Risk Management Reports

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!