Remarks to the Board of Gabelli Funds - August 10, 2005 - Jackson Hole, Wyoming

Karl Otto Pöhl - Former President of the Bundesbank

I wanted to make a remark on what seems to be a very important, could become very important issue with the devaluation of the yuan, the Chinese currency by 2½ %, at the first of July. While this is a small step (and it will not affect the U.S. trade deficit significantly), it could mark an important turning point in the strategy of management and trade relationships in China and Asian countries. It could mean more flexibility in monetary policy in China. It could mean the end of the so-called derived Brentwood system. In the longer run, it could have severe consequences. If China and other Asian countries focus their monetary policy and exchange rate policy on a basket of currencies, including the Euro (mainly), and the yen, and to a certain extent the dollar, and stop buying dollar assets, and treasuries. China in particular has accumulated $7 billion, invested in treasury bonds, feeding the American deficit. This is why in my view, extremely low interest rates in the U.S. and the low-end of the yield curve, which is the difference between the short-end and the long-end. This is really dangerous. Even Alan Greenspan said he does not understand it. It is easy to understand: China and other countries, India, for instance, have accumulated huge amounts of dollars. If that would come to a stop, it could have huge consequences to the United States. It would mean that interest rates in the U.S. would go up, because of the deficit. It could, for instance, prick the bubble in the mortgage and housing market which some people think is over heated. The U.S. current account deficit is homemade, as a function of the low saving rate in the U.S.: as long as the rest of the World was ready to finance the U.S. But this will not go on forever. The Japanese have accumulated 800 billion dollars. The Chinese, the outcry in the U.S., only a small portion would be used for that purpose. It could change the economic outlook significantly.

The second remark that I would like to make in the short time available is the euro. The euro is moving into a crisis - a consequence of the vote for the constitution. As a lame duck, and will not participate in any efforts to maintain the process of integration. That is just one example, why we are now at a standstill on the vote. Britain has its chairmanship in the European Union for a six-month period, though they will not make any conditions on the rebate. As long as the French, which use 40% for agriculture, and the protest continues in France, as the government is not in the position to give in. One consequence coming is Turkey, which will come to a standstill. Another critical situation in Europe is Italy. Italy has a very bad situation that has now become very well known - the governor of the central bank. Signor Fazio, has played a very unhappy role in the process of the acquisition of Italian banks taking two Spanish banks. They wanted to take over medium size banks and were rejected. This has ruined the reputation of Italy. Italy is really getting into a mess. We will see the consequences. Germany will have a rising index in September because of the end of the government. The chancellor requested elections, which is a very complicated process. It isn't very clear how the coalition will work. When the new parties formed, the communist party formed the core with very attractive leaders. In this Germany, the new communist party will be stronger. It could happen that after the elections, no party has formed a government. The situation is not as clear as it appeared six weeks ago. Hopefully, it will not happen but it is not certain.