A month ago, over the weekend of January 10-11, the G-10 (actually there are eleven of them) met in Basel, Switzerland. Now, over the weekend of February 6-7, the G-7 (the G-10 minus Belgium, the Netherlands, Sweden, and Switzerland) are meeting in Boca Raton, Florida, USA.
At the G-10 meeting, the assembled Finance Ministers and Central Bankers came up with profundities such as: "Global currency tensions are a risk" and "excessive currency movements are unwelcome". They also stood tolerantly by while various individuals who were privy to the meetings dropped arch hints to the media to the effect that the European Union (EU) and the European Central Bank (ECB) were about to enter the fray and lower rates and maybe even join Japan in its herculean efforts to buy up all the US Dollars which the Fed and the Treasury were creating.
These hints arrested the slide of the US Dollar, which had been accelerating downwards ever since November 2003, shortly after a Dubai G-7 meeting which had deemed currency "flexibility" as determined by the "markets" to be a good thing. They also arrested Gold, which had been climbing at increasing speed against the US Dollar ever since November 2003. By January 29, the day after the FOMC met for the first time this year and refrained from any action at all, the $US index had climbed from 85.39 to just under 88 and Gold had slumped from just under $US 430 (a decade plus high) to just under $US 400.
Since then, the $US index has given back most of its gains, but Gold has not recouped much of its losses, although the Comex Gold spot future price did climb $US 5.50 on February 6 to close at $US 403.60, fairly comfortably back above the $US 400 level.
There are a number of inconveniences which stand in the way of the picture of harmony, concord, and financial omnipotence which the G-7 would like their current meeting to convey to the world. At their previous meeting, they stated that they would like the markets to take care of the exchange rates between their currencies. This week, the Japanese reported that they had spent 7.15 TRILLION Yen in the MONTH between December 28 and January 27 assisting the markets in this arduous task. In the previous YEAR, Japan had spent 20 TRILLION Yen. The "markets" never had it so "good".
Then there is the slight problem that the Europeans have not made good on all the hints dropped at the G-10 meeting last month. They have not been sighted intervening in the markets buying Dollars with their Euros. And at the ECB's meeting on February 5, they did NOT lower rates nor did they give so much of a hint of any plans to do so. The nefarious Bank of England even had the temerity to RAISE its rates - by 0.25%.
Back in the USA, President Bush let it be known that the PLANNED US federal budget deficit for the fiscal year beginning on October 1, 2004 will be $US 521 Billion. That's no problem, said Treasurer Snow, we have "firm plans" to halve this deficit over the next five years. Here is the financial version of the notorious "weapons of mass destruction" fable.
Over the past month, the financial world has tried with desperate concentration and some considerable success to portray a facade of business as usual. World and US stock markets are in the black for the year and still hanging onto the considerable gains they have made since March 2003. The Dollar is still above its levels of early January. Gold is back in its "box". US longer term interest rates are stable. There have, it is true, been sporadic complaints about the size of US trade and budget deficits. The Japanese have been complaining about having to support the Dollar all by themselves and have even mused in public about examining the makeup of their foreign exchange reserves and even - blasphemous thought - adding some Gold to same. But all this has been swept back under the rug as fast as it spilled out the sides. The G-7 is coming, they'll fix everything.
Well, the G-7 is here. And judging from the first reports of the meeting, the prospects don't look good.
Here, for example, is a headline from Yahoo, reporting on the first day of the meeting:
G7 ministers debate exchange rate "stability" and "flexibility"
As interpreted by those who have the thankless task on reporting on the meeting, the US doesn't mind, in fact wants, a lower Dollar because it is "good" for their export industries. There is one slight problem with this. The number one US export, dwarfing all others, is US Dollars and financial "assets" denominated in US Dollars. Ask the Japanese whether a lower Dollar is good for this export market, having lost money on every Dollar they have "imported" over the past two years.
The Japanese don't want a lower Dollar because it is bad for THEIR export markets. This is true, and the reason why the Japanese have gone to such insane lengths to prevent the Dollar from dropping out of sight on the currency trader's radar screens. The Europeans are said to feel the same way. This is at best ingenuous. The US is not the major trading partner of the EU, nor does the EU rely on international trade to anything like the extent that Japan and Asia does. And as various European Central Bankers, from the head of the ECB on down, have been saying for weeks, what they want is a STRONG currency and a currency that is SEEN to be strong. That is what they have got.
So far, the G-7 meetings have been bilateral. On February 7, they all get together. What are they likely to talk about then? A European source said that the bilateral talks have: "Centred about the thorny question of currencies". That is undoubtedly what they have done and what they will continue to do throughout the weekend.
The "thorny questions" centre around one currency, and that is the US Dollar. How can the Dollar be "stable" in the face of the continuing and growing US trade and budget deficits? How can Japan and Asia be expected to keep supporting the Dollar without ultimately destroying their own financial and monetary systems in the process? How can a "first world" economy persist with "third world" fiscal and financial policies in perpetuity with no adverse effects? How can the world's monetary system be based on a currency which is being debased faster and faster, with no end in sight?
The answer to all these questions is the same. It cannot be done. When talking about MONEY, "stability" and "flexiblity" don't mix. When the great scientist Isaac Newton became Master of the Mint in Britain in 1717, he FIXED the British currency at a given and known weight of Gold. When asked why he had done this, he answered: "Gentlemen, in order to calculate, YOU MUST DEFINE YOUR UNIT."
When the Federal Reserve was born in December 1913, this was the preamble to the legislation which gave it birth:
"An act to provide for the establishment of Federal Reserve banks, to furnish an elastic currency, to establish more effective supervision of banking, and for other purposes."
In the comparison between these two statements lies the kernel of the problem now faced by the G-7 meeting in Boca Raton. The currency reformed by Isaac Newton was intended, in his own words: "to hold its value." It did. The currency "reformed" by the establishment of the Fed in 1913 was intended to do the same. It did not. The answer to the question of why one did and the other didn't is contained in the statements which accompanied their births.
Of course, nothing will be resolved by whatever public statement comes out at the end of this G-7 meeting. Nor, in all likelihood, will anything be resolved by whatever agreements or disagreements take place behind tightly closed doors. Ultimately, the situation will be resolved by the markets, despite any and all attempts by those participating at these meetings to bend these same markets to their purposes.
The spectacle is not provided by those going through the motions in Boca Raton. It is provided by all the "experts" in the rest of the world who hang on their every utterance with bated breath, unable to conceive of a financial situation which one more manipulation will not "cure" and unwilling to stop, take a step back, return to simple basics, and think through the situation for themselves.
The situation is very simple. Those who have thought through the situation own Gold. Those that haven't, don't. In the financial world, the cracks in the facade of "business as usual" are cracking open by the day. The G-7 is expected to, literally, paper them over. They will fail, the only thing in doubt is the timing.