Feldstein: Worry About the Dollar, Not the Euro: Keep an Eye on Sterling

Here is Marty Feldstein's view of the economic fundamentals in the euro and dollar portion of the forex markets.

Fundamentals mean little in the short term for trading purposes, at least in my own judgement. However, it does look as though the euro/dollar cross is a bit overdone. If that is correct, then it is likely that this correction in the precious metals should be almost done as well. But we will have to see what happens. The markets are shallow and edgy, almost wobbly. In a liquidation everything gets sold on the short term. Selling and buying on the margins makes price, no matter what size the market. Such it is with most auction markets disconnected from rational valuation.

On the fundamentals, however, Feldstein makes some good points. The problem with Europe is that it is sitting on the fence with its union, and the Greek debt crisis merely highlights their weakness which are largely structural. What is the EU likely to become.

As for the US, its day is fading, and it is in the grip of financial interests that will wring the last drop of vitality out of it given their way.

There are several roads to losing weight. One is to engage in healthy exercise and a good diet. The other way is starvation either through deprivation or disease. In both instances one 'loses weight.' The modern day Liquidationists favor starvation, for the other guys, not themselves. The modern day Keynesianians seem to wish to indulge in overeating with a change in diet to be left for another day.

The American economic system cries out for meaningful reform. Deficit spending without reform is futile, the road to addiction. But no government led structural repair efforts is the sure road to stagnation and a zombie-like existence such as has been seen in Japan, or even worse, a third world status and regional fragmentation.

My own bellwether is the UK. I believe quite strongly that Britain will reach its crisis before the US. And it may provide a proper warning, but all things considered, it may be too late. While there are many good signs in the financial reform regime from regulators aghast at the mindless venality that has brought the country to the brink of ruin, there is still the matter of the current political leadership, and its failure to engage with the issues in meaningful ways.

Addendum: Europe's Banks Brace for UK Debt Crisis

Bloomberg
Feldstein Says Euro’s Fall Due to ‘Panic’ Over Greece
By Steve Matthews and Sara Eisen

March 11 (Bloomberg) -- Harvard University Professor Martin Feldstein said the euro’s 4.6 percent decline against the dollar this year has been “panic selling” stemming from the financial crisis in Greece.

“The euro is weakening despite their better trade balance,” Feldstein, an economist, said in a Bloomberg Television interview broadcast today. “This is a kind of an irrational or panic selling where people are just saying, ‘I don’t know what is going on, I am just going to step to the sidelines and not leave money in euros.’”

Greek officials are trying to convince investors they can reduce the nation’s budget deficit, which at 12.7 percent of gross domestic product was the European Union’s largest in 2009. The government last week announced spending cuts and tax increases totaling 4.8 billion euros ($6.5 billion), the third round of austerity measures this year...

“What’s happening with the euro is an overreaction,” Feldstein said. “There’s, in my judgment, no real reason why the euro should have sold off, overall. After all, Germany is not at risk. France is not at risk.”

Feldstein, who warned in 1997 that European monetary union would spark greater political conflict, said “enormous fiscal deficits” projected over the next decade may mean the U.S. dollar may not maintain its current value.

Draw Funds

“Europe doesn’t have the need to draw in funds from the rest of the world in the way that the United States does,” he said.

“If I wanted to be nervous about the future of a currency over the next, say, five years, there is more reason to worry given the size of the U.S. budget deficits and given the size, even more importantly, of our trade and current account deficits,” he said.

The Congressional Budget Office projects President Barack Obama’s spending proposals would produce a record $1.5 trillion budget deficit this year and a $1.3 trillion deficit in 2011.

Concern over the possibility of U.S. tax increases to deal with the rising government debt may be depressing confidence, investment and household consumption, Feldstein said.

“It is a very negative impact, both on the economy in the long run and, through confidence, on what happens in the short run,” he said.

Feldstein, a former president of the National Bureau of Economic Research, is a member of the NBER’s Business Cycle Dating Committee, the panel charged with determining when U.S. recessions begin and end. He served as chairman of the White House Council of Economic Advisers during the Reagan administration.