Global Crisis? The Weight Is Still on the U.S.’ Shoulders

It seems a sad commentary that to have a healthy currency these days, a country’s role model has to be . . . Japan.

While financial markets worldwide reeled last week after Brazil joined the Devaluation Club, the Bank of Japan was spending its days buying dollars and selling yen, trying to keep the strong yen from getting stronger still.

For someone trying to grasp the basics of currency markets, Japan’s experience would suggest that the best way to ensure a robust currency--and thus hefty national purchasing power in the global economy--is to be in depression, with rock-bottom interest rates and a stock market no one wants to invest in.

Whereas Brazil, which finally allowed its currency to plunge Friday--bringing the weeklong devaluation to 18% versus the U.S. dollar--was rewarded with a stock market surge of 33%, leaving the country’s key share index off less than 1% for the week.

To take the apparent absurdity a step further, consider that last year, the U.S. dollar actually declined in value against most major currencies, even as our economy remained the healthiest in

the world by nearly every measure.

If that’s devaluation, maybe we should pray for more.

The difficulty that even market professionals have in explaining currency moves suggests there’s no percentage for most Americans in trying to grasp all of this. Some people, however, have no choice but to deal with it: those whose businesses are involved in export or import, for example, and recent immigrants who have close financial ties to family or enterprises in their native countries.

(If you have relatives in Brazil, for example, every dollar you send them now naturally will buy much more than it did a week ago.)

For American investors, perhaps the best reason to shrug off Brazil’s devaluation is that the wave of previous devaluations, beginning with Thailand in July 1997 and running through Russia’s last August, appears to have had little negative effect overall on life in the United States.

Remember the predictions of beggar-thy-neighbor trade policies leading to global depression? One country would submit to devaluation, making its exports cheaper for the rest of the world (one of the few benefits of devaluation), in turn forcing other countries to devalue to keep their exports priced competitively. A race to the bottom would ensue.

Certainly, plenty of currencies tumbled in value, relative to the dollar, in 1997. But far from seeking to lay claim to the most debased currencies, many of the worst-hit countries, including Thailand and South Korea, have worked hard to bolster their troubled economies and lift their currencies from drastically cheapened levels.

At the end of 1997, it took 1,580 South Korean won to buy $1. Today it takes 1,184. That’s a 25% rebound in Korean buying power.

So however much pain the Asian financial crisis and devaluation wave inflicted on hundreds of millions of people in emerging economies over the last 18 months, it has not triggered the global economic meltdown that some feared--or resulted in a perpetual downward spiral in currency values.

Thank U.S. and European consumers, and businesses, for their willingness to keep spending money: Even as the manufacturing sectors of those economies have been hurt because demand for their exports in much of the developing world has weakened, the U.S. and Europe overall have continued to grow, supported by surprisingly strong consumption within their own borders.

In part, that domestic spending has been supported by the beneficial side effects (beneficial, at least, for consumers) of the turmoil in Asia and elsewhere: falling commodity prices, especially at the gas pump, and sharply lower interest rates.

Maybe it’s no surprise, then, that U.S. stocks soared Friday after Brazil agreed to let its currency fall to a level that the free market judged appropriate, considering the country’s huge budget deficit and other financial woes.

The Dow Jones industrials zoomed 219.62 points, or 2.4%, to 9,340.55. Despite sharp declines earlier in the week as Brazil moved to crisis stage, the Dow’s close left it just 3.1% below its record high of 9,643.32 set Jan. 8.

“After a lengthy experience with currency and market explosions in Asia and elsewhere, investors in the U.S. and Europe seemingly have developed a crisis fatigue that translates into mild complacency,” says John R. Williams, economist at BT Alex. Brown in New York.

Devaluation? Been there, done that, markets appeared to be saying on Friday.

But could Brazil’s move be a more serious omen than Wall Street now wants to believe?

Devaluation pressures weighed on other currencies as well last week. Mexico’s peso was dragged to a record low Thursday as Brazil’s situation worsened, although by Friday the peso had bounced somewhat, ending at 10.3 to the dollar.

In Southeast Asia, the Indonesian rupiah fell 13% last week against the dollar, and the Thai baht eased 2.3%. Even South Korea’s won lost a bit of ground.

Regardless of how these countries believe their currencies should be valued, the lesson of the last 18 months is that the market will tell you what your currency is worth.

And for the most part, despite Japan’s weird experience with a very strong yen in a sick economy (in part a function of Japan’s need to bring money home from abroad, to shore up its banking system), a currency ought to reflect the perception of both domestic and foreign investors as to the underlying economy’s health and attractiveness.

Thus, if investors begin to perceive that another round of devaluations in developing nations is inevitable--because the countries’ economies will take a turn for the worse--devaluation then can become a self-fulfilling prophecy, as money flees the countries to avoid the risk of being further debased.

All of which keeps the burden of assuring that the global economy stays afloat on the shoulders of U.S. and European consumers--and on the Federal Reserve, and the new European Central Bank, to leave credit loose.

“A chain of currency devaluations becomes a real threat in the event the world economy begins to perform very poorly,” warns John Lonski, economist at Moody’s Investors Service in New York.

By itself, Brazil accounts for less than 2% of all U.S. trade, a minimal amount. A decline in some U.S. exports to Brazil this year could conceivably be made up by a rebound in exports to recovering Asia. (As for exports from Brazil--let’s wait and see if coffee really gets cheaper.)

Brazil’s health is important to America, but only at the margin. What’s really important--for the world--is that the internal U.S. economy remains robust.

Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.

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Dollar Up, Then Down

The dollar’s value soared against many currencies in 1997 amid the first wave of Asian currency devaluations. But last year it was the dollar that weakened, as many other currencies stabilized or rebounded in value. A sampling:

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Dollar’s gain or loss vs. currency: Country 1997 1998 Indonesia +104% +67% Taiwan +20% -1% Singapore +20% -1% Philippines +52% -2% Malaysia +55% -3% Japan +12% -12% South Korea +87% -24%

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Source: Bloomberg News