from Follow the Money

It is nice to have a bit of high profile support

February 25, 2008 3:24 pm (EST)

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At least on the case for more exchange rate flexibility in the Gulf. Former Fed Chair Alan Greenspan.

Former Federal Reserve Chairman Alan Greenspan said on Monday near-record Gulf Arab inflation would fall "significantly" were the oil producers to drop their dollar pegs, in contradiction to Saudi policy.

"In the short term, free floating... will not fully dissipate inflationary pressure, although it would significantly do so," Greenspan told an investment conference in Jeddah.

And, in Abu Dhabi

" Referring to Persian Gulf countries, he said ``letting the currency float is probably the best way to stop the flow of foreign exchange into the economy and cause inflation.’’

(cause looks like a misprint; curb is more consistent with his other comments)

Dr. Greenspan though doesn’t seem to share my concerns about the impact of the expansion of sovereign funds on global markets. Oh well. One of two isn’t that bad.

I am more concerned by the policies that gave rise to large funds -- policies that have impeded adjustment in the global balance of payments -- than the funds themselves.

But I also wouldn’t underestimate the impact of shifting from a world where sovereign investors buy $1 trillion of bonds every year to a world where sovereign investors buy $1 trillion in equity. The shift from a world with roughly $2.5 trillion of SWFs increasing by $100-200b a year to a world with say $4 trillion in SWFs growing by $1 trillion a year is unlikely to be smooth. It also is also, at least for now, just a forecast, not market reality.

UPDATE: Pam Woodall of the Economist joins the bandwagon calling for the Gulf to depeg.  Alas, though, I am one for two with her as well: She doesn’t seem convinced by my argument that dollar weakness actually leads to more dollar reserve growth, and that there actually hasn’t been much of a change in the dollar’s share of emerging market reserves since late 2003/ early 04.

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