The Fighting Over the Currency Issue is Likely to Get Worse

I will be in NY and Boston during the first week of February and plan to meet a number of investors there to discuss China. I believe it becomes official on February 1, but I recently joined the Hong Kong subsidiary of one of China’s top broker/dealers, Shenyin Wanguo, as their Chief Strategist, where my responsibility will be to provide research and advice to large institutional clients of the company. I will continue teaching at Peking University and doing research for the Carnegie Endowment – this new responsibility simply takes off from my existing work.
Unfortunately it will mean that my blog postings (in the future, and clearly not this one) will become shorter and perhaps more reacting to market events, but of course it also means that it will be much easier for me to travel to meet clients and friends in Asia, Europe, North America and elsewhere for more focused (and perhaps more open) discussions of China and the international economy.
For now I suspect everyone will want to discuss currencies. One of the more interesting pieces of news for me was yesterday’s Financial Times story on President Sarkozy’s finding “unacceptable” the disordered currency markets (“disorder” means a rising euro). According to the article:
Nicolas Sarkozy on Thursday stepped up his attack on global exchange rate imbalances saying “monetary disorder” had become “unacceptable”. The French president said he would make exchange rate policy an important theme of France’s presidency of the G8 and G20 forums of advanced and developing economies in 2011.
“There cannot be financial, economic and social order until we put an end to currency disorder,” he said at a conference in Paris. Mr Sarkozy has long railed against Chinese “monetary dumping” and the dominance of the dollar, but has sharpened his criticism in recent days reflecting concern in Paris that a balanced economic recovery in the eurozone could be choked off by an overvalued currency.
With a large trade deficit and with exports that are more price-sensitive than Germany’s, France feels more susceptible to exchange-rate movements than its neighbour across the Rhine. “We can’t increase the competitiveness of our businesses in Europe and have the dollar lose 50 per cent of its value against the euro,” Mr Sarkozy said. “When we produce in the eurozone and sell in the dollar zone, are we supposed to just give up selling?”
So we are sort of stuck, aren’t we? The dollar is overvalued, and it must rebalance downwards in order to force up US savings rates relative to US GDP, but since it cannot decline against Asian currencies, whose central banks intervene heavily, it must decline against the floating currencies like the euro.
But the euro is probably already overvalued against the dollar, so European manufacturers will be forced to accept the brunt of the adjustment. This will be painful for everyone in Europe, but I suspect it will be most painful for Germany, a country that is more dependent on manufacturing than the rest of the region and so who will suffer more if there is a sharp drop in demand for European manufactured goods. The fact that President Sarkozy is nonetheless making the most noise about the euro indicates that this is going to become a very popular political topic and has great demagogic appeal.
Later in the article Sarkozy was quoted as saying “You know how close I feel to the US. But this is not possible. The world has become multipolar. We must have a multi-monetary system.” As a half-French half-American I have to say I suspect that it is not likely to be easy to convince too many Americans of the truth of the first part of his statement. I think however, that although the US and the world (except perhaps export-dependent Asian countries) would be better off with a multi-monetary system, Sarkozy may be confusing issues.
The dominance of the dollar in reserve accumulation has little to do with a lack of an alternative currency and a lot to do with the inability of any country but the US to absorb the trade deficits created by export-dependent development strategies. Trade-surplus countries buy dollars because when they buy euros, they cause angry reactions from European businessmen and politicians who are uncomfortable with the impact of a rising euro on domestic manufacturing and employment. In fact, the rise of the euro against the dollar is precisely what Sarkozy claims to oppose in the first part of his statement and to support in the second part. If Asian central banks rely less on the dollar and more on the euro for their reserve accumulation, guess what will happen. Yes, the euro will rise against the dollar.


Source

Endowment policy cash could help cover retirement costs

Britons who have retired may want to make sure their household coffers are in as good condition as possible after a new survey has revealed the financial challenges retirees face once they leave full-time employment.

MGM Advantage said an extra £429 a year currently needs to be found by retired households whose main occupant is aged between 65 and 74. The cost of living for the average household has increased by 1.85 per cent - or £670.

Chris Radford, chief executive officer of aap, the UK's biggest buyer of endowment policies, said some of its customers who had retired had decided to sell their underperforming endowment policies so they could maintain a standard of living which they desire for their years outside of employment.

Running a retired household can prove expensive

After they have left the workforce, many Britons may want to invest time and money into ventures they previously could not enjoy because of their work hours.

However, MGM Advantage said the average annual household expenditure stands at £36,888. This drops to £23,106 when the main occupant is aged between 65 and 75.

With such high costs, maintaining a high standard of living could prove difficult if household finances are not large enough.

Commenting on the findings, Aston Goodey, sales and marketing director at MGM Advantage, said: "Many retired people have had to endure a rise in their cost of living. This, coupled with the fact that people are generally living longer is placing considerable pressure on retirement income.

Selling endowments could help cover the cost of retirement

Mr Radford, from aap, said some of its customers who had retired and who wanted to maintain a good standard of living had sold their unwanted endowment policies to help them in retirement.

He added that should aap make an offer to purchase an endowment policy, it will always pay more than the surrender value offered by the insurance company.

Source