Fall in Prime, Dollar Signals Cooperation
The first days of January have brought signposts on interest rates and the U.S. economy in the first half of 1990--and the news seems good, if puzzling to many people.
The signals say Monday’s prime rate reductions by major banks won’t be the last we’ll see, because the interest rate drop results ultimately from a shift by the U.S. Treasury that is tied in to a vast coordination of economic policies among the major industrial nations.
That’s why the U.S. dollar has been falling against the West German mark and other European currencies; it might also be falling against the yen but for a short-term consideration of Japanese politics.
It’s not foreigners pushing the dollar down but Americans. In early December, representatives of U.S. manufacturers--companies such as Caterpillar, Eastman Kodak, the major computer, chemical and machinery makers--held long meetings in Washington, pleading with the Treasury to push down the dollar’s value and help their export business. The Treasury, looking at a U.S. trade deficit that stuck above $100 billion in 1989 after falling dramatically the year before, was sympathetic.
That’s why you’re seeing central banks acting curiously, the Federal Reserve pushing down the dollar’s value and West Germany supporting a rise in the mark that will hurt German exports. But the moves make sense as part of a 1987 agreement by the major nations that they would coordinate economic policies.
Right now the scenario calls for Europe, led by West Germany, to grow forcefully and the U.S. economy to grow modestly but enjoy good sales to rapidly growing economies overseas.
That’s why you’ll see further falls in the dollar’s value, says Rimmer de Vries, chief economist of J. P. Morgan & Co. The Germans are encouraging a high value for the mark to draw in imports and curb exports, de Vries explains, while the U.S., by reducing the dollar’s value, can lower prices on its machinery and other goods. “The first half will be a key period for reducing the dollar’s value,” he says.
Yes, but, currency movements remain a distant mystery to most people--what does that mean specifically?
It means lower U.S. interest rates, below 9% on the prime with other rates moving accordingly. (Lowering interest rates reduces the attraction of U.S. investments to international money, which lately has been flowing strongly to West Germany, where interest rates are higher).
It means modest economic growth here at home--2% or less, suggest experts--but stronger export sales. U.S. manufacturing firms, now suffering sluggish business and layoffs, will enjoy an export-led recovery, experts say. It spells good business for producers of capital goods--electrical and industrial equipment and computers; companies such as Emerson Electric, Digital Equipment, Nordson and Parker Hannifin.
Capital goods are in demand now in Western Europe and soon will be in Eastern Europe--where economies are not yet able to buy consumer goods, but need production equipment.
So the outlook is hopeful, although nothing is certain because the international currency scene is massively complex. For starters, currency transactions in world markets--$400 billion a day, $140 trillion a year--far outweigh global trade, which totals less than $5 trillion a year. The volumes of currency make even the $5-trillion gross national product of the United States or the $3-trillion GNP of Japan look puny.
Also trade is not a simple matter anymore. “When we lower the dollar, we raise prices here at home, because imports are not discretionary purchases in a nation that buys 50% of its oil, 30% of its steel and 28% of its cars from abroad,” says economist Pierre Rinfret, who runs his own currency consulting firm.
Lowering the dollar works no miracles, says Rinfret, who notes that the U.S. trade deficit in 1989 is not much less than the $117-billion deficit of 1985, when the dollar was first devalued.
But times have changed. In 1985, the international economy was deteriorating--both Europe and Japan were growing slowly at home and prospering only by selling to the U.S. market. That’s why the U.S. trade deficit eventually rose to $152 billion in 1987.
Now the trend is improving--Europe and Japan are growing and buying. Japan is holding back on strengthening the yen because of upcoming elections. “But it will cooperate eventually rather than touch off protectionist reaction, here and in Europe,” says Morgan’s de Vries.
The prospect in short is for cooperation, not combat; for the world’s leading economies working to achieve balanced growth, not preparing for trade wars.
And that’s a very reassuring prospect. It means that the international economic system, vast and chaotic as it often seems, can be made responsive. Sometimes, the world makes sense.
