November 21, 2007 | posted by Michael Baxter in IABN | comments (0) |

Meanwhile, in the UK the CBI released its latest industrial trends survey yesterday. It’s good news for the manufacturing sector. But not so good for inflation.

A balance of 8 per cent of firms reported their order book levels were above normal. That might not seem that much to you, but actually a reading of plus 8 is the joint highest score announced by the CBI for a very long time. For most of the last few years the index has been negative.

But, the blow comes in the shape of the CBI index for measuring manufacturer’s pricing. The balance of manufacturers saying prices will rise next quarter (+21 per cent ) is the joint-second highest since 1995. Only in May, when the index reached 25, has the index been higher any time in the last 12 years.

Okay, a part of the reason for this rise was the high price of oil, but the point is this. The CBI survey reveals that manufacturers intend to pass rising fuel costs on, something they did not do two years ago, when the price of oil also spiked.

It’s all a little odd. The CPI inflation index is currently sitting at 2.1 per cent, that’s 0.1 per cent above target. More to the point, the retail price index is now at 4.2 per cent, and remember this is the index which is often used as the yardstick when wage settlements are agreed. The RPIX index now stands at 3.1 per cent. This is significant, because this is the index the Bank of England used to target, and just before it controversially changed to following CPI, its RPIX target was 2.5 per cent. So, if the central bank was still following RPIX, which many think it should be, inflation would be 0.6 per cent above target, well into dangerous territory.

Couple all that stuff about the current rate of inflation, with mounting evidence that manufacturers are soon going to pass costs on, combine that with the fact that utility bills will not reflect the current price of oil until well into next year, and combine the fact that food inflation is soaring. You would think that the Bank of England would be quite alarmed by it all.

And yet, in its recent inflation report it dropped a pretty strong hint that interest rates are about to fall, not once, but twice, and this morning speculation has mounted that the bank’s deputy governor, Rachel Lomax, voted for a cut in interest rates when the bank’s Monetary Policy Committee last met.

November 21, 2007 | posted by Michael Baxter in IABN | comments (0) |

While he was chairman of the Fed, Alan Greenspan liked to talk in riddles. He once said during a talk, “If I turn out to be particularly clear, you’ve probably misunderstood what I said.” But it’s not like that now. His successor, Ben Bernanke, likes to tell it how it is. By the terms of central bankers he is a plain speaker. This has left him open to criticism, because in revealing his thoughts, Mr Bernanke has turned out not to be especially omnipotent, whereas Greenspan’s crypticness seemed to give him a status not dissimilar from the awe the Ancient Greeks held for the Oracle at Delphi.

And while the ancient Oracle would say things like, “If you go to war then a mighty kingdom will fall,” which is pretty obvious, even so, it would lead to kings and their advisors debating the true meaning of the words. Yesterday, Mr Bernanke left little room for misinterpretation. Actually, when you think about it, the only time Greenspan spoke clearly was when he made his famous irrational exuberance warnings, and everyone ignored him.

The Fed recently vowed to reveal more information on its thoughts on the US economy when it publishes the minutes of its interest rate setting meetings. And yesterday it revealed that it has grown a lot less confident about 2008. It now expects the US economic machine to expand by between 1.8 and 2.5 per cent, whereas, back in June it had predicted a 2.5 to 2.8 per cent expansion.

Now the downside: the Fed projections seem a tad low, but actually, there are good reasons to think a prediction of 1.8 per cent growth is grossly optimistic.

For one thing, it seems likely the US housing market is set to get a whole lot worse. Yesterday, the US Conference Board released its latest data on home starts. At first glance it didn’t seem too bad. In fact housing starts jumped by 3 per cent in October over the month before but, then again, September saw a massive 11.4 per cent decline, and most had expected a small rebound in October. Capital Economics put the small jump down to “the unseasonably warm weather in the north-east” and “a rebound in multi-family starts after a particularly big drop off in September.” But, peek a little deeper into the data, and things are not so good. Capital Economics put it this way: “The number of building permits issued dropped to a 14-year low of 1,178,000, suggesting that the number of starts will fall again in the coming months. Even if starts did somehow miraculously stabilise over the next few months, the overall level of housing construction would still continue to decline for at least another 6 months because of the time it takes to build a home.” And it concluded on a rather downbeat note: “Housing is still in deep trouble.”

Remember, there has never been a case of a sharp slowdown in the US housing market which has not led to recession, and the current housing crisis seems to be a whole lot worse than a mere sharp slowdown.

Okay, so sub-prime is in a mess. We all know that, but then again, US manufacturing seems to be in the doldrums too. The latest data from the Institute of Supply Management suggests US manufacturing is heading back to recession.

And then there’s oil. Once again the black stuff crept north yesterday and when we took our daily reading from the New York Mercantile Exchange this morning, it was standing at the highest level we have yet recorded.

Remember, oil is not just at or around an all-time high, it’s also at the highest level relative to inflation recorded since the 19th century. In the past, two things normally occurred when oil was this high. Firstly recession, and then falling demand caused by the recession, allowed the price of oil to fall. It was the stuff economic cycles used to be made of. But it’s different now, the US is no longer the only major influence on global demand for oil and, as you know, as China expands this influence will wane even more.

Now, in the past, the combination of all the bad things, that’s the housing market in crisis, consumer confidence in freefall, crippling levels of debt, manufacturing on the rocks and oil at an all-time high (and expected to stay there), and the prognosis really would be awful. It would be perhaps be the 1930s, all over again.

So, what a relief that we have China, and the other rapidly developing economies.

Of course, a slowdown in the US will hit Chinese growth, which could even slow to below 10 per cent a year soon, and the resurgence of Germany, which at last has more or less paid the full cost of unification, could be hit. But right now, perhaps for the first time in a very long time, the US can trade its way out of difficulty. The falling dollar is making the US more competitive.

But don’t expect it all to happen overnight. It will take the global economy time to adjust to a scenario in which the US goes from propping up the world with its spending, to becoming a net exporter.

In the meantime, there is a real danger that as the dollar falls, instead of seeing exports rise, it could import inflation. Capital Economics reckons US inflation, which by the way is now standing at 3.5 per cent, could soon hit 5 per cent, meaning stagflation, which is high inflation and low growth.

Even in the longer term, as the world adjusts to a US that wants to export more, there’s another problem on the horizon. There’s this demographic thing too. Baby boomers are set to retire, meaning that by 2010 labour force growth will halve, meaning the potential growth rate will also fall. Capital Economic’s Paul Ashworth says, “What this means is that the Fed will not wait long to begin raising interest rates again once economic growth begins to pick up again late next year or in early 2009.”

November 21, 2007 | posted by Michael Baxter in IABN | comments (0) |

If the US is the home of anything, it is the home of optimism. Don’t knock it. You show us a pessimistic entrepreneur, and we will show you someone who never actually got round to launching the business idea. Outrageous optimism, a bloody-minded refusal to believe your idea is anything less than the greatest thing since sliced bread, and a never-say-die philosophy, are what makes a successful entrepreneur. Since US economic success is based on entrepreneurism, its optimism has been a vital ingredient for this success. Maybe it has something to do with immigration. After all, the US is built on immigration, and you have to be pretty optimistic to up your roots and move half-way across the world. Optimistic or desperate.

But just because optimism can be a good thing, it doesn’t mean it’s always good. And sometimes optimism gives way to a downright burying of one’s head in the sand. And it seems, just a tad, as if that’s what’s happening in the US right now.

The economic data flowing from the US of A is truly awful, and yet the Fed keeps its chin up and markets still have their regular bouts of unbridled exuberance. But it seems that, even in the UK, a country more akin to staring into half-empty crystal balls, some of the ideas floating around are not based on cold facts.

And yet, what are the alternatives? The US and UK need to start producing their way to greater growth, and not borrowing their way. Moving forward, especially as the populace in the two countries ages, growth needs to be built upon the rock of production, rather than the sands of consumption. But it is simply not credible to assume that either of these economies can jump from one to t’other, without pain en route. And maybe it’s better to have that pain now, while the rest of the world is so strong, rather than in a few years’ time, when the global landscape might be a good deal weaker.

November 20, 2007 | posted by Michael Baxter in IABN | comments (0) |

It’s a funny thing, but while all around there was gloom, buy-to-let mortgage specialist Paragon seemed to hold a beacon of hope.

The drip drip drip of bad news on the property market, seemed to come to a sudden halt when it hit the analysts at Paragon.

Repeatedly it has remained bullish, saying that higher interest rates are good news for buy-to-let landlords as it means even less people can afford to buy, and therefore more want to rent.

It has also suggested that landlords have been able to react to higher interest rates through upping rent.

In September, Nigel Terrington, chief executive of Paragon, said, “There is broad agreement that buy-to-let is a beneficiary of a softer housing market, as would-be homebuyers defer house purchase and find themselves competing with migrants, students and first jobbers, among others, for a finite supply of rented homes. The private rented sector continues to expand steadily to meet this growth in demand for accommodation, and landlords add to their portfolios in the knowledge that tenant demand is buoyant and rents continue to rise.”

And earlier in the month, John Heron, managing director of Paragon Mortgages said, “Landlords are confident because tenant demand is strongly underpinning the market. Young people are choosing to stay in rented accommodation for longer, while there are a growing number of students and immigrants who are fuelling demand for rented property.

It’s all a tad odd, because we have noticed that bullish announcements from Paragon, for so long a part of the ritual of a property market talking itself up, suddenly seemed to have come to a halt.

And then this morning, Paragon announced a rights issue. It seeks to raise £280m to meet what it calls short-term funding difficulties.

At the time of writing shares were down 45 per cent.

But Nigel Terrington continues to fight the good fight on behalf of buy-to-let, saying the sector has “strong credit defensive qualities and long-term growth prospects” and that the rights issue will enable Paragon to protect the “embedded value in the business.”

Early last summer, before the credit crunch, and before the run on Northern Rock, Capital Economics calculated that a new buy-to-let investor would need to put down a 55 per cent deposit to cover costs. This calculation was at odds with the more optimistic stance taken by Paragon.

It seems that the latest news from Paragon will lead to yet more uncertainty, and it seems quite likely that markets will react by pushing up market interest rates.

Still, it’s nice to know Paragon can remain so bullish. And that while all around the foul winds of property mayhem blow, it can still carry on whistling.

November 20, 2007 | posted by Michael Baxter in IABN | comments (0) |

With all that talk about the credit crunch, private equity has slipped from centre stage. But it has not been forgotten.

One of the things that some people don’t like about private equity is its secrecy. It makes many feel as if it can’t be trusted.

One of the things private equity likes about itself is, of course, its secrecy. It feels it can’t trust the media and analysts, and that while it likes to focus on making a company more efficient over a longish term, the analysts like to focus on the short term. So by keeping schtum on what its doing, the media can’t speculate on future results in that annoying way that they are inclined to.

But now, a new report commissioned by the British Private Equity and Venture Capital Association has proposed sweeping changes to the way the industry reveals information.

Mind you, there’s nothing compulsory about all this and whether the government, under pressure from Unions, will accept a voluntary code remains to be seen.

But the new regime proposed will mean private equity companies will be advised to reveal information about the names of people at a private equity firm overseeing particular firms, and then for each firm owned, the level of debt, cash flow and half-yearly and annual accounts.

The BVCA wants the guidelines to apply to private investors too, that’s people like Sir Richard Branson.

Private Equity has maintained that one of the ways it has managed to keep costs down is through restrictions on bureaucracy.

The question is this. Will the changes proposed by BVCA still mean that private equity is not stifled by a straitjacket of administrative priorities, the way it says PLCs are. And if the recommendations do mean this, will the government accept the proposals?

November 20, 2007 | posted by Michael Baxter in IABN | comments (0) |

When the Bank of England released its inflation report last week, it did something of a no-no. It talked about equities, and even gave an opinion. Whether its tip was checked by a compliance officer, we somehow doubt, but the Bank of England did say it felt the strength of equities was “surprising.”

In fact, its share tip went like this. “It’s very striking that despite developments we’ve seen in the last three months, equity prices are on average higher now than they were in August. This is true around the world and in emerging markets they’re 20 per cent higher. There must be some downside risks there. That’s factored into our projections. That’s the bigger risk to the global economy.”

Now that feels a little like a warning. It’s the Bank of England’s equivalent of Alan Greenspan warning of irrational exuberance. And yet, on the day this report was released the FTSE 100 rose.

Last week also saw a massive one-day rise for the Dow Jones. In the midst of all the economic gloom, the Dow saw its second best day of the year, and at the time, we likened the US to Lewis Carroll’s Cheshire Cat, which keeps smiling when all else has disappeared.

Market volatility this year has been extraordinary, and yesterday was no exception.

This time markets fell. The Dow was down 218 points, and at 12,958 at close was 1,206 points down on the all-time high set on October 9 . This means the markets have fallen by 8.5 per cent. A ten per cent fall, and it’s officially a correction.

Incidentally, the fall from the October peak represents the biggest peak-to-trough fall of the year. Back in July the Dow hit 14,000, and by August 16 had fallen to 12,845: that was a drop of 1,154, or 8.2 per cent.

You may recall the market fell quite heavily in February and March too. In fact it fell from a peak of 12,786, to just 12,050, a fall of 5.7 per cent.

The FTSE 100, on the other hand, seems to have had the worst of both worlds. It has not enjoyed the wild swings upwards seen in the US, with the year-high of 6,721, still more than 200 points down on the all-time high and, when markets recovered in September and October, the FTSE 100 never did pass the high seen in July, unlike the Dow which set a new all-time record.

And yet, when things went pear shaped, the FTSE 100 suffered just as much. The index is now 611 points down, that’s 9 per cent, from the peak seen on July 2.

Yesterday’s falls were largely set off by predictions from Goldman Sachs that more losses are to follow at Citibank, and it classified shares in the bank as a sale. It is unusual for one bank to be so negative about the fortunes of another large bank.

But, as we have said before, the real surprise has been the way equities have bounced back in the past. Who is to say they won’t bounce back again?

We have commented that markets have been saying “There’s news, it must be good news.” Later, they say, “What is the news, by the way?”

Does that mean that markets are just plainly displaying irrational exuberance, and just can’t get the hint that things are bad, and equities too-highly priced?

Well, not necessarily. Some investors think bankers have been blinded by their own troubles. They are suffering, therefore everyone should be. Hence, some investors say analysts are being too downbeat.

Well, to an extent this may be true, but we know that when the banks suffer so do we. Business lending falls, and now it appears even software companies are feeling the pinch, with it emerging yesterday that software sales to banks are falling.

But the real hope for the markets is this. What is the alternative? Property boomed earlier this decade, when all around there was bad news. Now, property is surely too high in price even for the most optimistic property bulls to buy.

Bonds? Well, it’s true interest payments are good, but it’s been a troubled time for bond investors. Maybe, equities are all there is.

Oh, except for commodities, of course.

November 20, 2007 | posted by Michael Baxter in IABN | comments (0) |

Gordon Brown once said the difference between a good chancellor and a bad one was when they got out. The chancellor who quit his post at the top of his game when the economy was booming and before the economic cycle had time to turn was considered a good chancellor. The one who got out during the downturn in an economic cycle was a bad one. And our Gordon seemed to pull it off pretty well. He was at number 11 for ten years, and the economy did nothing but expand. Some said he was a lucky chancellor, but if it was all just luck, then his good fortune held much longer than any sane gambler would count on.

And yet, no sooner does he get that new job, than it all changes. As PM, he has not been so lucky, but by handing the baton of chancellorship on when he did, Mr Brown displayed a degree of luck that goes far beyond anything else we have seen from him to date.

Ten years without a hitch, and now just a few months into Alistair Darling’s reign, and the new chancellor is fighting for his political life.

It’s interesting to ponder what it would have been like if the Blair-Brown partnership had run a few months longer, and Gordon was still chancellor. Maybe, if Gordon Brown had still been holding the purse strings, saying “don’t panic” to depositors at Northern Rock, they would have listened. Maybe Northern Rock would never have got into this mess.

That’s as it may be, but it’s difficult to see how Mr Darling is going to escape from this disaster.

Yesterday, it was two things that led to the latest panic at the Rock. For one thing, Northern Rock said all offers received so far for the bank represented a value “materially below” the current share price. For another thing, Mr Darling blinked. For so long he has maintained that the money provided by the Bank of England to prop up Northern Rock was safe, but yesterday be displayed a sliver of doubt. This is what he told fellow MPs: “The money lent by the Bank of England is secured against assets, such as mortgages, held by Northern Rock. We fully expect to get it back.”

And in the world of politics, and in the world of finance, those words were considered to be far too uncertain.

Shares in the bank crashed again, this time down by 21 per cent, valuing the bank at just £440 million. To put the fall in perspective, last night the share price stood at 104.2p. Back in March, shares in the bank were trading at over 1,200p.

It is no wonder that shareholders are so upset by it all.

It seems there is only one option that could possibly save money for shareholders, and that is for a new management team to be parachuted in, for the Bank of England to promise to provide its ongoing support, and then for the bank to bide its time, waiting for the credit crisis to come to an end. It’s a forlorn hope, and one beset with risk, but for shareholders there are limited options. That’s why existing shareholders (and, by the way, some savvy hedge funds count in their number) are hoping that Luqman Arnold, the former Abbey National chief executive, will be successful with his proposal; a proposal which sits almost perfectly with the dream scenario described above.

but this crisis is no longer about shareholders in the bank. Bear in mind that shares in Northern Rock doubled over a four year period to the beginning of this year. Shareholders made a tasty profit, benefiting from the high risk strategy employed by the bank.

Investing is a risky game. You can make profits, you can make losses. If there was no downside, and investing was only ever an upside game, then we would all be rich.

One should have a lot more sympathy for the bank’s customers. Sure, there is risk when we put our money in a bank but, let’s face it, few of us consider this. And if putting our money in a bank was considered to be a risky thing to do, the global economy would collapse.

The government’s decision to offer 100 per cent guarantees to depositors was the right thing to do. If it erred, it was that this guarantee should have been made earlier. Maybe the biggest mistake made by the previous lucky chancellor was that he did not enforce compulsory insurance for bank deposits.

So, what are the other options open to Northern Rock and its biggest creditor - you and me, the taxpayer?

One option would be for a management team to come in, armed with a big investment, take over the lion’s share of the bank, leaving existing shareholders with a hope that their diluted shareholding might be worth something one day. This is the type of deal offered by Sir Richard Branson. It is believed his deal involves a tiny valuation of the bank. Well, you would expect that wouldn’t you?

Another alternative would be for a complete takeover, such as the deal being proposed by JC Flowers, which, by the way, is supposed to involve an upfront repayment of £15bn of the Bank of England’s money, now running at £24 billion.

Alternatively the bank could just go into administration, which carries the risk that the final price received for all the assets when they are sold off falls short of the amount the taxpayer is exposed to. Remember, it’s not just £24 billion for the Bank of England, but the government has guaranteed depositors’ money, taking the total exposure to approaching £40 billion, around 4 per cent of GDP. Having said that, no one is suggesting the government and central bank won’t get at least most of this money back.

Finally, there’s the option to nationalise the bank. This approach has many pitfalls, not least a question over whether EU rules would permit it.

It often seems the government uses EU rules as a reason not to do things lots of other EU countries do. In any case, the EU commission allowed the Austrian government to bail out former trade union bank, Bawag, last year. Okay, the money involved was a lot less, but the principle was the same.

Of course, the Bank of England loan effectively means Northern Rock is being subsidised, and EU rules really do forbid a company which is being subsidised to compete on the open market (farmers being the exception, of course). So, a nationalised bank may not be able to take on new business. But then nationalised banks will be considered a good credit risk, and so it seems likely that a Northern Rock owned by the government will be able to borrow money from the money markets, so it will no longer be subsidised.

Of course, nationalising the bank is highly controversial. It will not look good, with the City of London seeing a major blot on its copybook. Shareholders in the bank won’t like it, and in any case nationalising a bank just goes against the way New Labour does things.

But, if the bank is nationalised, then when the credit crisis does end maybe taxpayers will be sitting on a nice asset, which could perhaps then be floated. Maybe the taxpayers will see a big profit for being willing to bail out a bank that would otherwise have gone bust.

Maybe the chancellor would then be seen as a hero, although whether the chancellor at that time is Alistair Darling (who, remember, has already given one major reason for an ignominious resignation with his strange change to capital gains tax), we somehow doubt. It would seem likely that some other individual will inherit Gordon Brown’s mantle as the Lucky Chancellor.

November 19, 2007 | posted by Michael Baxter in IABN | comments (0) |

Last week, the captain of Liverpool football club Steven Gerrard, found himself immersed in the immigration controversy, when he suggested that there should be a limit on how many foreign players English clubs should be allowed to employ. He said that the number of foreign players in the English Premiership is making it nigh on impossible for local talent to break through, thus reducing the choice of players available to play for England.

Mr Gerrard immediately got the support of the UK press, who are keen, of course, to run any anti-immigration story, but on this occasion it is hard to argue that Stevie G doesn’t have a point.

But now apply The Liverpool Maestro’s argument to the City.

According to research from the CBI and KPMG, the City of London is increasingly choosing overseas graduates over UK graduates.

And Ian Barlow, London Senior Partner at KPMG had damning words indeed when he said, “Young people must leave education with the skills that businesses need. In the current environment the educational authorities see the students as their customers. But the true customers are businesses because vocational qualifications are useless to students unless they lead to jobs.”

The research found that 65 per cent of London’s employers expect to be troubled by skills shortages over the next six months and the majority, 58 per cent, are already recruiting from overseas to fill gaps. Furthermore, the research found that 83 per cent of employers in the UK’s capital taking on oversees workers, were recruiting people with higher degree-level skills.

The survey also revealed that whilst 57 per cent of respondents thought that London’s talent pool was one of its leading assets in business success, 24 per cent warned that a lack of suitable skills was a top threat to London’s overall competitiveness.

John Cridland, CBI Deputy Director-General said, “British graduates are competing in the job market with a topslice of talent from overseas universities. To remain attractive to employers, UK graduates need better careers advice and stronger employability skills in areas like teamworking and communication.” He added, “Many employers are choosing foreign graduates over British applicants because they are of a higher quality and are more employable.”

Key employability skills like teamworking, communication and a positive attitude were cited by 40 per cent of bosses as a major skills constraint. Thirty-nine per cent said that a lack of technical skills is a bottleneck, while 33 per cent pointed to a shortage of managerial skills, up from 22 per cent in March 2006.

Demand for graduates is set to increase, with 68 per cent of employers expecting their higher level skills needs to grow. By contrast, while 21 per cent said they will need more people with skills at GCSE level, 30 per cent said they will need less.

It’s a tough one, though. It is easy to criticise universities and colleges for not thinking enough about employers, but as we all know, the best training is on the job. Most would probably agree that you can learn far more about the City and how it works through working there than you could through a lifetime of reading books about the Square Mile.

If the recruitment of overseas workers means that indigenous talent can’t get started, can’t get their foot on the ladder, then actually, the UK is shooting itself in the foot.

It seems that for those English footballers who want do make it through to the Premiership, they can only gain by playing with the world’s greatest players, week in, week out. Perhaps Steven Gerrard is right, and the pendulum has swung too far. Maybe, the same will soon apply to the City.

November 19, 2007 | posted by Michael Baxter in IABN | comments (0) |

When it first emerged that smoking might cause lung cancer, the tobacco companies were none too welcoming of the news. In the automobile industry, the early designs for seat belts were rejected, because a safety harness suggested motoring was not safe. But, now, it’s the big one: climate change. Never forget that there are many businesses out there that would like us to think fears of climate change are overdone, and when you read research ridiculing the idea of global warming as a man-made phenomenon, just remember, there are a lot of vested interests.

Take wind energy as an example. The anti-wind-power bandwagon has lately plumbed breathtaking depths. In the area where the author of this article lives, for example, one pressure group objecting to plans for a local wind farm has suggested country walks in the area will be ruined because of all the dead birds.

If there is one industry that has reason to be cynical about global warming, it is the oil industry. According to James Martin, in his book “The Meaning of the 21st Century,” oil reserves we know about have a value of around $60 trillion, and that’s the reserves we know about.

And yet yesterday, at the OPEC summit held in Riyadh, an official statement said that the group “shares the international community’s concern that climate change is a long-term challenge.”

Okay, so that’s just words, but it appears that, on this occasion, OPEC is putting its money where its mouth is, and announced a $750 million fund for developing technologies that will help create a cleaner environment.

The United Arab Emirates and Qatar both pledged 150 million dollars to the fund, while Saudi Arabia put its name down for $300 million.

Naturally, the OPEC plan is all about making the use of oil more palatable, with an official statement emphasising technologies for carbon capture and storage, and the “importance of cleaner and more efficient petroleum technologies,” but even so, it’s a step in the right direction.

November 19, 2007 | posted by Michael Baxter in IABN | comments (0) |

You may have noticed that whenever Iran’s president Mahmoud Ahmadinejad appears in front of the camera he is smiling. Permanently, no matter what he is saying. And yesterday, no doubt with a broad grin across his face, he described Uncle Sam’s most famous symbol of strength, the mighty dollar, as a “worthless piece of paper.”

The two countries have a lot of gripes, and what ever your thoughts are on those issues, when it comes to the dollar, Mr Ahmadinejad does have a point.

The dollar falls, and so OPEC countries get less for their oil. As the Iranian president told the press, the US “get our oil and give us a worthless piece of paper.”

You may recall that, not so long ago, predictions of a big fall in the dollar were ridiculed, because too many countries across the world peg their own currencies to the greenback. If the dollar falls, then so too do their own currencies. This is a big problem in Saudi Arabia, for example, where consumer prices rose 4.9 per cent in August, and last year, inflation in the United Arab Emirates hit 9.3 per cent.

As you probably know, China has its fair share of inflationary problems too, with the inflation rate running at 6.5 per cent in October. Last week, Andrei Klepach, head of Russia’s Economy Ministry’s macroeconomic forecasting department, warned that Russian inflation could top 11 per cent this year.

It seems that, bit by bit, countries are responding to domestic inflation by moving out of dollars. It’s a process that has been building up for some time, but there now seems to be a headwind behind this process that is virtually unstoppable.

Last year, Russia cut its dollar-denominated foreign reserves from around 66 per cent of its total, to about 40 per cent, but it was not alone. Sweden cut its dollar holdings from 37 per cent to 20 per cent, while Italy has been switching from dollars to sterling. Incidentally, Russia is also talking about launching its own exchange for oil, in which the black stuff will be valued in roubles.

As for China, while US politicians have been calling for China to appreciate the yuan, economists from behind the Great Wall have been suggesting that this is inevitable in any case.

It’s thought that China, Russia and Saudi Arabia control around $2 trillion worth of funds, and if they choose to buy non-dollar assets with this money the rout on the dollar could become nasty.

Big falls in the dollar are significant for many reasons. Firstly, this will make foreign goods more expensive, creating inflationary pressure, making it much harder for the Fed to reduce interest rates at a time when the US economy badly needs that boost.

But perhaps, in the longer term, a more important consideration is what the falling dollar means for US debt. For years the US has been borrowing from the rest of the world, and the rest of the world through its keenness to hold dollars, has acquiesced.

For years, some have predicted that the massive US balance of payments will eventually cause equally massive problems for Uncle Sam. Others have asserted that it is nothing to worry about and that the deficit is totally affordable. In any case, say the defenders of the US economy, predictions of doom have come to nothing for years, and so they argue these prophecies have no credibility.

And yet, if the dollar falls, and the world’s nations stop lending the US money, then the deficit does matter and the US will be forced to realign its economy. Maybe in the long-term this will be a good thing, but the pain en route will be unpleasant. And suppose that the dollar falls so much out of fashion that the US starts borrowing in other currencies, currencies that are rising in value relative to the greenback. This will make US debt increasingly unaffordable.

A more extreme argument suggests that a falling dollar will make US foreign policy less affordable, possibly weakening the country’s influence on a worldwide scale which, again, could cause some nasty fallout on the way.

And who will be the recipient of the world money freed up as dollars are sold? It seems that the euro could become the world’s foreign reserve of first choice but we are not so sure that is a good thing for the Eurozone either. Maybe even sterling will benefit.

Again, that is not what the British economy needs.

Yesterday, at the third ever summit of OPEC, held in Riyadh, Saudi Arabia blocked attempts by Iran and Venezuela to bring the question of the dollar onto the agenda. But, even so, the slightest whiff of anti-dollar talk from OPEC was enough to see further falls in the US currency yesterday.

It’s no wonder some are predicting more increases in the price of gold.