Sunday 27 July 2003

Pic of the day: Do I look like some kind of day trader to you? Perhaps a night trader ... Nah.

Currency gambler? Me?

It would seem unlikely. Despite my sympathy for capitalism and market economy as a system, despite my interest and some education in economy: I am not a rich man, nor do I hope I shall ever be. And traditionally, trying to exploit currency changes for profit is a hobby for rich risk-takers.

But lately, the currencies of my native Norway and our trading partner the USA have been acting weirdly. The US$ has been sliding, as is good and proper for a country living way beyond its means, where government and private households compete in the sport of reckless borrowing. Earlier this summer a US$ cost less than 7 Norwegian Kroner (Crowns), bottoming around kr.6.92. But the cost to Norwegian export was too heavy; and the falling import prices threatened to send us toward deflation. (The USA is exporting its deflation, I wrote once before. This is an example of that.) So our central bank decided to aggressively slash interest rates, which have been among the highest in the rich world.

In a matter of days, the Norwegian currency fell like a shot duck. And so the dollar soared in comparison, peaking around kr.7.50. For someone about to buy e-books for $100, that's quite a bit. So I decided to wait. Also buying gifts to my American friends from Amazon.com is on hold. This situation, I decided, must be temporary.

The Norwegian economy may no longer be overheated, as more and more people lose their jobs and even rent is coming down in the cities. But we have a huge buffer from many years of trade surplus. Over the next five years or so, the dollar ought to plunge like an avalanche compared to our currency, as the madness of the Bush era comes to light (I'm talking about the economy here) and the bills come due. While Norway is using too much of its money, the USA is using too much of the money it doesn't have, borrowed money. That's a big difference.

As if sensing this outcome, the currency markets have reversed the trend, and the dollar now stand in ca kr.7.14. Perhaps this is the time to shop. Or perhaps I should wait till it's back below kr.7.

But the current trend is based on the assumption that Norges Bank (Norway's Central Bank) will slash interest rates by half a percentage point this summer and the same again in fall. Yet if the currency rises to its former strength, the bank may feel forced to cut by one percentage point at least once. It has been given a mandate to keep our inflation half a percentage point above the EU area, to compensate for our stronger economy. And the core inflation is now much less than that. Or is it really?

***

Last winter saw an unprecedented surge in electricity prices in Norway. Traditionally electricity has been cheap here because of our abundant hydro-electric power; it is common to use electricity even for heating. (For instance, my apartment is heated solely by electricity and sunshine: There is no fireplace, stove, oil burner or central heating.) Recently electricity trade with other countries was deregulated, and our hydro-power plants exported large quantities, expecting the fall flooding to re-fill the magazines. This fall, the flood did not come. Despite import, prices soared during the bitter cold Norwegian winter, and half a year later they still remain way above what has been common here.

What's that got to do with anything? A lot. When calculating core inflation, temporary and extraordinary changes are not included. In this case, electricity. But electricity is a fairly large part of living costs up here, especially in winter. So people have had less money to spend on other goods and services. Shops, sitting on unsold goods, have squeezed their margins, bringing inflation down. But unlike utility bills, this change is included in core inflation - it is not like it could possibly be calculated apart from other deflationary effects such as unemployment and competition from abroad. So, Norges Bank works with numbers that are too low, but is not allowed to admit it. It may therefore be forced to slash interest rates more in order to devalue our currency. Which means, in the end, that because of last year's dry fall in Norway I may have to pay 7% more for my American e-books. That's not very logical, if I may say so.

***

My alternative is to just wait for the dollar to fall again. The Norwegian currency is chiefly compared to the Euro, not the dollar. In the long run, it is enough for me that the US$ slides against €, and my books will be cheap again. But will that happen? The European "locomotives" such as Germany and France are doing none too well, and their "stability pact" keeps them from running a grand deficit to counter the cyclical downturn. The USA, of course, is not burdened by any such pact. And so it has totally broken the dam in terms of economic stimuli: The federal government is emptying its coffers in tax breaks and military expenditure. The Federal Reserve has slashed interest rates to near zero, fueling a private spending spree that already was insane by the measure of our civilization's history. The Fed's chairman has made it clear that if interest rates at zero doesn't prevent deflation, there are other tools. That means, to be blunt, printing money and dumping it at the market. But all this means a lower dollar. (And cheaper e-books for me!)

As for the economic recovery, I firmly believe that it is at least one decade away, possibly two or more. The current economic growth in the USA is moderate and only possible as long as the superpower keeps exporting its economic problems and borrowing the world's money. The political climate is not ideally suited for the world to play along forever, either. But that's another story. For now, I'm simply watching the currency bulletins ...