not like those days," said Lye Thim Loong, who helps manage US$500 million at Avenue Invest Bhd in Kuala Lumpur. "Those who traded recklessly with no fundamental reasons got burnt."
The slump in trading by individuals coincided with an exodus by foreigners from Southeast Asia's second-biggest stock market, leaving Bursa more reliant on domestic institutional funds. Overseas investors have sold a net RM1.36 billion of Malaysia's equities this year, adding to RM8.57 billion withdrawn in 2009 and RM38.6 billion that flowed out in 2008, according to exchange data. In 2007, they bought a net RM24.7 billion.
The exit left foreigners holding 20.6 per cent of local stocks at the end of April, down from 27.5 per cent in April 2007, according to stock exchange data. Overseas investors held 9.33 per cent of Tenaga Nasional Bhd at the end of April, compared with 27 per cent in April 2007, according to data from Malaysia's biggest power producer.
The state-controlled Employees Provident Fund accounts for 50 per cent of daily trading volume in the equity and bond markets, Prime Minister Datuk Seri Najib Razak said on March 30. More than half of the RM417.1 billion of market value in the benchmark stock index is owned by government-linked funds, according to calculations by Bloomberg.
Retail investors' share of trading is low by comparison with at least one neighbour, Thailand, where individuals accounted for 56 per cent of turnover so far this year, according to data compiled by Bloomberg. Exchanges in neighbouring Indonesia and Singapore don't track the figures.
"There has been some increase in the total of retail account sign-ups recently, but the amount is negligible," Alex Hwang, chief executive officer of HwangDBS Investment Bank Bhd in Kuala Lumpur, said in an e-mailed reply to questions. - Bloomberg
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