Re: ECB and world-wide recession

["Hugh Whinfrey" <econ@xxxxxxxxxxxx>]

Sven asks:

> So the question is really how on earth we're going to make
> the ECB strong - if that's at all possible. (Disbanding the ECB is
> simply unthinkable for political reasons.)

The ECB has to play a passive waiting game
and let the FED/USD self-destruct. That is the only way
it can win. And it intends to win. In other words, it
becomes strong by the emergence of glaring
weaknesses in that which previously had appeared
to be the stronger in relation to it.

Reasons commonly given for why the FED/USD
will self-destruct include the trade deficit, excess
consumer debt, stock market bubbles, deteriorating
conditions for corporate borrowers and in particular
gold leasing issues. Sure, you can slice this in a
number of ways where some of these are positives
instead of negatives - however the point is that
the debate is in part centered on addressing these
things, and in particular projecting these trends/shocks
and asking how long it can continue, etc. without
systemic failure in the US. An airtight argument
that these things are all positive things for the US,
plus that there will be no ultimate systemic failure
in the US is the only thing I can see that might
have a chance of knocking the ECB out of its
present course. The recent public pressure
from the US on the ECB shows only frustration,
not a studied attempt to 'make it happen'. I
don't take that lack of effort as a good sign either.

Henry notes:

>The global economic order is unraveling and
>most governments are resorting to protectionist
>strategies while still talking a globalization game
>The struggle is not one between the North and
>the South, but among G7 giants. It will get very ugly.

I agree, however I think a point needs to also be made
as to how and why, lest our American friends be made
to feel socially unacceptable by it all. Look at that discussion
about the 'collapse of the Soviet Union' again.  There
is a big pice missing to the puzzle in the way it
is popularly presented as a collapse. Gorbachev
let East Germany go. That was ultimately not an
act of 'weakness' as much as a deliberate act of
aggression towards the US, i.e. it altered the
balance of power and gave it to the EU in the
longer run, knocking the legs out from under the
US. Sort of like saying "ok if you won't let us win, then
we can at least help somebody else win so you
don't"

We've just been playing the cards out ever since,
and this hand of the game will be over when the Euro
is the dominant global currency, replacing the dollar.

Barkley Rosser notes:

>      Although it is not supposed to according to
>all kinds of commentators, I suspect that it will
>take the full replacement of the national currencies
>as Mo by the euro next year before the ECB will
>really be in a position to "gain respect."  It might
>happen at that time if the predicted rush out of
>dollars into euros by all kinds of black marketeers
>and underground economy types materializes,
>thereby giving the euro a big boost in value.

I agree 100% with this, i.e. that the Euro will only
be 'real' when you can have one in your pocket.
I can cite an additional data point in support of this
timing in the form of one of the allegedly 'voo-doo'
methods that traders in the markets actually use to
project market psychology instead of paying
attention to fundamentals. The work of Chris
Carolan projects 'the crash' at the very end of
2001, several days before the Euro
hits the streets. He won a national technical
analysis award a couple of years ago for his
ground-breaking work. I believe the paper is on
the web somewhere. He also writes a
newsletter. While the method may not be up
to the quantititative rigour of this forum with
respect to fundamentals, what makes it relevant
is that traders use this type of stuff and hence
it is part of what moves the markets.

Hugh