[OPE-L:7199] Re: NYTimes.com Article: The Muscle-Bound Dollar May Now Be an Achilles' Heel

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Thu May 16 2002 - 19:31:42 EDT

Well Brenner seems to have been correct to focus on the politics of 
currency--see article below.

With the development of the capital markets since the Plaza 
agreement, do govts still have the power through coordinated action 
to engineer a controlled devaluation of the dollar?

And given China's and Japan's own heavy debt problems, will they 
cooperate with the US Treasury in the devaluation of the dollar as 
Japan did in the Plaza agreement?

If it is so clear that the US needs a devaluation of the dollar and 
that an upward revaluation of the Euro will mitigate inflationary 
pressure and allow the European Central Bank to pursue growth 
accomodative monetary policy,  why is Treasury Secretary O'Neill so 
reluctant to intervene in the currency markets? Don't US businesses 
need foreign markets and protection at home?

  Or is there some reason that a strong dollar helps some, perhaps the 
most powerful, US-based businesses--for example, if one has a 
technological monopoly then a weak dollar only results in the US 
giving away what others cannot produce, as the rightwingers at the 
American Spectator would put it.

If the US competes in foreign countries through sales from 
subsidiaries, doesn't a strong dollar give US based businesses a 
competitive advantage while tariffs and subsidies can be used to 
protect American business at home? At any rate, why does O'Neill seem 
so reluctant to intervene in the currency markets as his predecessors 
in the 80s did?

The Muscle-Bound Dollar May Now Be an Achilles' Heel

May 16, 2002

HE dollar has long been the wild card in the economic
outlook. Its surprising strength in the 1990's helped keep
inflation in check by reducing import prices. A high dollar
also attracted hundreds of billions of dollars in
investment to compensate for the low savings rate among
Americans. And while the dollar rose more than 40 percent
since 1995, the gross domestic product kept growing
strongly, anyway. The high dollar greatly raised world
prices for the nation's manufacturing exports, but record
trade deficits only partly offset other fast-growing
components of G.D.P.

This pattern, however, has long been too good to stay true.
As the expansion shows signs of weakness, it is time to
encourage a modest decline in the dollar to stoke
manufacturing sales, which have been hit hard by the high

It is also time to recognize the serious imbalances the
strong dollar has created. The United States owes trillions
of dollars of debt it took on to finance current account
deficits. As important, the high dollar has done
longer-term damage to some industries by discouraging
investment in globally competitive goods.

Those most hurt are lining up in Washington to demand
relief. Jerry Jasinowski, head of the National Association
of Manufacturers, testified before Congress recently that
the high dollar cost manufacturers $140 billion and 500,000
jobs the last 18 months. Thomas Palley, assistant director
of policy at the A.F.L.-C.I.O., points out that more than
90 percent of lost jobs in the current recession were
manufacturing jobs, though such jobs account for only 14
percent of total employment.

But although vested interests may be clouding the debate,
the arguments for a lower dollar are persuasive. The first
is that a high dollar is going to restrain the expansion.
America's rapid growth began in the mid-1990's, let us
remember, when the dollar was 40 percent lower. Moreover,
the last time the dollar was as high as it is now, in the
early 1980's, manufacturing profits were at a low point.
Profit rates did not begin to rise until the late 1980's, a
couple of years after the Reagan administration arranged
the Plaza Accord to bring the dollar down sharply - by some
50 percent, as it turned out.

When the dollar took off in the mid-1990's, manufacturing
profit rates declined again. Capital investment remained
high only because of the inflow of capital from abroad and
high stock prices. But now, Mr. Jasinowki's member
companies report that their exports are on average 25
percent more expensive than rival products from other
nations. Investment is way down.

A second argument in favor of a lower dollar is that its
level is unsustainable. As J. Fred Bergsten of the
Institute of International Economics points out, the nation
must import $4 billion in capital a day to compensate for
its current account deficit and capital outflows. Moreover,
stocks are unlikely to attract as much capital as they did
in the 1990's.

Mr. Bergsten is concerned that if the nation does not act
now, a sharper fall is decidedly possible. The trade
deficit has reached 4 percent of G.D.P. - not merely
unprecedented in recent times but a point at which it has
almost always become unsustainable in other nations. If the
dollar falls too far too fast, it could ignite inflation
and influence the Federal Reserve to raise interest rates
so high as to weaken the economy.

A third argument, too often ignored, is that over an
extended period, a high dollar misallocates capital
resources. Some export industries are neglected, while
those that import low-price supplies, often services,
attract more investment than is optimal. The 1990's boom
disguised this impact, but it is harder to reduce a trade
deficit when companies do not develop new export products
because those products will be chronically overpriced in
the world market. Technology-intensive industries have long
run a substantial trade surplus, for example, but Mr.
Jasinowski calculates they are now importing $20 billion
more in goods than they are exporting.

If the nation continues to grow much more rapidly than its
trading partners do, there is an argument that the high
dollar can be maintained. But almost certainly the gap in
growth rates will narrow, if not turn in favor of other
countries, in coming years. By traditional measures, Mr.
Jasinowski, Mr. Palley and Mr. Bergsten argue that the
dollar is overvalued 20 to 25 percent. Mr. Bergsten would
like to see the Treasury "lean against the wind" and even
buy undervalued currencies, like the euro or yen.

Dollar policies usually make economists nervous. Some say
intervention usually does not work, in part because it is
offset by shifts in the money supply. But Mr. Bergsten
notes that intervention did indeed work during the Plaza
Accord and several times during the Clinton administration,
including a coordinated action to lower the yen in 1995.

The greater danger is that a change in dollar policy could
precipitate a run on the dollar and the very collapse we
fear most. Again, Mr. Bergsten says such routs have been
stemmed in the past. In 1987, for example, central banks
bought dollars after a two-year slide.

There is no way to avoid risks when it comes to influencing
currency levels. The question is whether the risk of dollar
neglect is greater than the risk of pushing it down. Given
questions about the strength of this expansion, the rapidly
growing trade deficit and enormous levels of foreign debt,
ignoring the high dollar will only make matters worse in a
year or two.

A lower dollar might even help the Europeans. While it
would make their exports less competitive, it would enable
the European Central Bank to reduce Europe's high interest
rates because inflation would be less a threat.

It is time to face forthrightly the imbalances created in
the late 1990's rather than resort to outworn shibboleths
about how the markets must set currency rates.


For information on advertising in e-mail newsletters
or other creative advertising opportunities with The
New York Times on the Web, please contact
onlinesales@nytimes.com or visit our online media
kit at http://www.nytimes.com/adinfo

For general information about NYTimes.com, write to

Copyright 2002 The New York Times Company

This archive was generated by hypermail 2b30 : Sun Jun 02 2002 - 00:00:07 EDT