-Caveat Lector- from: http://www.aci.net/kalliste/ <A HREF="http://www.aci.net/kalliste/">The Home Page of J. Orlin Grabbe</A> ----- ------------------------------------------------------------------------ Single Currency Tax Squabbles Cloud Euro Party The first euro trades take place in India? More than 30,000 people yesterday joined a street party on the lawn in front of the European Central Bank in Frankfurt to celebrate the launch of the euro and first economic union in Europe since the Roman Empire. However, the launch of the single currency was accompanied by a fresh row between the UK on one side and France and Germany on the other over the decision-making power of euro-zone countries and tax harmonisation. London indicated its difficulty with comments by Gunther Verheugen, Germany's minister for Europe, that "target zones" for corporation tax could ease problems of unfair tax competition. It also challenged a French statement that euro-zone finance ministers would become the "economic government of Europe". The exchange rates of the 11 participating western European countries were fixed irrevocably at the start of the new year, marking the final stage of more than 10 years' intensive preparation on a project proposed nearly 30 years ago and creating an economic and monetary union for 290m people. Following an unprecedented transfer of economic sovereignty, Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain now share a common currency, central bank and short-term interest rate of 3 per cent. European leaders hailed the birth of the euro as a milestone in the history of Euroossible for countries "to go it alone in economic and financial policies". He also proposed a Europe-wide jobs pact. Several EU finance ministers, at a ceremony to fix the rates in Brussels, predicted that the euro would rank alongside the dollar as a world currency and give the EU a stronger voice in international affairs. Trading in euros and euro-denominated assets will start at 5am on Monday in Australia, which is 7pm tomorrow in western Europe and 6pm in the UK. It will be joined later by Tokyo, Singapore and Hong Kong, but "the show really won't take off until Europe comes on late in the afternoon", said one Sydney trader. The consensus among Australian traders was that when trading starts the spread between buy and sell rates would be 20 basis points, narrowing to 5 basis points when trading begins in Europe. A basis point is one hundredth of a percentage point. However, competing claims for the first euro trades abounded, with an Indian public-sector bank purchasing 5m at a rate of $1.173-$1.174 yesterday. Some London currency dealers, meanwhile, said a handful of transactions in the new currency had been conducted earlier in the week through the Electronic Broking System. Conversion rates between the euro and the 11 national currencies, which set a rate of DM1.95583=1, will be in place until early 2002 when national denominations will be phased out and replaced by the euro notes and coins from January 1 2002. The Financial Times, Jan. 2, 1999 Single Currency The Euro: the End of the Dollar's Free Lunch? Bipolarism WASHINGTON - The beginning of the end for one of America's great free lunches comes Monday, when 11 European countries begin trading the euro as their common currency. That is one scenario, based on some analysts' expectation that the introduction of the euro will undermine the dominance of the U.S. dollar in the global monetary system, threatening America's ability to maintain its profligate economy by borrowing cheaply from overseas. But others offer another, less disturbing prediction of how the euro will affect the United States: It will do little harm to the U.S. economy, in this view, and may do considerable good. The dollar will retain its premier role in world finance and trade, while a more unified Europe offers lucrative opportunities for American corporations and provides reassurance that the Continent will never again plunge into war. Such conflicting forecasts are among the many maddening uncertainties surrounding Europe's grand experiment in creating a unified currency. What nearly everyone agrees on is that the euro could pose the first serious challenge to the half-century reign of the dollar as the undisputed king of global currencies. The U.S. Treasury - the guardian of the international status of the dollar - is blasé about the euro. Both publicly and privately, economists in the administration of President Bill Clinton wish their European counterparts luck in establishing a credible currency that helps foster a more vibrant, stable economy on the Continent. ''We have everything to gain and little to lose from the success of this momentous project,'' Lawrence Summers, deputy Treasury secretary, said recently. ''If Europe benefits, this will greatly benefit the United States.'' A number of economists and money-market experts are far less sanguine about the ramifications of the new currency. After all, the dollar commands a position in the world economy that far exceeds the United States' 27 percent share of global output. The dollar is used in more than half of all international trade and international borrowing, and it accounts for 57 percent of the reserves held by central banks. Such a disproportionately important role for the dollar could come into question with the creation of a single currency for ''Euroland,'' the informal name given to the countries adopting the euro - Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Euroland has a larger population than the United States, and its gross domestic product is 77 percent the size of the U.S. economy. The euro is likely to be used instead of the dollar for much of the commerce within Euroland and between the bloc and its major trading partners, such as Britain, Brazil and South Africa. ''The euro's rise will convert an international monetary system that has been dominated by the dollar since World War II into a bipolar regime,'' predicted C. Fred Bergsten, director of the Institute for International Economics, in a 1997 article in Foreign Affairs magazine. What will that mean? For one thing, hundreds of billions of dollars currently invested in securities such as Treasury bills will be shifted to euro-denominated securities, according to Mr. Bergsten, who argues that as a result, the value of the dollar will fall sharply. That, he warned in an interview, could cause inflation fears to rekindle as imports get more expensive, and lead to higher U.S. interest rates. Some experts take an even more dire view of the long-term consequences for a country that continues to live beyond its means by importing $200 billion a year more than it exports. Up to now, the United States has encountered virtually no trouble getting the money from abroad that it needs to pay its import bill, partly because of the dominant status of the dollar. Companies selling, say, Sony televisions or Mercedes-Benz cars to Americans are content to take their payment in dollars and invest the proceeds in dollar-denominated securities such as Treasury bills. That is a dramatic contrast with, say, Russia or Thailand or Indonesia, which have been forced to borrow from the International Monetary Fund - and submit to its dictates - when people lost faith in their currencies. ''What America is about to lose - or, more exactly, to begin to lose - few Americans ever realized they had,'' wrote James Grant, editor of Grant's Interest Rate Observer. ''This unique national blessing is the privilege of borrowing in the very currency that the United States alone can lawfully print. The strategic and financial value of this franchise is inestimable.'' Thanks to the euro, in other words, the dollar will be less appealing for foreigners to hold. So to induce them to take dollars, American borrowers may have to offer more attractive returns - and, according to Mr. Grant, ''competition from the euro will tend to cause dollar interest rates to be higher than they would otherwise have been.'' But other economists dismiss such arguments as unduly alarmist. For starters, the euro will suffer from numerous drawbacks that will limit its appeal for use in trade and finance. A person holding a few million dollars can always park it easily in the giant market for U.S. Treasury securities, where dealers compete fiercely with one another so that investors need incur only modest costs for buying, selling and hedging. By contrast, the convenience of the market for euros may be handicapped by the absence of a single, Euroland-wide bond such as the U.S. Treasury bond. Each country in the bloc will still issue its own securities. Jeffrey Shafer, vice chairman of Salomon Smith Barney International in New York, said many of his firm's clients had expressed interest in borrowing and investing in euros. But the leading-currency status of the dollar ''isn't what allows us to finance our deficit,'' said Mr. Shafer, a former Treasury undersecretary. ''It's that we are the world's strongest country, with rule of law and respect for property. It also helps to have a first-class financial center - and we'll still have that.'' Indeed, the ability of the United States to borrow in dollars came into question when inflation ran rampant in the late 1970s, and Washington felt obliged to issue bonds denominated in Deutsche marks. As long as U.S. inflation stays low, Mr. Shafer said, that sort of episode should not recur. ''The dollar's advantages will still be there,'' said David Hale, global economist at Zurich Group in Chicago. ''But we will be experimenting with alternatives in a way we haven't done before. All one can say is, 'Stay tuned.''' International Herald Tribune, Jan. 2, 1999 US Equities Time for the Bears to Become Bulls? Stocks 50 percent overvalued, Lex says For two years, Lex has been bearish about equities, especially in the US. After another year of close to 30 per cent total returns, readers might expect the column to put its hand up and confess the error of its ways. But Lex is in no mood to capitulate. Indeed, the higher markets rise, the more overvalued they seem. In an analysis published on October 19, the column argued that the fair 1998 price/earnings ratios for the US and the euro-zone are 17. That for the UK is 15. Given the sharp rebound in equities since the late summer, such figures imply US shares are 50 per cent overvalued. The UK and Europe are not far behind - at about 35 per cent. If so, shares are now in bubble territory. How did they get there? There are two answers: liquidity and irrational exuberance. Broad money is growing at more than 10 per cent in the US. But instead of spilling over into consumer price inflation, it is fuelling asset price inflation. Investors are pouring cash into mutual funds. Equities are the thing to be in - more than a fashion, almost an article of faith. And this is where the irrationality comes in. Investors continue to expect annual returns in the mid-teens for the indefinite future; yet the only way current valuations could be sustainable is if investors were happy with mid-single digit returns. Meanwhile, analysts are officially forecasting 17 per cent earnings growth for the US next year, about 15 per cent for the biggest euro-zone markets and 11 per cent for the UK, according to IBES, the research group. That all looks too optimistic given that these economies will be growing sluggishly in 1999, although they will probably avoid shrinkage. Indeed, nobody really takes these "bottom-up" estimates seriously. With deflationary forces spreading through the global economy, earnings will be lucky to increase at all in the US and UK - though the somewhat faster growing euro-zone should manage single digit earnings growth. Of course, predicting when a bubble will pop is tricky. Provided liquidity and exuberance continue, it could conceivably inflate even more. This is getting harder, however, because while US investors are responsible for the exuberance the cash is somebody else's. Both the boom in the real economy and the bubble on Wall Street are being financed with borrowed money. The US savings ratio is now negative while the current account deficit is widening. The cumulative effect of years of borrowing from abroad is that the US has shifted from being a creditor to having net external liabilities of nearly 20 per cent of gross domestic product. As a result, it is now running a deficit not just on trade but also on investment income. A reversal will eventually occur: it is a question of when and how, not if. So far this triple imbalance - an inflated stock market, negative savings and a yawning deficit - has been mainly sustained by liquidity flows from Japan. Effectively Japanese savers have been financing US consumers' overconsumption, allowing them to borrow and invest in equities. One reason the bubble might just last through 1999 is that there is little to keep Japanese savers at home. As the country's long-drawn out agony continues, the authorities may be pushed into inflating their way out of trouble. Certainly, recent weeks - with bond yields jumping from less than 1 per cent to 2 per cent - suggest there is a limit to how much borrowing the government's balance sheet can take. Bailing out its banks and reflating its economy are not cost-free options. If the government does resort to printing money, the yen could collapse. The snag is that the dollar will not necessarily be the beneficiary of a flight from the yen. One feature of next year is that Japanese savers will have another big currency competing for their attention - the euro. The euro-zone's politicians and central bankers may not want their new currency to rise next year, as this would dampen growth. But that may happen by default given the structural weaknesses of both the yen and the dollar. With a big current account surplus and relatively strong growth prospects, it would be natural for the euro-zone to take the baton from the US as the world's importer of last resort. And though the European Central Bank may try to mitigate an appreciation of the currency by cutting interest rates from the current level of 3 per cent, the scope to do so is limited. So the best guess for currencies next year is a strong euro, a weak dollar and an even weaker yen. Sterling, as often, will probably get torn two ways - weakening against the euro and strengthening against the dollar. The UK economy does not suffer from the same imbalances as the US; but it is not growing as fast as the euro-zone and interest rates, now 6 per cent, are likely to fall further and faster. If the euro does strengthen substantially, even the euro-zone will struggle to show much earnings growth. True, funds flowing into the region might shield equities from the worst of any fall-out on Wall Street. But, given the overvaluation, shares look a risky bet pretty much everywhere. Should investors favour bonds instead? Certainly not Japan's given its funding difficulties. As for other countries, the best of the bond rally is probably over. Deflationary tendencies in the global economy may limit the downside risk. But any further rise in euro-zone bonds (10-year yields are below 4 per cent) could only be justified on the dubious belief that inflation is not just dormant but dead. Gilts, which have enjoyed an excellent year, also offer little scope for capital appreciation. Yields at 4.4 per cent already assume good news on inflation and a high chance that Britain will sign up to the euro. Any further convergence to euro-zone levels should wait for a much clearer signal from Tony Blair that he is willing to take the plunge. US Treasuries, with 10-year yields at 4.7 per cent, arguably still offer value on fundamentals. But, as with all US assets, this must be tempered by concerns over the dollar. All in all, the best bet for 1999 is probably to shift assets into cash and pop it into a brand-new euro savings account. The Financial Times, Jan. 2, 1998 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! These are sordid matters and 'conspiracy theory', with its many half-truths, misdirections and outright frauds is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRL gives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. CTRL gives no credeence to Holocaust denial and nazi's need not apply. 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