I almost entitled
this “The Almighty Dollar,” but our trade medium is less than
“almighty” these days. Only two months ago, I suggested that
the most critical risk management issue for 2004 is the U.S. dollar and
its current and potential decline. Nothing has occurred since then to
alter my opinion, despite some modestly favorable economic news coming
from this side of the Atlantic. The unfavorable signs persist: the continuing
monthly U.S. trade deficits, an almost-nonexistent savings rate, and our
unconscionable budget deficits. The current administration in Washington
just presented us with an unrealistic 2005 budget, showing no real determination
to address our mounting losses. Even the IMF raised a red flag, joining
the voices of many of the economists whose words I follow. Paul Krugman
is scathing in The New York Times, arguing now that “any
solution (to the U.S. deficits) has to include a major increase in revenues.”
Peter Bernstein counters those who are more optimistic in his February
15 issue of Economics and Portfolio Strategy. He argues that
“the current situation has no parallel in the past” and that
even if the more sanguine prove to be right, the “odds on a dollar
crisis are high enough to warrant setting aside some portion of portfolio
assets as a hedge . . . .” Just how long will the rest of the world
be willing to finance our debt, snapping up our bonds and paper, when
we ourselves are unwilling to take corrective action? I admit that, in
an election year, it is hard to imagine politicians of either stripe talking
or acting like responsible statesmen, but doesn’t that exacerbate
the current problem, increasing the odds of a crisis?
Facing the possibility
of a dollar crisis requires all the talents and ingenuity of risk officers,
from imaginative currency hedging to serious reviews of the financial
strength of key counterparties. It also creates opportunities!
One opportunity is to begin to repair our flawed educational system in
the U.S. Peter Bernstein writes that we now live in a global knowledge
economy, where new skills and technology will carry the winners and punish
the losers. Why are service jobs flooding like the Ganges in monsoon to
Mumbai and Bangalore? The knowledge workers there are highly skilled,
more reliable, and less expensive than those found in other developed
countries. A long-term solution to the problem here in the U.S. is to
refresh and reinvigorate our former obsession with education.
Our elementary and high school systems are woefully inadequate when compared
to many other countries, even as our university and graduate schools are
the best in the world. So far federal government intervention isn’t
working. Is it time for corporations to contribute and collaborate locally
in the effort to revive and inspire elementary and high school education.
The adjustment to the global economy continues to be painful to many,
yet it is a development that cannot and should not be stopped. The only
alternative is a retreat to relative isolation and protectionism, policies
that won’t work in any event. In the long term, better education
is the primary solution for economic revival in the U.S.
I have taken my own
words to heart for Seawrack Press, the publisher of Risk Management
Reports. All my income and expenses are in U.S. dollars, so you might
say that I don’t have a problem. I checked my subscriber list and
found that 48%, almost half, my paid subscribers are non-U.S. As the dollar
falls, RMR costs each of them less. Should I consider offering
RMR for sale in euros, pounds or pesos, to take advantage of
their rising value? Should I increase the offshore price, since it would
produce more income for me without adversely affecting my non-U.S. readers?
I think not, simply because of the ensuing accounting nightmare. But I
am seriously considering the possibility of offering a lower (not higher)
subscription price outside the U.S. in an attempt to ride the falling
dollar into a significant increase in non-U.S. subscribers! That’s
one way to take advantage of an unexpected event. It also contributes,
in a very modest way, to reducing our current trade deficit!
Finally, I placed
my own hedge last week. I asked that an honorarium due in May for a
Canadian lecture be paid in Loonies rather than U.S. dollars. Who knows,
by then the Canadian dollar may be worth more than its U.S. counterpart!
Prophecy is the most gratuitous form of error.
George Eliot, Middlemarch, 1872