If the United States were not still the world's preeminent economic power with the most important currency, the International Monetary Fund would already be ordering President Clinton to balance the federal budget, cut back imports and raise interest rates and/or taxes to repair U.S. accounts with the rest of the world.
That's what the IMF has done to other countries, from Germany to Britain to Mexico, for more than five decades since it was set up at the Bretton Woods monetary conference in 1944. It has acted as the world's banker and arbiter, telling nations to get their economic houses in order if they want further credit.
Until now, the United States has been exempt from such strictures because of its power and the dollar's role as reserve currency, the money all countries rely on as an ultimate means of exchange in global trade. Thus it has been able to run trade and budget deficits without taking immediate action to correct them.
Lately, however, those continued U.S. deficits have begun to look like the self-indulgence of a pampered adolescent. The United States has been reprimanded in recent years by gradual reductions in the dollar's value and in U.S. influence in the world.
But now the overgrown adolescent is going to the woodshed. A sterner reckoning is coming that will demand the United States move toward a balanced budget and run its affairs to support the value of the dollar.
We should understand why that is, because other currency crises will follow this one unless corrective action is taken.
In the aftermath of the dollar's latest swoon against the German mark and Japanese yen, international experts say an extraordinary meeting of the seven leading industrial countries--Britain, Canada, France, Germany, Italy, Japan and the United States--will be convened, probably next month, to stabilize currency relationships.
Such a meeting, comparable to the 1985 Plaza Hotel conference that brought down an overly strong dollar, would impose conditions on U.S. behavior--including a requirement that the Federal Reserve Board raise U.S. interest rates by as much as a full percentage point.
Yes, that would slow the U.S. economy and impose hardships on Americans. But that's the fate of borrowers with slipping credit ratings, and U.S. credit has been falling among global investors of government and corporate funds.
Those investors--a vast array of insurance companies, pension funds, corporate and government agency treasurers who trade $1 trillion a day in currencies and securities--have been trimming back investments in dollars, choosing instead to keep funds in marks or yen or Swiss francs.
Their actions are based on political more than economic judgments, say experts. They trust Germany's central bank, the Bundesbank, to take unpopular actions to maintain the value of the mark, and they trust the German government, which has also taken unpopular measures, including tax hikes, to absorb the former states of East Germany.
The paradox is that Germany's economy is one of the most uncompetitive around, lagging technologically in computers and telecommunications and with high unemployment. That's why German stock prices have stayed low even as the mark has risen 20% against the dollar this year.
Similarly, the yen has risen more than 10% while Japanese stocks have fallen amid lingering problems from Japan's bubble economy.
U.S. industry, by contrast, is highly competitive, with efficient companies that look forward to higher earnings and rising exports. That's why U.S. stock markets have soared even as the dollar has fallen.
"This has nothing to do with trade," says economist John Rutledge. "Investors are buying the mark as a store of wealth because they believe the Bundesbank will support it."
That turn of events has profound implications for the world economy. If investors are even moderately turning their backs on the dollar, it means the United States will no longer be able to run deficits in its current account--the sum of trade in goods and services plus investments and borrowings. The U.S. current account deficit approached $150 billion last year.
To reduce that deficit, the United States will have to import less--not good news for many developing countries.
It will have to curb budget deficits because foreign investors are reluctant to help fund them, seeing continued deficits as debasing the very U.S. currency they're being asked to invest pension money in.
We should keep in mind that success, not failure, has brought matters to this pass. "The Wall went down, and the Cold War ended five years ago," notes economist Albert M. Wojnilower of CS First Boston Investment Management. "Insurance companies and pension funds now choose a portfolio of currencies to spread their investments, where to do so before was unsafe."
Again, paradox. Having made the world safer, the United States must compete for investments it used to have by default.
Also, peace is not bringing one world, but what looks like a world of currency blocs. So the United States has a responsibility to defend the dollar because many allies and markets are tied to the U.S. currency--all the countries of the Western Hemisphere, plus Taiwan, South Korea and even perhaps Russia, although it could go inside the mark's expanding sphere of influence.
The United States will have to defend the dollar because its continued decline is reducing U.S. purchasing power and influence in international bodies. Linda Tsao Yang, U.S. Ambassador to the Asian Development Bank, says other countries want to bar American companies from bidding on bank projects in booming Asia because of lagging U.S. government contributions.
Finally, the United States must discipline its economy because it needs to lead the way back to a more productive international monetary system. The markets that make judgments on currencies these days are themselves irrational and dangerous. The exaggerated run on the dollar, for example, has thrown the Argentine economy--which was making great strides--back into recession. "This chaos does not help productive work or trade," says economist and author Judy Shelton.
A new Bretton Woods-type conference is needed to develop a system of stable, fixed exchange rates. But a precondition of such a conference would be that the United States balance its budget. The overgrown adolescent can't escape that responsibility.