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August 30, 2001 The truth IS out there.

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A NEXIALIST N+E+W+S FEATURE: The BIG-One IV (update)

from L. Reichard White


Do you like the "A-ha!" experience?

- "This is the biggest financial challenge facing the world in the last half-century." -Bill Clinton to CFR, 14 Sep 1998

REVIEW:

THEME: Mr. [Albert] Friedberg [famed Austrian economist, currency specialist and head of Canada's Friedberg Mercantile Group] points to the monetary policy of the Federal Reserve as the fundamental cause of the currency debacle. He notes that since the early 1990s, the Fed has backed a credit expansion policy that it has exported abroad. He also predicts that "the crisis will widen. ... Eventually it will come back to the United States." -TORONTO GLOBE AND MAIL (January 10, 1998) [NEXIALIST N+E+W+S reprise]
REVIEW:"It's certainly the worst international monetary crisis since the founding of the system, the Bretton Woods [paper money] system in 1944. ... And I know that the authorities in Washington are most concerned about this spread, and properly so -- because it seems to be happening." -Roger Altman, EVERCORE PARTNERS CHAIRMAN, former Deputy Secretary of Treasury, CNBC, 14 Aug 1998, ~7:37:21 AM EDT
REVIEW: Japanese growth is crucial for Asia and the world, but it was bad in 1997 and could be worse in 1998. The Japanese government needs to make massive and permanent tax cuts. Even so, things could take two or three years to turn around -- and a lack of recovery will slow Asian recovery and thus hurt US & Europe as well. -CNBC, 23 January, 1998, ~2:53:12 PM EST
REVIEW: Japan, still trying to come to grips with the bursting of its equitiy and real estate bubbles of the late 1980s, has experienced further setbacks as its major Asian customers have been forced to retrench. Reciprocally its banking system problems and weakened economy have exacerbated the difficulties of its Asian neighbors. -Federal Reserve Chairman Alan Greenspan, to House Banking Committee, 16 September, 1998
REVIEW: It will take two to three years to fix Japan's banking system if they started now. But if it's not done right, which so far it isn't, it could take much longer. -CNBC, 2 October, 1998, ~2:16:53 PM EDT
REVIEW: FEARS are mounting that Japan could soon relapse into recession -- and suffer a new banking and financial crisis -- as the renewed economic downturn adds to a massive overhang of debt that has burdened the system for the past 10 years. ... What has provoked these fears is the growing belief that Japan's economic recovery has peaked out after a brief cycle, and that this time the government has few policy options -- at least those that it is willing to contemplate -- with which to counter a possible new recession. ... Mr Mizuno believes that the next financial system crisis in Japan -- the third since the collapse of the "bubble economy" 10 years ago -- will bring about the collapse of further insurance companies as well as banks. It will also entail another plunge in the Tokyo stock market, which likewise has suffered several severe collapses over the past 10 years. The market signalled distress last Friday when the Nikkei 225 Average tumbled 374.90 points or 2.5 per cent to 14,552.29 -Anthony Rowley in Tokyo, Coming months will be crucial as Tokyo's policy options are seen to be drying up, THE BUSINESS TIMES online edition, 18 December, 2000 http://business-times.asia1.com.sg
REVIEW: Argentina and Mexico have received promises of help from IMF. A big move in the [Argentine] peso hurt Mexico, will this happen in Brazil? A weaker "real" will help Brazilian exports, but this puts further competitive pressures on other Latin American countries, pressuring them to make competitive devaluations to protect their industries. -Nick Hastings, Sr. Foreign Excng. Corres., Dow Jones Newswire, CNBC, 15 Jan 1999, ~9:56:18 AM EST

REVIEW: This is a direct explanation of what causes "competitive devaluations," one of the forces that causes the "contagion" to spread. If your currency doesn't devalue relative to your devaluing trade partner, the prices of your products in the devaluing country's currency increase, making them more expensive there. By the inverse, the prices for products bought from the devaluing country drop. Argentinians could buy products imported from Brazil at about half of what they cost before but Brazilians had to pay double for products imported from Argentina. What effect do you think this would have on Argentine producers? In general this is very good for industries that export from the devaluing country but bad for competing enterprises in their non-devaluing trade partners. -LRW

REVIEW: -The BIG-One III from NEXIALIST N+E+W+S, if you want a COMPLETE review!

ASIA, TURKEY AND THE CURRENT ACCOUNTS/TRADE DEFICIT:

TURKEY: Should we worry because far-away devaluations may effect us, as did Thailand and Russia? SEIDMAN: So far it isn't effecting us. TRADE DEFICIT: Is the trade deficit a problem? SEIDMAN: It is running at a billion dollars a day which is dollars we're sending out into the world and some day they will have to come back which means higher inflation. -CNBC Chief Commentator Bill Seidman [1], CNBC, Feb. 24, 2001, 5:46PM EST
ASIA: The Rupiah has come under new pressure, causing further deterioration in the political and social situation in Indonesia, and putting pressure on other countries and currencies in the area. This reminds one of the "Asian Contagion" in 1997 and 1998. -Ron Insanna, CNBC, March 12, 2001, ~3:35PM EST

SOUTH AMERICA:

SANTIAGO, March 12 (Reuters) - Chile's peso currency opened at a fresh all-time low on Monday as frayed nerves over the regional economic outlook continued to take their toll, traders said. Traders said that political infighting in regional peers Brazil and Argentina had sparked worries of a deeper crisis that could spread to other emerging markets like Chile. Similar concerns pushed the peso to then-historic lows last week. "In Brazil and Argentina we've seen some accusations against government officials, which are a similar symptom to what was seen in Turkey just before the financial crisis in that country," said a trader. -Chile's peso opens at yet another all-time low, Reuters, March 12, 2001 09:20

ASIA, JAPAN & U.S. ECONOMY:

Anchor TED DAVID: What did Alan Greenspan not say? SEIDMAN: He [Greenspan] can create a self-fulfilling prophecy if he says something a little too negative. I think he's more worried than he let on. .... SEIDMAN: I think the FED is behind the curve. They need to lower interest rates more agressively. If the [stock] markets drop further, we might find the dollar is in trouble. TED DAVID: Repatriation? SEIDMAN: Yes, repatriation. -CNBC Chief Commentator Bill Seidman, CNBC, March 1, 2001, ~11:28AM EST
What normally happens, once "foreigners" start repatriating their money is essentially a sort-of financial catharsis. Anticipating that everyone else will unload (repatriate) their supplies of the currency too, everyone starts "selling" the currency, that is, trading it for almost any financial instrument denominated in any currency but their own. ... The closest analogy to this process is the much fabled and dramatized "bank run." As American President William Jefferson Clinton put it in an address to the World Bank and the IMF, October 6, 1998, "We must [now] address not only a run on a bank or a firm, but also a run on nations." -L. Reichard White, BIG-FLOAT: The American Damocles, USAGOLD.COM
The NASDAQ closed down 115.19 (about 5%) at 2053.54. This is the NASDAQ's lowest level since Dec. 1998, a drop just decimals short of 60% from its 5048 point high exactly 1 year ago. This is the all-time worst percentage drop in NASDAQ history. 15% of the NASDAQ traded at 52 week lows. The NASDAQ has lost more than $3.6 trillion in market capitalization since the year-ago high. The DOW closed at 10644, down 213. The Wislhire "Total Market" index closed down nearly 3%. -CNBC, Friday March 9, 2001, 4:01PM EST
NASDAQ closes down 128.28 (6.2%) at 1924.50, down 61.9% from its all time high and the last time it was this low was Nov. 19, 1998. DOW down 436.37 at 10208.25. The Wilshire "Total Market" index closed down 480.75 at 10850.98, 17.7% below its all-time high. S&P 500 closed down 53.13 at 1180.22, down 20% from its all-time high and thus officially in bear-market territory. -CNBC, Monday March 12, 2001, 4:30PM EST "The bonds weren't helped much by all this money comming out of stocks." -Ron Insanna [If money is leaving stocks but not going into bonds, could it be foreigners are removing themselves from dollar denominated paper assets of all kinds? -LRW]
Japan's finance minister Kiichi Miyazawa has warned that the country's finances could be close to a collapse. In another blow for Japan's ailing economy, the minister told a parliamentary committee that "the nation's finances are now abnormal, in a state relatively close to collapse". He warned that urgent steps, including fiscal reform to reduce the government's debt burden, needed to be taken. "We have to create a healthy economy instead of just trying to sound positive with words," Mr. Miyazawa added. His comments drove the yen to a 19-month low against the dollar. -Japanese minister warns of 'collapse', BBC, Thursday, 8 March, 2001, 12:47 GMT
"By selling Treasury bonds, we might increase our gold holdings. That is an option we had. Among countries around the world, there are many who hold their foreign currency reserves in the form of U.S. Treasury bonds. As long as they continue to maintain the U.S. government bonds -- even when the U.S. dollar is weakening relatively -- it is because these countries are holding onto these government bonds that the U.S. economy is being maintained. Many people, in fact, don't realize this. ... I hope the U.S. will engage in efforts and cooperation to maintain exchange stability so that we will not succumb to this temptation to sell off government bonds and switch our foreign reserves to gold." -Japanese Prime Minister Hashimoto, June, 1997
The Nikkei 225 closed down 456 points (3.62%) at 12171, its lowest level in 16 years, the yen dropped to ~120 per dollar, the lowest level in 20 months. -Leslie LaRoch, CNBC, March 12, 2001, 11:35AM EST
TED DAVID: Is burgeoning public debt the problem in Japan? SEIDMAN: Yes, but the core problem is Japan can't get its economy going. They can't get the economy going without major restructuring of the entire economy even as far as 20 to 30 years out. TED DAVID: ~"If the Japanese economy collapsed, what would the effect be on the U.S.?" SEIDMAN: ~"They would have to liquidate their U.S. Treasury bonds, which would depress prices and cause interest rate hikes, which would cause world-wide economic slowdown." -CNBC Chief Commentator Bill Seidman, March 08, 2001, 11:25AM EST
They [Japanese and U.S. economys] are like two drunks leaning against each other, but I think the FED will lower interest rates and pull our economy up. -CNBC Chief Commentator Bill Seidman, CNBC, Feb. 24, 2001, 5:46PM EST
SEIDMAN: ~"Any Central Bank is much more effective at stopping a boom than getting one started again. That's because they can't force people to borrow money. That's why some people call it 'pushing on a string.' That's why the near-zero interest rates in Japan haven't been able to get things going." -CNBC Chief Commentator Bill Seidman, March 08, 2001, 11:25AM EST
Bank of Japan cut the over-night interbank rate, the lending rate it charges member banks, from 0.5% to 0.25%, a record low. [Such an essentially meaningless interest rate cut is often described as "pushing on a string." Japanese rates were later lowered literally to zero. -LRW] Some people are calling this a "hail Mary" rate cut. Japanese spokesmen claim this is in response to ailing Japanese banks with admitted bad loans totalling at least $1 trillion. -CNBC, 9 Sep 1998, ~12:15:37 PM EDT

NOTES:

[1] Mr. Seidman headed up the RTC (Resolution Trust Corporation) the quasi-government organization which unwound the "Savings and Loan Crisis" of the late '80s and is currently a chief advisor to the Japanese government on how to handle it's economy. return

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