| The Euro is
a construct as artificial and unstable as the old Soviet Union. But, since
perception is reality in the financial world, people are perfectly willing
to use it as a medium of exchange and a store of value. The problem
is, however, that it’s not nearly as widely known, accepted or trusted
a medium of exchange as the dollar. The dollar is known and accepted
everywhere in the world; few people outside the EC even have a clue what
the euro is. And its record as a store of value has been dismal so
far. So it’s just not as good a money as the dollar.
The incipient
bear market in US equities and the massive shake-out in the “new economy”
will reduce demand for the US dollar. So far, reduced demand has been
disguised by the simultaneous collapse of the Euro. Rising oil prices increase
the demand for dollars, since oil is priced in dollars and the countries
selling oil usually keep their deposits in short-term dollar deposits.
It was doubly clever of Sadaam to demand that the receipts from Iraq’s
oil sales be kept in Euros. First, it hurts and embarrasses the US Government.
Second, he’s getting out of the hot-potato dollar for a unit that may have,
at least temporarily, bottomed.
I don’t, however,
think the euro is going to survive the next decade. Or, if it does, it
will be as an obscure accounting unit between governments, like the IMF’s
SDRs. The reason is that governments are very big on using monetary
policy to stimulate their national economies and printing currency to pay
their bills. The euro, with its independent, albeit incompetent, monetary
authority is very inconvenient for them. The theory of the euro is one
thing in a booming world economy. But likely to be something else again
when the going gets tough.
However
grossly overpriced at its inception; now that it’s fallen 26% (reaching
what was probably a low of 82.85 cents on Oct. 26), it seems to me more
or less reasonably-priced.
There is, however,
a practical speculative alternative to the US dollar.
THE NZ DOLLAR
The world’s
weakest currency since January 1—not counting units issued by Afghanistan,
the Congo and surprisingly few other places that are currently in that
class—has been the New Zealand dollar. It started down from a recent
high of about 70 cents US in 1996, drifting down to about US$.50 this time
last year (at which time it became a genuine bargain), then
collapsing
a further 25% to its current level of US$.40. It’s actually been as
low as 38.5 cents. I consider this a true anomaly. It’s at once a superb
speculative opportunity and a great means to diversify some assets out
of the grossly overpriced US dollar.
Why has
the kiwi fallen so far? Part of it is simply the strength of the US$, which
is up against every other unit in the world. Part of it has been the weakness
for wool, meat, dairy, timber and other basic commodities in recent years.
The world has needed fewer NZ dollars to acquire the main things the country
produces.
A big part
of it over the last year is surely the socialist government that was elected
there last November. These are not just an ordinary bunch of knuckleheads
going through usual drill about stealing from the rich and giving to the
poor, or even the old-style cloth cap-wearing, working man’s socialists.
These people are very New Class, with academic backgrounds, which means
they’re totally divorced from both “the people” and reality. The kiwi
crash corresponds more closely to their election than anything else I can
think of.
A currency
is, in many ways, tantamount to stock in the government that issues it;
when you look at who these people are and what they’ve done since their
election, it’s easy to see why the kiwi dollar has cratered.
First
They’ve raised
the top marginal tax rate, starting at NZ$60,000, from 33% to 39%. Despite
predictions this would result in minimal (NZ$100-200 million) increased
revenue, but be devastating to the economy, the government went ahead in
an overtly envy-driven effort to hurt the rich. As it turns out, the
net increase in tax revenue has been close to nil, but the country is in
a nasty domestic recession.
Second
NZ has long
(with Sweden, it was the first country in the world to adopt Fabian socialism
as a national policy, over 100 years ago now) had government health programs.
One of them is that anyone in the country who suffers an injury gets care
at taxpayers’ expense. Unfortunately, during the free-market revolution
of the 80s this program wasn’t abolished, only privatized. It’s now
been re-nationalized and costs have magically increased by scores of millions.
Third
NZ has always
had a strong union movement, at once corrupting the workers, bedeviling
capitalists and helping to slowly impoverish the country. The revolution
of the 80s abolished a lot of ridiculous work rules and union monopoly
practices, but the new government has re-instituted collective bargaining.
Among other (numerous) provisions, the new law requires employers to open
up their books to union bosses in order to help them determine whether
companies can “afford” pay raises. It also eliminates any trial period
should an employee be hired, and requires a two-week period in which, if
a job offer is made, the employer must make good, although the employee
may accept or reject it at will.
Under NZ’s
parliamentary system, these people may or may not stay in office until
their term expires in Nov 2002 but, since they’re ideologically driven,
they’ll continue to do their worst until then.
That being
said, I’d say the collapse is way overdone. My main rationale for this
belief is based on the Purchasing Power Parity (PPP) theory.
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