A Real Pain
The plunging value of the American dollar is like a toothache. It is not only a problem in itself but is also a warning that something basic has gone wrong and needs tending to. What makes the saga of the dollar a cliff-hanger is that it is much more complicated than a toothache, and there is no way to deaden the pain while the nation grinds away at the real problem.
The dollar is falling because other currencies, particularly the German mark, look like better investments than the dollar as long as the United States is running record-high trade deficits and adding to its $2.2-trillion national debt.
The trade deficit is at record levels for two reasons. One is that the dollar got expensive enough to price American exports out of foreign markets. The same high dollar also meant bargain prices for Americans on imports--good news for consumers but bad news for American manufacturers and farmers, who got it coming and going.
Washington has been perfectly happy to let the dollar fall in price, on the premise that a cheaper dollar would make American goods easier to sell abroad and make Japanese and other imports more expensive. Sooner or later the combination should turn around the trade deficit.
Washington also has been leaning on other industrial countries, particularly West Germany and Japan, to cut their interest rates and go deeper into debt to touch off a consumer boom so that Germans and Japanese could afford to buy more U.S. goods.
On paper it all looks logical and tidy. In practice it is a chancy business, because all of the world’s industrial nations are looking out for No. 1 and because of the risk that letting the dollar drift to levels that are comfortable for the United States could get out of hand.
Looking out for No. 1, West Germany on Thursday cut the discount rate at which its banks borrow money from the central bank--a move that the United States had been urging. But West Germany also cut its money supply--a move not likely to send consumers out on buying sprees.
Japan’s manufacturers have been able to compete even as the dollar fell, because they have swallowed profits to keep from losing their share of the American market to American companies. Japanese Finance Minister Kiichi Miyazawa’s dramatic flight this week to Washington, where he tried and apparently failed to get a commitment to stop the slide of the dollar, is evidence enough that Japan has swallowed about as much of its profitsas it thinks it is safe to do.
So the tricky part still lies ahead. It would not help U.S. exporters to tip either West Germany or Japan into a recession, because then their consumers couldn’t afford to buy from the United States any more than they can now. As the dollar falls, foreign countries may be less inclined to buy U.S. securities--investments that have helped make it possible for this country to sustain deficits of $200 million or more a year for the past five years.
Nothing that this country’s trading partners could do to help Americans would be as important as what this nation can do for itself: Cut its deficit.
It takes money, for example, for American companies to gear up to be more competitive abroad, perhaps to swallow profits in order to get beachheads in foreign markets as the Japanese have done. But the United States is competing with industry for money to pay nearly $200 billion a year in interest on its federal debt--money that does nothing to make the country competitive.
It will be tough going, but even getting the deficit for fiscal 1988 below $200 billion would free up immense amounts of cash. It will be difficult, but it is the only response to the warning signals of the falling dollar. And there is not enough Novocain in the world to dull the pain.
