Buttonwood of the Economist: The dollar’s demise

The dollar’s demise
Nov 23rd 2004
From The Economist Global Agenda

Is the dollar’s role as the world’s reserve currency drawing to a close?

WHO believes in a strong dollar? Robert Rubin, Bill Clinton’s treasury secretary, most certainly did. John Snow, his successor but two, says he does but nobody believes him—if only because he wants other countries’ currencies, in particular the Chinese yuan, to go up. Mr Snow’s boss, President George Bush, in one of his mercifully rare forays into economics last week, also said he wants a muscular currency: “My nation is committed to a strong dollar.” Again, it would be fair to say that this was not taken as a ringing endorsement. “Bush’s strong-dollar policy is, in practical terms, to maintain a pool of fools to buy it all the way down,” a fund manager was quoted by Bloomberg news agency as saying. It does not help when the chairman of your central bank, Alan Greenspan, whose utterances on the economy are taken rather more seriously than Mr Bush’s, has said the day before that the dollar seems likely to fall: “Given the size of the current-account deficit, a diminished appetite for adding to dollar balances must occur at some point,” were his exact words. The foreign-exchange market immediately decided that it was sated, and the dollar fell to another record low against the euro.

Mr Greenspan’s words were of huge moment, and not just because he spoke clearly, unusual though this was, nor because the Federal Reserve rarely comments on foreign-exchange movements. No, Mr Greenspan’s words were significant because he was tacitly admitting what right-thinking economists the world over have long believed: that the emperor has no clothes.

Mr Greenspan’s previous line had been that America’s ever-expanding current-account deficit was not a problem when capital could flow so freely around the world; and that, in effect, it would continue to flow to America because the country is such a wonderful place in which to invest. Now he is saying that it won’t, or at least that investors will demand a cheaper dollar, or cheaper assets, or both, to carry on financing America’s deficit.

But Buttonwood suspects that the deeper significance of Mr Greenspan’s admission is that the game that has been played since the collapse of the Bretton Woods system in the early 1970s is drawing to a close. The dollar’s status as the world’s reserve currency—its preferred store of value, if you will—is gradually coming to an end. And, ironically, the fact that it has become so popular in recent years will only hasten its demise.

One man who undoubtedly believes in a strong dollar is Japan’s prime minister, Junichiro Koizumi. Unlike America, Japan has been putting its money where its leader’s mouth is. On behalf of the finance ministry, the Bank of Japan has bought more dollars than any other central bank has ever done. At last count, it had the equivalent of $820 billion in foreign-exchange reserves, most of it denominated in the American currency.

As goes Japan, so goes the rest of Asia. In an interview this week with the Financial Times, Li Ruogu, the deputy governor of China’s central bank, the People’s Bank of China, said that his country would not be rushed into revaluing the yuan, and that America should put its own shop in order. Mr Ruogu’s bank, too, has been a huge buyer of dollars in recent years. China and the rest of developing Asia now have $1.4 trillion of reserves, mostly dollars. This is more than the combined reserves of the rest of the world (excluding Japan). Thanks mostly to Asian intervention, foreign-exchange reserves at the world’s central banks have climbed from $2 trillion in 2000 to $3.5 trillion in 2004.

It used to be that countries amassed reserves as a war chest to protect against a run on their currencies of the sort suffered by East Asia in 1997, or Russia in 1998. But Asian countries have snaffled up far more than would be justified to prevent such crises. Their aim in accumulating these reserves is generally different now: to stop their currencies rising against the dollar and so keep their exports competitive. In effect, they are trying to peg their currencies; China’s peg is explicit. Huge foreign-exchange reserves are the result.

Some pundits have dubbed this arrangement the new Bretton Woods. The Bretton Woods arrangement (a post-second world war agreement that tied the dollar to gold and other currencies to the dollar) collapsed in 1971. The present arrangement seems similarly doomed to failure. The big question is whether the world will suffer similarly ill effects when it collapses.

Past saving?

The upward pressure on Asian countries’ currencies stems either from their saving too much and consuming too little, or from America saving too little and spending too much. American politicians, naturally, tend to concentrate on the first interpretation, because it stops them having to recommend unpleasant remedies, such as cutting deficits or encouraging Americans to save more. But Mr Greenspan’s most recent comments show that he recognises the problem is more home-grown. Personal saving in America, as a percentage of household income, slumped to just 0.2% in September, close to a record low. Indeed, the savings rate has been declining remorselessly since 1981, when it reached a high of 12.5%. This lack of saving shows up in the current-account deficit, which is a record near-6% of GDP and rising.

In effect, foreigners are saving on America’s behalf. In a recent study for the New York Fed, two economists, Matthew Higgins and Thomas Klitgaard, point out that the United States now absorbs more than the measured net saving of the rest of the world combined (suggesting someone’s got their figures wrong somewhere). The American economy cannot continue to expand at its current rate without those foreign savings. The question is whether foreigners will be happy to carry on financing this growth with the dollar and asset prices at their present level. The private sector is already voting with its wallet: it has been financing an ever smaller percentage of the deficit, and there has been a net outflow of direct investment. That leaves the public sector—ie, central banks—and those, in particular, of Asia.

At the heart of the central banks’ calculations is a trade-off: intervening to keep your currency down can be costly, but it is good for exports. Though the costs of intervention are hard to quantify, they are potentially big. Because the domestic money supply is expanded—those dollars must be paid for with something—it can cause inflation (though this can be neutralised through “sterilisation”, ie, bond sales). But the big potential cost is in amassing a huge stash of dollars with precious little exit strategy. Quite simply, Asian central banks now own too many of them to exit en masse, for their exit would cause the dollar to crash and American interest rates to soar, which would cause huge losses on their holdings of Treasuries.

Get out while you can

The biggest risk, of course, is that lenders would lose pots of money were the dollar to fall. As the printer of the world’s reserve currency, America can pass on foreign-exchange risk to the lenders because, unlike other indebted countries, it can borrow in its own currency. Messrs Higgins and Klitgaard reckon that for Singapore, the most extreme example, a 10% appreciation against the dollar and other reserve currencies would lead to a currency capital loss of 10% of GDP. Though loading up with even more dollars might of course stop the dollar from falling for a while, it would increase the risk of still larger losses were it eventually to do so. America already needs almost $2 billion a day from abroad to finance its spending habits, and the situation deteriorates by the week because America imports more than it exports, which worsens the current-account deficit.

The incentives to flee the Asian cartel (to give it its proper name) thus increase the bigger the game becomes. Why take the risk that another central bank will leave you carrying the can? Better to get out early. Because the game is thus so unstable it will come to an end, and probably a messy one. And what will then happen to the dollar? It is hard to imagine its hegemony remaining unchallenged when so many will have lost so much. And doubly so given that America has abused the dollar’s reserve-currency role so egregiously that its finances now look more like those of a banana republic than an economic superpower.

Financial Times: China tells US to put its house in order

China tells US to put its house in order

By James Kynge in Beijing, Chris Giles in London and James Harding in Santiago

Published: November 22 2004 18:36 Last updated: November 22 2004 18:36

In a mark of China's growing economic confidence, the country's central bank has offered blunt advice to Washington about its ballooning trade deficit and unemployment.

In an interview with the Financial Times, Li Ruogu, the deputy governor of the People's Bank of China, warned the US not to blame other countries for its economic difficulties.

“China's custom is that we never blame others for our own problem,” said the senior central bank official. “For the past 26 years, we never put pressure or problems on to the world. The US has the reverse attitude, whenever they have a problem, they blame others.”

Mr Li insisted an appreciation of the Chinese currency would not solve the US's structural problems and that although China was “gradually” moving towards greater exchange rate flexibility, it would not do so under heavy external pressure.

“Under heavy speculation we cannot move [towards greater flexibility] and under heavy external pressure we cannot,” said Mr Li. “So the best environment for us to gradually move towards a more flexible exchange rate is when people don't talk about it.”

His comments will disappoint US, Japanese and European politicians. Pressure has mounted on the Chinese administration to revalue the renmimbi or to increase the flexibility of the Chinese exchange rate over the past two years.

Mr Li said China could only permit greater renminbi flexibility after creating a domestic financial infrastructure, including reformed banks and developed markets, able to cope with a more liberalised currency mechanism; considering the conditions and the wishes of neighbouring Asian economies on any move towards a more flexible system; and educating people on how to deal with a new exchange rate system, teaching them how to hedge.

Mr Li, who spoke before a meeting of the Asia-Pacific Economic Co-operation (Apec) forum last weekend, said China did not want to run trade surpluses or accumulate foreign currency reserves. Its reserves stand at $515bn.

“If there is a small deficit, we are not concerned. But certainly we don't want to run into the US situation of having a trade deficit of 6 per cent of GDP,” he said.

“That is not sustainable,” he added. “The appreciation of the RMB will not solve the problems of unemployment in the US because the cost of labour in China is only 3 per cent that of US labour they should give up textiles, shoe-making and even agriculture probably.

“They should concentrate on sectors like aerospace and then sell those things to us and we would spend billions on this. We could easily balance the trade.”

China's timetable for freeing up the renminbi is expected to have an impact on sales of US goods to the mammoth and growing Chinese market as well as the consumption of Chinese goods in America.

The recent, adjustment to Chinese interest rates is seen by some in Washington as evidence that Beijing accepts administrative measures that are no longer an effective means of managing an increasingly liberalised market.

At last weekend's G20 meeting, finance ministers and central bank governors called for a global effort to reduce trade imbalances, and in partiuclar, the US current account deficit. John Snow, the US treasury secretary, repeated his commitment to work towards halving the US budget defict and to increase net US national saving, which would reduce the current account deficit.

But President George W. Bush's assurances at the weekend that his administration is committed to a strong dollar policy appeared to do little on Monday to encourage buying of the dollar, evidence of how far the White House's credibility on currencies has been undermined by the rising deficit. In mid day trading in New York the dollar was at 1.304 against the euro and 103.21 against the yen.

Stephen King: Dollar's weakness is a concern for us all

Stephen King: Dollar's weakness is a concern for us all

Any other country that chose depreciation would be pilloried. It is not much more than a 'beggar-thy-neighbour' policy

22 November 2004

Do trade deficits matter? There are those who argue they don't. Many American policy makers have, in the past, taken the view that America's trade deficit is a sign of strength, not of weakness. For them, the trade deficit is an inevitable consequence of America's attractions as a home for international capital. The more that foreigners wish to accumulate US assets, the more that imports into the US will rise. If, for example, a Japanese car company decides to build a factory in the US, the required machines and equipment could be imported into the States from all over the world. US imports would rise, but only because everyone wants to invest there rather than elsewhere. That's good for American jobs, good for American incomes, and good for America in total.

This, though, is a remarkably blinkered view of the process that's taking place. It's true that, in the short term, an investment in the US rather than, say, Japan will create jobs in the US at Japan's expense. But the story clearly does not end there. By investing in the US, Japanese businesses (and their shareholders) are making claims on future profits made in the US. Those profits are not going to US workers. They are, instead, destined to end up in the pockets of foreign capitalists. To use the late Earl of Stockton's famous comment, the longer America runs a trade and current account deficit, the more of its family silver will end up heading abroad (or, at the very least, pawned in the hope that it will come back one day in the distant future).

America's current account deficit now stands at around 5 per cent of GDP. Its size is now becoming a real issue not only for financial markets but also for policy makers. The Federal Reserve has often worried about the sustainability of America's external finances, but those worries appear to have intensified in recent months. As Alan Greenspan remarked last week, there are "only limited indications that the large US current account deficit is meeting financing resistance. Yet, net claims against residents of the US cannot continue to increase forever in international portfolios at their recent pace."

The issue has hotted up for three key reasons. First, the structure of the US current account deficit is changing. Until recently, the deficit on trade was partly offset by a small surplus on net income from abroad. Initially, this seems a little odd because America's external assets are quite a lot smaller than its external liabilities. However, whether by judgement or good fortune, US investors have managed to extract higher returns on their foreign assets than foreign investors have achieved on their holdings of US assets.

This story, though, will not last. The sheer scale of the rise in external liabilities associated with a current account deficit in excess of 5 per cent of GDP tells us that, even if America were full of Warren Buffet clones, there's no way that the net income balance could help matters out. Indeed, now that this balance is also swinging into negative territory, the overall current account deficit is going to be rising at a faster and faster rate. If nothing else changes, the deficit will quickly head towards 8 or 9 per cent of GDP. Try funding that.

Second, the rapid growth of the current account deficit threatens the sustainability of American economic expansion. Should foreign investors prove unable to come up with the necessary funds to bail out the US in ever larger amounts, the US may find itself having to pay a significantly higher cost to get access to global capital. That could take the form either of a major increase in interest rates or, alternatively, a collapse in domestic asset prices. There's no guarantee that America won't avoid this fate but sensible policy makers will certainly want to explore other alternatives.

Third, those other alternatives have suddenly acquired a status wholly absent in previous years. The US Treasury Secretary, John Snow, has recognised the problem and wants to blame the Europeans for it. If only they'd buy a few more American goods, Snow suspects the problem would go away (a conclusion that reflects American frustration with the continued sluggishness of the European recovery: the irony, though, is that the flow of capital into the US that opened up the current account deficit in the first place was partly driven by Europe's sluggishness). And, importantly, the US now believes that the easiest way to deal with a possibly explosive current account deficit is to defuse the detonator via a weak dollar.

The remarkable thing for foreign investors is that the Americans have done the same thing on so many previous occasions. Since the demise of Bretton Woods in the early 1970s, the dollar has been a bit of a one-way bet. Admittedly, there have been numerous occasions when the dollar has been strong. The first half of the 1980s and the late 1990s are the two most obvious examples. These, though, are the exceptions that prove the general rule: when the going gets tough, the dollar gets falling.

Most debtor nations are ambivalent about currency depreciation. Obviously, a falling currency will help competitiveness. But it's also potentially a serious hindrance. Faced with heavy foreign currency liabilities, a depreciation or devaluation will increase the debt burden for those in the domestic economy who have borrowed from abroad. And, knowing that these debtors might struggle to repay their now higher debts, the risk premium tends to rise: in other words, a nation finds itself facing higher interest rates.

For the US, however, these arguments do not always apply. Because of America's reserve currency status, investors have been happy to lend to the US in dollars, not in their own currency. So, should the dollar decline, it's the foreign creditors that feel the pain, not the domestic debtors. This makes a dollar decline an unusually attractive option for US policy makers to pursue. Moreover, because so many other countries choose to peg their own currencies against the dollar - for them, it's a more credible nominal anchor than, for example, a domestic inflation target - any dollar decline requires them to buy dollar assets to prevent their currencies from appreciating. And that prevents the risk premium on US assets from rising very far.

It's easy to see, therefore, that dollar depreciation seems like a simple solution for America. Alan Greenspan also said last week that: "Alternative approaches to reducing our current account imbalance by reducing domestic investment or inducing recession to suppress consumption obviously are not constructive long term solutions." Fair enough, but any other country that chose depreciation instead of domestic adjustment - that passed the burden onto other countries - would be pilloried for making such a claim. At the end of the day, a dollar depreciation is not much more than a "beggar-thy-neighbour" policy.

And it's for that reason that perhaps we should worry. Periods of sustained dollar decline have never really been happy occasions for the world economy. In the early 1970s, when the dollar came unstuck following the collapse of Bretton Woods, inflation, exchange rate volatility and commodity price shocks became the major economic challenges, creating a nirvana for speculators but a nightmare for everyone else. In the late 1980s, the dollar's decline contributed to the stock market crash, Japan's economic excesses and the depth of the European recession in the early 1990s. A falling dollar might seem like a solution for the US but the longer-term consequences might prove to be quite a lot more painful for all concerned.

Stephen King is managing director of economics at HSBC
stephen.king@hsbcib.com

Philippine Star: $3.2B in mining investments seen in next 5 years

$3.2B in mining investments seen in next 5 years
By Marianne V. Go

The Philippine Star 11/23/2004 The country’s mining industry is expected to attract investments worth $3.2 billion in the next five years, Trade and Industry Secretary Cesar V. Purisima said yesterday.

"In the next five years we can expect to attract $3.2 billion in investments, export some $1.2 billion worth of minerals annually and generate P21 billion in tax revenues," Purisima said.
According to Purisima, these mining projects would result in employment for 6,000 workers and create 36,000 indirect jobs.

At the same time, Purisima said, some P312 million worth of funds per year would be used for the development of the countryside.

Purisima said that at least one mining operation may start next year.

Philnico Mining Corp. (formerly Nonoc Mining and Industrial Corp.), the DTI chief disclosed, is being eyed for rehabilitation by two Chinese mining firms.

Philnico’s rehabilitation would entail an investment of $1 billion.

The two interested Chinese firms were identified as Jinchuan Nonferrous Metals Corp., the largest mine and refinery company in China producing nickel, copper and platinum metals, and Shanghai Baosteel Group Corporation which is one of the largest steel companies in the world.

The two Chinese firms, Purisima admitted are currently conducting a due diligence study on Philnico for a possible joint venture project.

Philnico’s plant is located on Nonoc island which is about eight nautical miles northeast of Surigao City in Mindanao.

Purisima earlier said the revival of the mining industry would definitely spur the development of the country’s economy.

He pointed out that big mining project need huge investments that cannot solely be provided by local firms.

Majority of the investments needed for big mining projects, Purisima acknowledged, "must come from foreign capital. These foreign investments are pre-requisites to developing our mineral resources in order to contribute to the country’s economy in terms of investments, employment and exports."

The Philnico project, he said, has the potential to generate around $350 million in exports annually and could create some 4,500 direct and indirect employment.

NMIC started operation in 1975 but ceased operation in 1986 due to technical problems. The DTI chief stressed the fact "that large-scale mining projects are capital intensive and very risky."

The Philippines, Purisima said, is richly endowed with world-class mineral resources, both metallic and non-metallic. The country’s mineral resources, Purisima said, are estimated to be worth $964.65 billion "but will remain to be just a potential if not developed." Multinational corporations, because of their expertise, Purisima argued, are able to lower the risk of mining ventures because "their technical expertise and financial clout are able to spread the risk over a number of projects in various sites and in many countries."

Thus, Purisima pointed out, "even if we take the optimistic view that five percent of mineral finds become moderate successes, a company must be willing to lose money in some projects to come up with one moderately profitable venture." But more than that, Purisima said, "one great advantage of the mining sector over the other industries is that this sector has an almost 100 percent value-added which means that almost all of the elements of production are sourced locally."

*****

Prudent Investor says....

WAY TO GO!!!!!!

Japan Times: Japan, Philippines clear steel hurdle, reach FTA accord

Japan, Philippines clear steel hurdle, reach FTA accord

SANTIAGO (Kyodo) Japan and the Philippines reached a basic agreement Thursday for a bilateral free-trade agreement after striking a deal on the stickiest issue -- steel tariffs.

Economy, Trade and Industry Minister Shoichi Nakagawa and Philippine Secretary of Trade and Industry Cesar Purisima reached the agreement on the sidelines of a two-day ministerial meeting of the Asia-Pacific Economic Cooperation forum in Santiago, Nakagawa said.

The deal with the Philippines would be the third FTA for Japan, following pacts with Singapore and Mexico.

The agreement with the Philippines is expected to give momentum to ongoing FTA negotiations between Japan and other trading partners in Asia -- Malaysia, South Korea and Thailand.

Nakagawa said the two nations reached a compromise on the Philippines' tariffs on Japanese steel imports, based on Japan's proposal that Manila scrap tariffs on 30 percent of Japanese imports and gradually reduce the remaining levies.

Nakagawa said tariffs on Philippine-bound Japanese steel exports definitely will be lowered with the agreement, and the two countries will fine-tune the details at working-level negotiations.

"With a basic agreement reached, negotiations at the political level are over," he said.

The agreement was reached after Purisima consulted President Gloria Macapagal Arroyo on the matter, according to Nakagawa.

The pact will probably be endorsed at a meeting between Prime Minister Junichiro Koizumi and Arroyo on the sidelines of the summit of the Association of Southeast Asian Nations plus three -- China, Japan and South Korea -- later this month in Laos.

The issue of accepting foreign workers in Japan was also a focal point. Japan and the Philippines agreed last month that a limited number of Philippine nurses and caregivers will be allowed to work in Japan with lesser restrictions on condition that they pass Japanese qualification examinations.

On agricultural products, Japan agreed to lower tariffs on bananas and pineapples from the Philippines. But the two sides sidestepped a decision on politically sensitive sugar imports.

The Japan Times: Nov. 20, 2004

Blommberg: Greenspan Says Foreigners May Curb Financing Deficit

Greenspan Says Foreigners May Curb Financing Deficit

Nov. 19 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said foreign investors may tire of financing the U.S. current account deficit and diversify into other currencies or demand higher U.S. interest rates. The dollar and U.S. Treasury securities fell.

``Given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point,'' Greenspan said at the European Banking Congress in Frankfurt. ``International investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing the U.S. current account deficit and rendering it increasingly less tenable.''

Americans' demand for imported goods and a government that spends more than it takes in may be adding to the risk of a further decline in the dollar, higher interest rates and slower economic growth. The current account deficit, the widest measure of trade, grew to a record $166.2 billion in the second quarter.

The federal deficit was a record $412 billion in the fiscal year ended Sept. 30. President George W. Bush today signed an $800 billion boost in the federal debt limit to $8.18 trillion.

Against the yen, the dollar fell to 103.10 at 4:21 p.m. in New York, from 104.18 late yesterday. The U.S. currency also declined to $1.3020 per euro from $1.2961. The dollar has dropped to five records against the euro in two weeks.

Treasury Notes Fall

Treasuries fell after Greenspan said rates are poised to rise. ``Rising interest rates have been advertised for so long and in so many places that anyone who has not appropriately hedged this position by now obviously is desirous of losing money,'' he said, drawing laughs in a one-sentence response to a question about whether emerging markets are prepared.

The benchmark 10-year Treasury note fell 11/16 point, pushing the yield up 9 basis points to 4.20 percent at 4:21 p.m. in New York.

``He's telling people rates are going to keep going higher and the dollar is going to keep going lower,'' said Scott Gewirtz, co-head of U.S. Treasury trading at Deutsche Bank Securities in New York. The firm is one of 22 primary dealers of government securities that trades with the Fed's New York branch.

Markets probably will make adjustments ``without crises,'' Greenspan said, adding ``we cannot become complacent.'' He spoke on a panel that included European Central Bank President Jean- Claude Trichet and Bank of Japan Deputy Governor Kazumasa Iwata.

Avoiding a Crisis

Financial markets are so large that the impact on interest rates and currency values by central bank actions has only been ``moderate,'' and derivatives and hedge funds also have helped reduce risks, Greenspan said.

``The market economies are usually pretty good at handling these adjustments,'' said Minneapolis Fed President Gary Stern today at a separate event. ``I don't think we ought to jump to the view that something very disruptive or chaotic has to happen.''

Greenspan and U.S. Treasury Secretary John Snow are participating in meetings of the Group of 20 finance ministers and central bankers over the weekend. The dollar's slide against the euro is likely to dominate discussions, analysts said.

``The current account deficit is a chronic problem and the Fed is right to address it,'' said Mark Spindel, who manages $13 billion in debt securities as chief investment officer at International Finance Corp., an arm of the World Bank in Washington. ``The currency depreciation represents an additional risk on the inflation side.''

Taxes

Greenspan, 78 and in his fifth term as Fed chairman, endorsed the idea of tax cuts in 2001, when the U.S. was running budget surpluses. Bush eventually won passage of a $1.8 trillion, 10-year tax cut package. The U.S. has since run deficits, hurt by an eight- month recession and slow recovery.

Senator Richard Shelby, the Alabama Republican and chairman of the Senate Banking Committee, said in an interview that cutting the deficit ``would be the right signal.''

``What we need to do in the Congress is put some spending caps and walls and separate some things that are essential and nonessential,'' Shelby said.

Greenspan said today that ``reducing the federal budget deficit (or preferably moving it to surplus) appears to be the most effective action that could be taken to augment domestic saving.'' Personal savings in the U.S. rose at a 0.4 percent annual rate in the third quarter, the lowest on record.

``Significantly increasing private saving in the United States -- more particularly, finding policies that would elevate the personal saving rate from its current extraordinary low level -- of course would be helpful,'' he said.

Balanced Budget

At a hearing before the Congressional Budget Committee on Sept. 8, the Fed chairman shunned tax increases as a method of raising revenue. ``I personally would much prefer to have lower taxes and lower spending, but of necessity, a balanced budget,'' he said at the time.

Fed officials stimulated consumption by cutting the overnight lending rate to a 45-year low in June 2003 of 1 percent and leaving it there for a year. Because short-term deposit rates were negative after an adjustment for inflation, the U.S. central bank produced an incentive to spend rather than save.

Snow signaled two days ago the Bush administration won't participate in attempts to stop the dollar's slide. ``The history of efforts to impose non-market valuations on currencies is at best unrewarding and checkered,'' Snow said in London.

The U.S. is encouraging China to stop intervening in currency markets to peg its yuan at 8.3 to the dollar, a practice that keeps the prices of Chinese exports low.

As Asian economies ``move toward price stability, that implies a move toward more flexible currencies will occur,'' Japan's Iwata said.

`Worrisome'

Fed officials received a special presentation from the staff on the U.S. current account deficit in June, and subsequently began remarking on the dollar's potential to fall. The Fed called the current account deficit ``worrisome'' in the minutes of its Sept. 21 meeting released last week.

Dollars accounted for 63.8 percent of all assets in the vaults of foreign central banks and national treasuries at the end of 2003, the International Monetary Fund said, down from 66.6 percent in 2000. Foreign official holdings of euros rose to 19.7 percent in 2003, up from 16.3 percent in 2000.

The U.S. central bank raised its overnight lending rate to 2 percent on Nov. 10, the fourth increase since June. The federal funds rate target is now equivalent with the European Central Bank's refinancing rate.

New York Times: Senate Backs Higher Debt

Senate Backs Higher Debt
By EDMUND L. ANDREWS

WASHINGTON, Nov. 17 - Faced with the prospect of a government unable to pay its bills, the Senate voted on Wednesday to raise the federal debt limit by $800 billion.

Though an increase in the debt ceiling was never in doubt, Republican leaders in both houses of Congress postponed action on it last month, until after the elections, to deprive Democrats of a chance to accuse them of fiscal irresponsibility.

The bill, if approved by the House in a vote expected on Thursday, would authorize the third big increase in the federal borrowing since President Bush took office in 2001. Federal debt has ballooned by $1.4 trillion over the past four years, to $7.4 trillion, and the new ceiling would allow borrowing to reach $8.2 trillion.

With no end in sight to the huge annual budget deficits, which hit a record of $412 billion this year, lawmakers predicted on Wednesday that the new ceiling would probably have to be raised again in about a year.

Democrats, still stinging from their election defeats, voted against the measure and argued that it should be accompanied by rules that would force Congress to pay for new tax cuts with spending cuts or tax increases elsewhere.

"I don't remember anyone during the elections making a promise to raise the federal debt to $8.1 trillion," Senator Kent Conrad, Democrat of North Dakota, said. "What we're doing here is just writing another blank check and saying to this administration, 'Go ahead, continue to run record budget deficits.' "

Administration officials have been pleading for an increase in the debt limit since last August, and the Treasury Department has been tapping into Civil Service retirement accounts since Oct. 14 to avoid breaching the limit.

On Tuesday, Treasury Secretary John W. Snow warned that the administration had "exhausted" all the previously used financial maneuvers. The government can probably keep paying bills until early next month, but the Treasury Department would have to postpone an auction of new Treasury securities scheduled for Monday.

Raising the legal borrowing limit has long been more political theater than substantive decision making, because lawmakers ultimately have no choice in the matter if the government is to stay in operation.

The 52-to-44 vote was almost purely along party lines, with one Republican, Senator John Ensign of Nevada, voting against a higher ceiling.

Two Democrats, Senators John B. Breaux of Louisiana and Zell Miller of Georgia, voted in favor of the measure.

Some Republican lawmakers had hoped to bury the measure in a broader spending bill that would attract less attention and that many Democrats would feel compelled to support. But Senate leaders decided to vote on a stand-alone bill in exchange for a commitment from Democrats to limit the debate.

"We've come to a general agreement to move ahead today," Senator Bill Frist, the majority leader, said. "The House literally is waiting for us to act."

In a muted floor debate, Democrats did almost all the talking - all aimed at castigating the administration and its Congressional allies for indulging in "borrow and spend" policies - while Republicans grimly waited for the debate to end and the vote to begin.

Senator John Kerry of Massachusetts, in his first appearance on the floor since losing the presidential election, said the growing debt threatened economic security.

"To pay our bills, America now goes cup in hand to nations like China, Korea, Taiwan and Caribbean banking centers," Mr. Kerry said. "Those issues didn't go away on Nov. 3, no matter what the results."

Administration officials contend that the annual deficits are undesirable but necessary to help stimulate an economic recovery and fight a global war on terrorism.

Mr. Bush has promised to reduce the deficit by half over five years, though the administration is fighting to make its tax cuts permanent and may need more than $70 billion in extra money next year to support military operations in Iraq.

House Republicans said they would schedule a vote on the bill for Thursday evening.
"We'll get it done," John Feehry, a spokesman for House Speaker J. Dennis Hastert, said. "We have an obligation to keep the government in operation."

Philippine Stock Market Daily Review November 18: Foreign Buying Buoys the Phisix

Foreign Buying Buoys the Phisix

As the US dollar plumbed to its record levels, Philippine equity assets appears to be one of the beneficiaries of global portfolio diversification AWAY from the US-dollar denominated assets. The Phisix climbed an impressive 23.28 points or 1.3% on broad based heavy foreign buying to the tune of P 159.586 million ($2.835 million). Foreign capital participation represented almost half or 48.56% of today’s aggregate output.

Last week, despite the stream of foreign money flows to the Phisix on select sectors, the Philippine benchmark index succumbed to sharp sell-offs. The steep correction led by the telecom sector seemed to have placed the Phisix at the fringe of a seeming ‘inflection point’. However, robust foreign money flows managed to allay the local investors concerns and provided the structural support which apparently averted the market from further declines. As foreign money flows continue to shore up local equity assets fickle local investors appears to have rekindled their interests on the markets, hence the marked improvement in sentiments and the indices.

Significant money inflows were seen in Bank of the Philippine Islands (unchanged), PLDT (+3.8%), which denotes a reversal from the previous streak of foreign selling activities, SM Primeholdings (+4.28%), Jollibee Foods (unchanged), Ayala Corp (+1.53%), JG Summit (+11.1%), Meralco B (+1.02%), Petron Corp (+1.56%) and ABS-Preferred (unchanged). Advancing issues beat declining issues by 38 to 27, while all sectors reported advances with the Mining sector as the laggard, even as GOLD has steadily carved out a series of record breaking (16-year highs) price growth.

The easing of the sell-offs in the telecom sector and the continued foreign money inflows mostly to the banking sector and now spreading to the broader market has been providing the Phisix the necessary support to most probably carry over its ‘year end rally’ due to seasonal strengths, historical patterns and cyclical shifts while the marked decline of the US dollar has provided global investors the fundamentals for diversifying their portfolios to non-US dollar denominated assets as the Philippines.

Bloomberg: Gold Rises to 16-Year High; Dollar Falls to Record Against Euro

Gold Rises to 16-Year High; Dollar Falls to Record Against Euro

Nov. 17 (Bloomberg) -- Gold prices in New York rose to a 16- year high as the dollar fell to a record against the euro for the fourth time in two weeks, increasing the appeal of precious metals as an alternative to stocks and bonds.

U.S. Treasury Secretary John Snow signaled he won't back any agreement to stem the dollar's slide. Gold, sold in the U.S. currency, has risen 9.4 percent in the past three months as the euro climbed.

``At the moment, all the fundamentals for gold are positive,'' said Bernard Hunter, director of precious-metals marketing for the Bank of Nova Scotia's ScotiaMocatta unit. ``The world is looking for a weaker dollar'' and gold may rise to $450 an ounce by the end of the year, he said.

Gold futures for December delivery rose $4.60, or 1 percent, to $445.10 an ounce on the Comex division of the New York Mercantile Exchange. Prices earlier reached $445.40, the highest for a most-active contract since August 1988. A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.

The streetTRACKS Gold Trust, offered by the World Gold Council, won regulatory approval yesterday to sell as many as 120 million shares on the New York Stock Exchange. The trust first filed documents with the Securities and Exchange Commission for the sale in May 2003.

The trust plans to sell 2.3 million shares, backed by 230,000 ounces of bullion, through underwriter UBS Securities LLC. The shares, each backed by a 10th of an ounce of gold, will allow investors to avoid incurring costs of storing and transporting physical bullion.

The London-based World Gold Council is backed by some of the world's biggest producers.

`More Liquidity'

``Any product that makes the metal more freely available to the investment or the retail community has got to be good for the market,'' ScotiaMocatta's Hunter said. ``It provides more liquidity and a greater depth.''

U.S. consumer prices climbed 0.6 percent in October, the biggest gain since May, signaling accelerating inflation. Prices this year have risen at a 3.9 percent annual rate, compared with a 2.2 percent rate a year earlier. Excluding food and energy, prices are rising at a 2.4 percent annual pace, up from a 1.3 percent rate a year earlier.

``Sensitive indicators of excess monetary liquidity like gold and the dollar suggest that the Federal Reserve remains in a hyper-accommodative monetary posture,'' Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut, said in a report today.

``Price pressures are increasingly likely to be passed on, which could push year-to-year core inflation rates to 3.5 percent or higher during the next several quarters,'' Darda said.

Some investors buy gold in times of inflation, which erodes the value of fixed-income assets, such as bonds. Gold futures surged to $873 an ounce in 1980, when U.S. consumer prices rose 12.5 percent from the previous year.

To contact the reporter on this story:
Choy Leng Yeong in Seattle at clyeong@bloomberg.net

UPI: Global coal demand up, mining surging

Global coal demand up, mining surging

NEW YORK, Nov 16, 2004 (United Press International via COMTEX) Strong demand for coal from China and India is driving coal production to record levels, the Wall Street Journal reported Tuesday.

Last year world coal consumption rose 6.9 percent, compared with 2.1 percent for oil, according to BP, the British petroleum company.

To fill that need, in the United States coal production is expected to climb to a record of more than 1.2 billion tons, an increase of more than 3.7 percent from 2003. In China, coal production is expected to grow about 200 million tons, or 11.8 percent, this year to 1.9 billion tons.

Coal is booming because power plants are located close to the mines, reducing the plants' cost of operation, and there are still huge untapped coal reserves that can be developed at a low cost, unlike oil.

Also, the cost of producing enough coal to generate a specific level of energy is less than half the cost of producing enough oil to do the same.

By producing more coal for Chinese and Indian markets, the upward price pressure they would otherwise place on oil is relieved, thus putting a damper on petroleum prices.

TimesOnline: Funds set to plunge £76bn cash into world markets

Funds set to plunge £76bn cash into world markets

By Patrick Hosking, Investment Editor

MORE than $140 billion (£76 billion) is expected to be pumped into equities over the next few months if the world’s fund managers dip into their hefty cash piles to reduce them to neutral levels.

Fund managers currently hold an average of 4.6 per cent of their assets in cash, a full percentage point higher than what is seen as the neutral level of 3.6 per cent, according to Merrill Lynch, the investment bank.

With fund managers gaining confidence in the wake of the US presidential elections and bonds widely seen as too expensive, the main beneficiary could be equities, Merrill said.

In its monthly fund manager survey, published yesterday, the banks said fund managers were under increased pressure from customers to put their cash piles to work.

Cash levels in November grew to their third highest this year. Although by historic standards they remain low, there is far more pressure today for fund managers to invest the money in productive assets because interest rates are so low. American fund managers leaving assets in cash — typically ultra-safe money market instruments — earn interest of just 1.5 per cent, meaning the principal shrinks after adjusting for inflation.

Of the $14 trillion invested worldwide by mutual funds alone, a 1 per cent shift from cash to equities would mean a $140 billion boost to world share markets. Including pension funds, the impact would be greater still.

The survey covered 302 fund managers with assets of $931 billion of assets.

David Bowers, chief investment strategist, said: “With bonds widely perceived to be overvalued, investors may turn to equities in the short term.”

The survey — the first since the US election — found that fund managers were now looking to take more risk in the short term, although there was still great uncertainty for next year.

A net 8 per cent of fund managers were now reporting a lower than normal appetite for risk, compared with 16 per cent in October. They were also more confident about company profits.

Bonds were being widely shunned, Merrill said, with 66 per cent of fund managers believing they were overvalued, compared with just 3 per cent who thought they were undervalued.

By contrast, just 14 per cent thought equities were over-valued, compared with 24 per cent who said they were undervalued.

Telecoms, as well as energy, were most in demand by equity investors, while autos, retail and media were most disliked.

The survey painted a mixed picture for UK fund managers. A net 79 per cent said UK fundamentals were deteriorating, yet a net 22 per cent also thought UK shares were cheap.

Merrill identified a marked change in UK interest rate expectations in recent months. The net percentage expecting another rise in base rates has fallen from 82 per cent in August 43 per cent this month.

The move away from cash already appears under way in Britain, with the proportion of managers claiming to be overweight in cash falling from 39 per cent in October to 14 per cent.

In the UK, insurance, raw materials, telecoms and media were the most popular equity sectors. Fund managers were most underweight in consumer staples, technology and drugs.

Currencies: A Reversal of the Asian Currency Crisis by Stephen Jen of Morgan Stanley

A Reversal of the Asian Currency Crisis

Stephen Jen (Milan)

Similarities with the 1997-98 experience

I find striking parallels between current market conditions and sentiment regarding USD/Asia and the experience during the Asian Currency Crisis in 1997-98. Specifically, the market and some US policymakers seem to be calling for a kind of ‘Asian Currency Crisis in Reverse’. I am in no way looking for a ‘crisis’, either in terms of the magnitude of movements in USD/Asia or in terms of the general level of angst. Rather, I simply point out that the down-trade in USD/Asia that many are calling for, in a way, almost fully reverses the Asian Currency Crisis. If China moves to a ‘crawling band’ in the near future, it is likely that there be a wholesale decline in USD/Asia.

My general view on the USD

In my view, the USD index measured against the major currencies is now undervalued. This undervaluation of the USD is particularly stark against the European and commodity currencies. However, against the Asian currencies, the USD is still meaningfully overvalued. This should not be surprising, given the modest movement in the Asian currencies against a falling USD over the past three years.

However, in light of the widening US C/A deficit, particularly the imbalances run against the Asian economies, protectionist pressures will likely build in the US to indirectly force the Asian central banks to ease off on intervention and absorb a greater share of the economic costs of a weaker USD. The longer China remains robust, the harder it will be for Asia to stave off the downward pressures on the USD against their currencies. Bottom line: USD/Asia may want to trade lower because of relatively robust economic fundamentals, contrary to my expectations since May this year.

What has happened since 1997-98?

The market is increasingly looking for a correction in USD/Asia, for reasons including large and burgeoning external surpluses and high and rising official reserves. These are precisely the opposite traits of many Asian countries back in late-1996, early-1997. In many ways, Asia’s position today is a direct result of the Asian Crisis seven years ago.

The maxi-devaluation of the Asian currencies, coupled with the emergence of China as a viable production entity at around the same time, led to an Asia that is, collectively, much more competitive than it was before the Asian Crisis. At the same time, Asia’s official reserve holdings exploded, rising from US$712 billion in June 1997 to US$2.265 trillion now − an increase of some US$1.55 trillion. Thus, the Asian Currency Crisis put Asia in such a competitive position that the market is now under mounting pressure for there to be a ‘reversal’ of the effects of the Crisis.

RMB float could be the trigger for a sell-off in USD/Asia

The prospective dismantlement of the de facto dollar peg could potentially be the trigger for a broad-based move lower in USD/Asia, at least this is likely to be the knee-jerk reaction. Country-specific idiosyncratic factors may not matter much, at least in the period immediately after the RMB de facto peg is dismantled.

What happened during the Asian Crisis is also illustrative of what could happen when the RMB peg is dismantled. Before the onset of the Asian Crisis in 1997, only Thailand and the Philippines had large C/A deficits, relative to the size of the economies. Nevertheless, the run on all the Asian currencies was indiscriminate. It didn’t matter that Singapore, Taiwan, China, and Indonesia had solid external positions, good growth and low inflation, all of these currencies, with the exception of China, were pushed significantly lower by the market.

Valuation matters

However, over the medium term, valuation should matter as well: those currencies that are more misaligned should come under greater pressures.

First, all six Asian currencies (KRW, TWD, SGD, THB, PHP, and MYR) are undervalued against the USD. Second, compared to the median forecasts, KRW, TWD, SGD and THB are about 5% mis-priced, but PHP and MYR are 20-25% undervalued. Thus, from a valuation perspective, a depreciation in the USD against the Asian currencies makes sense, unlike in the cases of EUR, GBP, and AUD.

Fair values and C/A surpluses

Rather than thinking about the fair values per se, i.e., values of USD/Asia that are consistent with a set of fundamental variables, investors may be asking how low USD/Asia will need to trade in order to help narrow the US C/A deficit. If investors remain fixated on this question, most Asian currencies will likely be pushed deep into overvalued positions before investors stop selling USDs. In other words, if the dynamics of EUR/USD are of any guide, the Asian currencies are likely to be pushed beyond their fair values.

Competitors versus partners: status matters

Over the medium term, it should also make a difference whether the country in question is an economic competitor to China or an economic partner with China. If the decline in USD/RMB is large enough (this is a big ‘if’), countries that compete with China should benefit, while those that supply capital goods and raw materials to China may be hurt. There should, thus, be a disparity in the Asian currencies depending on their relationship with China.

Bottom line

The significant pressure on USD/Asia can be traced back to the Asian Crisis, which I believe was the key reason why Asia has been able to run massive trade surpluses and large foreign exchange reserve positions. In many ways, the market is looking for a reversal of the Asian Crisis. A prospective RMB float could very well be the trigger for such a USD/Asia sell-off. In that event, I expect USD/Asia (particularly USD/PHP and even USD/MRY) to move by more than USD/RMB.

November 16 Philippine Stock Market Review: Banks Lead Market Rebound

Banks Lead Market Rebound

I have stated in numerous occasions in my newsletters that foreign buying has evidently been rotating to the banking financial sectors. Today’s remarkable rebound came about as the key Phisix heavyweight components price charts have been showing signs of fissures on the downside. The Phisix’s electrifying advance of 45.08 points or 2.57% came about mostly on the foreign led buying in the banking sector (+2.92%) which posted the best gains among the industry indices.

The erstwhile leaders in the telecoms industry seemed to have been bogged down by foreign led profit taking in the recent past. Although in today’s session they remained in the lists of foreign instigated sell-offs, the palpable local support on these issues provided the framework for its notable advance, PLDT up 3.1% while Globe rallied by 2.06%.

The banking sector led by top traded Bank of the Philippine Islands (+4.21%) soaked up P 94.937 million of foreign capital representing almost 94% of today’s cumulative net foreign inflow P 100.742 million. Foreign buying was basically broad based with more than twice more issues that recorded inflows than the outflows. Foreign money accounted for the significant majority or 58.62% of today’s turnover. The foreign profit taking in SMPH, PLDT, Globe Telecoms and Digitel was more than offset by substantial inflows in ex-banking issues as Ayala Corp. (+4.76%), Jollibee Foods (unchanged), Ayala Land (+2.89%), First Philippine Holdings (+3.7%) and Petron Corp. (+6.77%) leaving the considerable foreign buying margin to the banking sector, most especially to BPI.

While today’s advances maybe an subsequent offshoot to the recent sharp selloffs, as technical indicators suggest, it remains to be seen if the banking inspired across the board rally may be able to counterbalance the still ongoing foreign led liquidations in the telecom sector. Will the banking sector take the cudgels and be the next leaders to lift the Phisix, aside from Ayala Corp? Stay tuned.

The Economist: Farewell to Powell and his doctrine

Farewell to Powell and his doctrine
Nov 15th 2004
From The Economist Global Agenda

America’s secretary of state, Colin Powell, has become the most high-profile in a number of senior officials to announce that they will not be serving in George Bush’s second term. Given that Mr Powell lost numerous battles with the administration’s hardliners, this is hardly surprising

IT IS a safe bet that Colin Powell, America’s secretary of state for the past four years, is more popular and respected around the world than his boss. Mr Powell’s more emollient, multilateralist style was much more to the liking of America’s allies and other interlocutors than the unilateralist, “my way or the highway” style of President George Bush. So those in the world’s capitals who groaned when Mr Bush beat John Kerry earlier this month are likely to have heaved a sigh of regret on hearing, on Monday November 15th, that Mr Powell was resigning.

Though it is not yet clear how willing Mr Powell might have been to serve a further term if Mr Bush had asked him not to go, his departure is hardly surprising, given how he had lost a number of crucial battles with the Bush administration’s hardliners—most notably the defence secretary, Donald Rumsfeld, and Vice-President Dick Cheney. Though in public Mr Powell maintained that some of his disagreements with the “hawks” were more perceived than real, he was widely believed to have tried to resist their plan to invade Iraq and topple Saddam Hussein. Once the hawks had persuaded Mr Bush to go ahead, Mr Powell persuaded the president to at least have a serious try at seeking a consensus at the United Nations Security Council in support of the war.

When this got nowhere, Mr Powell, like the loyal soldier that he was before entering politics, swallowed his doubts and sturdily defended his boss’s policies, maintaining that Saddam’s supposed possession of weapons of mass destruction justified the invasion. Perhaps his most memorable speech was the one he made at the Security Council in February last year, shortly before the invasion began, in which he presented the “evidence” for the Iraqi regime’s possession of illegal weapons—evidence that has since proved to be deeply flawed.

When Mr Bush was first running for president in 2000, he was critical of the idea that America should indulge in “nation-building” beyond its shores. On winning, and making Mr Powell his secretary of state, it seemed that Mr Bush was likely to follow the “Powell doctrine”, which Mr Powell had developed while he was armed forces chief of staff during the presidency of Mr Bush’s father. In essence, his doctrine states that America should only use force in defence of its vital national interests; when it does so, it should use force overwhelmingly and should have a clear exit strategy. A corollary of this is that the building of multilateral alliances and the use of “soft” power (ie, diplomatic and economic pressure) should be preferred to unilateralism and “hard” power (ie, military muscle).

But everything changed on September 11th, 2001. The subsequent invasion of Afghanistan seemed to square with the Powell doctrine, given that its regime was harbouring the people behind the massive terrorist attacks on American soil. But, whatever merits it may have had, the war in Iraq seemed rather harder to fit with the doctrine, except by overstating the reliability of evidence that Saddam had deadly weapons capable of hitting American bases in the region. As time has gone on, the Iraq venture has become harder to square with the doctrine: the military force applied by America has been less than overwhelming, and the continuing insurgency has made it harder to discern a timely and honourable exit.

Mr Powell’s resignation comes at a particularly difficult time: when American forces are attempting to break the back of the Iraqi insurgency through a bloody battle to recapture the rebel-held town of Fallujah; and when the death of Yasser Arafat is offering a chance of restarting the stalled Israeli-Palestinian peace process (see article). Mr Powell will stay on until his successor is chosen and his staff say he will continue working at full speed until then (he is due to attend talks in the West Bank next week). But it may be hard for him to make any progress while every political leader to whom he speaks is anxious to know who will replace him.

Who Mr Bush nominates as his new secretary of state is likely to be an important indicator of what he has in store for his second term. Will it be more of the same hard-power unilateralism or a swerve towards a softer, multilateral policy? The former is more likely if the job goes to John Danforth, a Republican former senator who is currently America’s ambassador at the UN. There would also seem little prospect for change if Mr Bush gives the State Department to his national-security adviser, Condoleezza Rice, who is so far the leading candidate to replace Mr Powell.

Already, Mr Bush has signalled that he is not about to go soft, by replacing John Ashcroft, his hardline attorney-general, with an equally controversial figure, Alberto Gonzales. Mr Gonzales is a long-time loyalist who served Mr Bush as legal counsel when he was governor of Texas, and was later brought to do the same job at the White House. In 2002, Mr Gonzales wrote a memo for his boss supporting the notion that the Taliban and al-Qaeda fighters captured in Afghanistan were irregular “enemy combatants” not subject to the protections of the Geneva Conventions. The new paradigm of the war on terrorism, he wrote, “renders obsolete Geneva’s strict limitations on questioning enemy prisoners”. This was seen by critics as a wink at the torture of captives for information. Once again, Mr Powell fought against this policy, and lost.

There are signs that Mr Powell’s may not be the last high-profile departure from the Bush administration. There has been speculation that one of his main foes, Mr Rumsfeld, may also be about to leave. Many (including The Economist) called on the defence secretary to resign or be sacked after the prison-abuse scandals at Abu Ghraib. But Mr Bush held on to him. This is partly because the administration is not terribly good at admitting to mistakes. But it may also be because Mr Rumsfeld is halfway through a transformation of America’s military, from a lumbering force of infantry and armoured divisions built to face the Soviets into a lighter, faster, supposedly smarter, technology-driven machine for the wars of tomorrow. Such a transformation has its opponents, and Mr Bush may conclude that the hard-charging Mr Rumsfeld needs to be kept on board to see it through, no matter whom this upsets. And a second Bush administration with Mr Rumsfeld but without Mr Powell is bound to cause dismay in many parts of the world.