Global Traders Remind U.S. Where the Buck Stops
Led by the United States, a global phalanx of 16 nations from Japan to Portugal intervened in currency markets last week to uphold the value of the dollar against speculation by foreign exchange traders.
Right away you know there’s a crisis when Portugal, 10 million people and an economy one-tenth the size of the U.S. gross domestic product, is brought in to defend the dollar.
There was reason for concern. The dollar’s value, which had been declining since January against the Japanese yen and German mark, threatened to accelerate downward; foreign investors were reducing their purchases of U.S. bonds and stocks; U.S. long-term interest rates had taken a worrisome turn upward again, imperiling housing and the economy’s expansion.
And those were only fever symptoms of the underlying illness, which was worldwide fear that the United States would withdraw from its economic responsibilities to other nations. Signs were there. The Clinton Administration has been talking down the dollar to benefit U.S. exports and hurt Japanese imports since the day it took office.
As the dollar has moved from being worth 124 yen to worth about 100, Japanese manufacturers of cars and copying machines have seen costs on products for the U.S. market go up by 19.3%. That means a Toyota Camry that could be sold profitably for $16,000 more than a year ago would now carry a $19,000 price tag--which gives an advantage to the Ford Taurus, unless Ford also hikes prices to increase its profits, which it has been doing.
Foreign investors also noted White House and congressional resistance to the Federal Reserve Board’s raising of interest rates to stem incipient inflation. And they concluded that Clinton would tolerate inflation if it made for more employment and wage hikes in the U.S. economy.
Finally, foreigners were alarmed by statements in Congress that the United States might not even live up to its commitment to the General Agreement on Tariffs and Trade.
So foreign investors put less money into Treasury bonds and other U.S. investments--even though the strong economy argued for more investment. And as there was less demand for U.S. dollars, the value of the greenback declined against other currencies.
Simply put, the foreigners sent a message to Washington that if the United States tries to act alone in the world, it will pay a price.
Foreign investment is needed to finance the U.S. current account deficit, which will run about $100 billion this year, says Washington economist John Mueller. That’s the sum of the U.S. trade deficit in merchandise, its trade surplus in services, and investment flows into and out of U.S. and foreign pension and mutual funds. If foreign money doesn’t come in, scarce U.S. savings must finance the economy’s expansion, which in effect would mean slower growth or that some borrowers, mainly small business, would be starved for capital.
It’s an interdependent world today, one in which $800 billion worth of currencies are traded daily on markets from New York to Tokyo to London. Governments are ruled by this trading, notes Robert Solomon of the Brookings Institution, who has a book coming out, “Transformation of the World Economy, 1980-1993.”
In 1980, international markets dumped the French franc and forced France’s new president, Francois Mitterrand, to change his socialist policies.
Now those markets are sending messages to Clinton, and the issue is critical because of the dollar’s central role in economic activities worldwide.
We benefit from the dollar’s status. The United States can run trade and budget deficits and no International Monetary Fund interferes or lectures.
But markets always have something to say.
The current system of floating exchange rates began in 1971 when the U.S. attempt to finance the Vietnam War and a consumer economy at home strained the fixed exchange rate system. President Richard Nixon abandoned fixed rates, and since then currency values have been guided by global trading.
That hasn’t freed us from the concerns of foreigners. In 1978, President Jimmy Carter was forced to issue U.S. bonds denominated in yen because Japanese lenders feared U.S. inflation, notes Kenneth McCarthy, head of Economic Intelligence Co., a New York consulting firm.
In 1987, a dispute with Germany over the dollar and interest rates set off a global stock market crash.
Will markets crash this time? Probably not, even though Friday’s decline in U.S. stocks was scary. The U.S. economy is stronger than it has been in decades; fears of inflation are somewhat overblown. But some business people see signs. John Rutledge, an investment banker and director of several companies, reports that land and building values in Denver have risen 30% in the last year and that land prices are rising in the Southeast and Texas.
Foreigners see such signs too, and they worry when Clinton Administration officials call for easy money policies. “They fear losing money in U.S. bonds,” says Albert M. Wojnilower, senior economist of CS First Boston. “It’s their pension fund you’re playing with too.”
The result is a crisis, staved off temporarily by 16 countries madly swapping billions in dollars, marks and yen.
“There will be more crises; the dollar will be weak through the summer,” predicts Carl Weinberg, an economist at New York University.
If that sounds to you like a wasteful way to conduct the world’s economic affairs, many experts agree. The latest debacle will increase calls for a more stable exchange system.
Economist Judy Shelton, author of a new book, “Money Meltdown,” suggests that the United States call a new international monetary conference, comparable to the Bretton Woods talks at the end of World War II.
Shelton suggests backing the dollar with gold; Rutledge and others suggest backing with U.S. real estate--the $9.5-trillion net worth of all U.S. land, houses, buildings and factories.
But more important than technicalities is that “the U.S. must take the lead,” says Shelton, of Stanford University’s Hoover Institution.
She hits the nail on the head. Because the real message the currency markets sent to Washington last week was a cry for U.S. leadership. Surely if Portugal rushing to defend the dollar proves anything it’s that the world is interdependent and sees the United States as its leader.
“We must all hang together or assuredly we shall hang separately,” Benjamin Franklin said in 1776. True then of his young nation, true today of the world.
