International Monetary Policy

WHAT A BUSY WEEK for the International Monetary Fund! And it’s just over halfway through.

Just how busy will the IMF get when it helps host the G-7 meeting of policy wonks from the world’s seven richest nations in Washington this weekend?

Rumors were that finance ministers from Europe, Japan, the U.K., Canada, and, of course, the United States wanted to chew over joint intervention in the currency market — buying dollars to support the U.S. currency, easing the surge in commodity prices, and helping export-dependent economies avoid a race to debase as they try to stay competitive.

But could they really be so dumb?

On Monday, the IMF’s managing director, Dominique Strauss-Kahn, called for concerted crossborder intervention and regulation by national governments to stem the ongoing global banking crisis.

On Tuesday, the IMF laid out plans to reorganize its own finances, selling 400 tonnes of gold reserves to help cover a $400 million deficit in its $1 billion budget.

Tuesday night saw the IMF warn that total write-downs (i.e., balance sheet losses) due to the collapse of subprime U.S. mortgage lending may reach $945 billion.

“It is now widely acknowledged that public measures are needed in a number of areas,” claimed the IMF — established at the end of World War II to help keep the world’s financial system in check with the U.S. dollar newly crowned as king of world currencies.

“In particular,” the IMF added, “there may be a need to shore up the prices of various types of securities to prevent fire sales.”

And then, on Wednesday, the IMF cut its forecast for world economic growth in 2008 to 3.7 percent, from the 4.2 percent it had predicted only three months before.

“Further,” says the head office of analysis and advice for 185 member nations, “world growth would achieve little pickup in 2009, and there is a 25 percent chance that the global economy will record three percent or less growth in 2008 and 2009, equivalent to a global recession.”

Pretty much the entire globe has been downgraded by the IMF’s chief economist, Simon Johnson, starting with a “mild recession” in the United States. Which leaves him, oddly enough, scratching his head at the collapse of the U.S. dollar.

“The effect of the financial turmoil in the United States has been to lower the prospects of growth,” he said in Wednesday’s 2008 World Economic Outlook, “but somewhat paradoxically, it has also increased oil prices, metal prices, and, of course, food prices.”

Plunging property prices tend to go hand in hand — squeezing tight like a child in a crowd — with a falling exchange rate. Just ask British consumers about their 1990-92 slump in real estate prices.

Or ask them again, jabbing a thumb in their eye, about what’s happened to sterling since the latest house price slump began in late summer ‘07.

That’s why the sudden surge in the dollar of last August presented investors and savers with such a fantastic opportunity to get ahead of the curve and defend their wealth.

The initial surge in the dollar — which pushed the euro down from $1.38 to $1.34 by the start of September — came thanks to a dash for cash by the world’s biggest banks.

The U.S. dollar being the world’s No.1 money, cash equaled greenbacks. And selling everything else to raise money — for settling lost trades and client redemptions — the panic marked what might prove a last chance (during this dollar bear market, at least) to swap dollars for gold below $700 per ounce.

And now? The very week that the IMF said it’s going ahead with a gold sale of 400 tons (pending U.S. approval, which looks a dead certainty)? “It seems that dealing with the risks stemming from the behavior of private sector financial institutions may be the big focus for this coming weekend’s G-7 meeting in Washington,” noted John Hardy at Saxo Bank.

“There are some calls to include currency issues on the agenda, but the G-7 may once again have little to say on currencies, especially if the U.S. dollar is not trading at new lows as the meeting gets under way.

“Even if it is trading at new lows, real intervention beyond verbal remarks is likely some way off,” he concluded.

But the growing call for panglobal financial meddling looks sure to create a “Reverse Plaza Accord” sometime soon in the future:

“In view of the present and prospective changes in fundamentals,” said the communique of Sept. 22, 1985, issued by the rich G-5 nations from the Plaza Hotel in New York, “some further orderly appreciation in the main nondollar currencies against the dollar is desirable.”

Together, therefore, the big guns of the global economy “[stood] ready to cooperate more closely to encourage this when to do so would be helpful.”

Put another way — which was entirely the point — the G-5 would start selling dollars and buying non-U.S. currencies to cut down the looming “super dollar” that towered over the global economy.

(Those changing fundamentals, by the way, were that the United States had become a net debtor for the first time in 70 years. It’s barely looked back…)

What now might cause “close cooperation” in reversing this strategy, buying the dollar to increase its value, and thus aiding non-dollar countries struggling to bear the costs of the dollar’s six-year decline?

There is now agreement in the eurozone about the fact that the depreciation of the dollar is a problem,” said an unnamed French official to the International Herald Tribune back in December.

The finance wonks attending the next G-7 meeting “have to pass the same message to the market,” he went on. But so far — if they’ve passed on that message at all — it’s been ignored:

Of course, it’s not in the United States’ interest to see the dollar go higher.

If you owed $9 trillion and you owned the printing press, wouldn’t you be just fine with the idea of your debt being inflated away?

But the other G-7 cronies, not to mention the poor Asian and Middle Eastern economies that continue to pile up greenbacks and T-bonds every time they do business…might they want to see some kind of “Reverse Plaza” enacted — and soon! — to support their stockpile of dollars?

And with the International Monetary Fund standing ready to sell 400 tons of gold over the next couple of years, wouldn’t it make a great deal for the central banks of Beijing and Japan?

As the GFMS consultancy here in London points out, China holds barely one percent of its foreign currency reserves in gold at the moment. The rest, pretty much, is in dollars. The Japanese do little better, with a two percent gold holding. They just broke the $1 trillion mark in U.S. dollars, on the other hand.

If this swap — the West’s gold for Asia’s dollars — comes off sometime soon, you won’t have to simply stand by and watch this transfer of wealth as if helpless. You could join the big switch — out of dollars and into truly hard currency — starting today, if you wish.

Or you could wait for that communique from the Beijing Plaza Hotel.

Regards,
Adrian Ash
BullionVault
April 10, 2008