Posted on 01/27/2003 9:46:34 AM PST by Norm640
'Strong dollar' policy loses its grip By Patrice Hill THE WASHINGTON TIMES John W. Snow, President Bush's pick to head the Treasury Department, faces an immediate challenge of how to handle a rapidly tumbling dollar. For reasons ranging from fear about war with Iraq to low interest rates, a weakening economy and huge trade and budget deficits, the greenback since November has fallen quickly to three-year lows against the euro and is down by 17.5 percent against six other major currencies in the last year. That raises the cost of imported goods from cars to French wine and makes it more expensive for Americans to travel overseas. The biggest concern for the Treasury is that a falling dollar also makes it more difficult for the country to finance its burgeoning debts, which require $1.4 billion in daily inflows from overseas. The White House says it has not changed its "strong dollar" policy, but the currency's decline accelerated noticeably last month after the departure of former Treasury Secretary Paul H. O'Neill, who after a rough start two years ago became a strong defender of the dollar. Mr. Snow, who as chief executive of CSX Corp. comes to Washington from industry rather than Wall Street, like Mr. O'Neill starts out handicapped in assuming the Treasury secretary's unique role as chief spokesman for the dollar. As CEO of the transportation company, he advocated a weaker dollar to help U.S. manufacturers deal with overseas competition. Mr. O'Neill, a former chief executive of Alcoa Inc., never won any accolades from Wall Street, but he gained credibility as a dollar defender by steadfastly spurning pleas for a weaker currency from U.S. exporters in industries battered by the recession. Mr. Snow is expected to adhere to the administration's earlier "strong dollar" policy, though he has refrained from commenting on the dollar or other economic matters ahead of his confirmation hearing tomorrow before the Senate Finance Committee. All signs are that traders in the vast dollar market ? who are known to push a currency to the extreme once it has reversed course ? will put Mr. Snow to the test quickly. More than $1 trillion exchanges hands in trading each day. "The U.S. dollar is in a full-fledged bear market, and the downtrend is still in the third inning out of nine," Merrill Lynch told clients last week. The Wall Street firm attributes the dollar's troubles mostly to the trade deficit, which in the last year bloated to $453 billion, or nearly 5 percent of the gross domestic product. "The huge U.S. current account deficit is perhaps an old and tired story," Merrill Lynch said, "but breaking above 5 percent relative to GDP is a big deal ? the threshold that in the past got emerging markets into trouble." To reduce the trade deficit to a more normal 2 percent of GDP, Merrill Lynch estimates that the dollar would have to decline another 20 percent. Ironically, it notes that the deficit has widened partly because the United States has been growing faster and absorbing more imports than major trading partners such as Japan and Europe. Federal Reserve Chairman Alan Greenspan and former Fed Chairman Paul Volcker have been warning for years that the relentless growth of the trade deficit is unsustainable and someday will exact a price, causing the fall of the dollar. Mr. Volcker has told the National Press Club that his biggest worry about the U.S. economy is that a precipitous drop in the dollar will touch off a full-fledged financial crisis, although he added that such a dire scenario can be avoided if the decline is gradual. The United States was able to sustain large trade deficits when its economy and financial markets were booming during the 1990s, acting like natural magnets that lured foreign investors to put their dollars back into the United States. But after three years of big stock losses and economic weakness, investors have been casting about for more profitable alternatives. Money has been flowing into everything from gold and bonds to Swiss francs, real estate and even the Norwegian krona and Canadian dollar ? currencies that have gained status as safe havens if the United States goes to war with Iraq. That is a reversal for the dollar, which for years has been the world's principal safe-haven currency. Nick Parsons, head of currency strategy at Commerzbank, said the "daily ebb and flow" of jousting between the White House and Iraq has played a bigger role than economic factors recently in driving down the dollar. "If we could construct an index of bellicosity, it would show a near-perfect correlation with the dollar," he said. European leaders, who struggled to support the euro as it sank steadily against the dollar after its introduction in 1999, have been pleased about the reversal of fortunes. The euro is up by 26 percent against the dollar in the past year. German Chancellor Gerhard Schroeder and French Prime Minister Jean-Pierre Raffarin issued a statement last week gloating over the euro's gains. "It's not the euro that's strong, it's the dollar that's less attractive," said French Finance Minister Francis Mer, who is hosting a meeting of the Group of Seven finance ministers in Paris next month. Investors who saw the United States as the best-performing economy during the 1990s now, after two years of recession and faltering recovery, "question if the U.S. method is still the best to create growth," he said. Economists point out that the moderate decline of the dollar in the past year has had some beneficial effects. An important one was giving the European Central Bank leeway to stop defending the euro and cut interest rates to stimulate growth in the euro zone. A softer dollar also helps hard-hit U.S. manufacturers, farmers and other exporters sell more goods overseas. The growth in exports, in turn, fuels growth in the economy and eventually helps to reduce the trade deficit. A weaker dollar also improves the earnings of U.S. corporations that have offices overseas. In the short term, however, a lower dollar raises the cost of imports and causes the trade deficit to bulge further, while raising prices and threatening to reignite inflation. "The deficit is clearly draining tons of cash from the economy" and is a major culprit in the dollar's decline, said Joel Naroff of Naroff Economic Advisors. "As long as uncertainty over the U.S. economy and geopolitical risks continue, it will be difficult for the dollar to rally with this kind of deficit." But Mr. Naroff predicted that the economy will reaccelerate once worries about the war are put to rest, and "the dollar will follow suit." He said the promise of returns on investments in the United States remains higher than it is in Europe or other regions. Nariman Behravesh, economist with Global Insight, agreed that stronger growth in the United States in the end will support the dollar. "The odds of a dollar crash are low," he said. Even if its decline accelerates into a free-fall, "the Fed and other central banks would likely intervene to prevent disruptive events."
My opinion is that the US is in a position where it can't act in its own interests economically because of the political backlash from fat-cats around the world. Plus, and I hate to say it, CEOs of American companies couldn't care less if they send their jobs overseas--they still benefit. I fail to see how that benefits the American economy.
But I'm humble enough to realize I don't know everything about this--someone offer some intelligent commentary on how to save America's economy. Thanksa bunch.
It will settle at equilibrium. Besides the Euro has worse fundamental problems when peace breaks out it will sink like a Polish battleship.
I would start by establishing a dollar-euro exchange band, with international reserve status parity anchored by a dual OPEC transaction standard. Ideally, followed by a yen-yuan currency bloc benchmarked to the dollar-euro exchange rate and shifting to a fractional reserve global monetary system backed by a diversified commodities bundle...
Those pigs will fly whenever there's nowhere left to turn with the current fiat Ponzi scheme...
Those short term costs are trivial compared to the long term benefits.
A reduction in the dollar is good for the country. A strong dollar encourages the American manufacturing and tech industries to move offshore, taking American jobs with them.
Bottom line: if you like Americans having jobs, you like a lower US dollar.
"Bringing the dollar back" is a loaded proposition. The stronger the dollar is, the more expensive US goods are to the rest of the world, which is bad for the trade imbalance. The cheaper the dollar is, the more affordable American goods are to foreigners and the more motivated they are to buy our goods.
Other countries have restrictive import laws - but in the long run such laws are poison. The Soviet Union had the most restrictive import laws feasible - and compare their economy to ours at the end of their Communist experiment.
You also say that companies which produce goods abroad pay their workers squat - but this simply isn't true. $100 a week isn't much - but when rent at a liveable apartment is $20 a month, it's pretty darned good.
Squat by American standards is, for a Malaysian factory worker, literally four times better than his parents did.
The reason the dollar is tumbling is that the Fed is pushing too much liquidity into the market, far more than is being called for by market actors- banks and producers.
Keynesians and other obsessive tinkerers would understand this thinking but such understanding is not of real world economics. It is fantasy. Keynesians and other economic tinkerers understand nothing.
The rest of the world's currencies will come into line with the dollar at some point. Other countries are even more afflicted with tinkerers than US is. Producers go "offshore" because taxes are too high. As the dollar weakens against the other major currencies, the euro and the yen, for a time other countries will buy more here and sell less, for a short time.
At the same time foreign investment will dry up as the dollar is perceived as having decreasing stability and as thus imparting to the US economy greater risk for investment. As such investement ebbs there is less ability in the US to expand and to create employment. Because of the inefficiency of having to guess at inflation rates and changes, the losses from decreasing investment will exceed the gains from "cheaper goods". And the other governments equalize their currencies with the US faster than foreign investors adjust their investments so the damage will outlast the gain.
Utterly untrue. A system that maintains the dollar at an unvarying exchange rate with gold will suffer neither INflation nor DEflation. That is the essence and definition of stability.
While stability is easily attained it is not likely to BE attained because that takes from the government the power to inflate an economy out of debt, which is what US is doing right now. As the deficit rises in number of dollars it falls in percentage.
The fantasy is that the government can tinker constructively to increase wealth ond/or employment. It cannot. It can reduce wealth and employment by creating instability.
GWB is a market oriented conservative but his advisors have been "conservative" Keynesians. They want the right things for the economy but know not how to make those things happen. They know how to tinker. It is the carpenter whose only tool is a skilsaw and it is broken, but he uses it for every job anyway and the job he is to do consists of all preshaped cuts.
So, we will import less and manufacture more locally and (as neo-isolationist) I feel that this great.
It surely does make things easier for liberals when they can find a word that shifts them back into the slogan mode of argument. "Gold" is such a word sometimes. Capital is another. And "banks"... You can feel that the pressure is off for having to think rather than emote.
In an extreme scenario, if US has no restrictions on imports, no tariffs, and the rest of the world has high tariffs, The rest of the world's investment capital will flow to the US because that is where the highest rate of return will apply. Foreign industry will have greatly reduced sources of capital. Their prices will vlimb steeply and plant will not be improved. Most prodution will go to US so long as it can be made cheaply enough to be sold at all because the foreign consumers will not be able to afford it. The only better situation economically for US is for there to be no trade barriers at all. When all plant and capital, foreign and domestic, can be directed to production without the drain of capital to pay for government intervention, then all people will improve economically.
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