Post G-7 Thoughts
- A
diplomat is “an honest man sent abroad to lie for his country
As WimDuisenberg, first head of ECB said, “We hear but we do not
listen.”
The G-7 meeting is over; long may the
Dollar sell off. Reading through the press reports emanating
from this weekend’s G-7 conclave, one would get the opinion that there
was some resolve to halt the Dollar’s decline. There was the
phrase, “Excess volatility and disorderly movements in exchange rates
are undesirable for economic growth,” added to the currency statement
from Dubai. The Europeans all felt that this statement was a
great victory for them and would relieve some of the upward pressure
on the Euro. This is fantasy of major proportions. The
European financial diplomats are uncorking champagne to toast an
illusory victory. Why? Because when Treasury Secretary John Snow
was asked to comment on what this would mean for the foreign currency
markets he stated, “I never comment on the subject of exchange rates.”
The communiqués also said that exchange rate flexibility is desirable,
“…for major countries of economic areas that lack such flexibility to
promote smooth and widespread adjustments in the international
financial system, based on market mechanisms.” When Snow was
asked if this applied to China, he said that, “The communiqué speaks
for itself.”
That the Europeans understood the
phrase about volatility to be a victory for them will be tested by the
markets. If the Dollar begins to sell off today and there is no
coordinated central bank intervention to halt the slide, the jawboning
on the part of Europeans will be immediate. If a line is drawn
in the sand, be it 1.30 or 1.35 Euro, the markets obligation is to
test that level to discover what the authorities have planned.
Friday, finance minister of France Mer, excoriated the markets that
they had gotten Dubai all wrong. Mer accused the markets of
misunderstanding the Dubai communiqué and that Boca Raton would set
the markets on the correct path. The fact that the markets are
wrong and French bureaucrats are correct is arrogance of the highest
order or as Sir Wotton may have said, “…a diplomat is an honest man
sent abroad to lie for his country.”
This type of European arrogance is not
new, as we have heard it before. When the ECB was under pressure
2 years ago to cut interest rates because of a nascent economic
slowdown, ECB Chairmen Duisenberg responded, “That we hear, but we do
not listen.” This aloofness permeates the thinking of Eurocrats
and it is this sort of arrogance that the financial markets will test.
The markets will demand action and make no mistake about it, that
action is for the ECB to cut interest rates. It is in this
manner that the markets will test the meaning and then the resolve of
the G-7 communique. As they would say on the streets of Chicago,
“MONEY TALKS AND BULLSHIT WALKS.” The danger in this
scenario will be the effect of a Dollar slide on global equity and
bond markets.
Stay focused,
Yra
yra53@aol.com