Well Brenner seems to have been correct to focus on the politics of currency--see article below. With the development of the capital markets since the Plaza agreement, do govts still have the power through coordinated action to engineer a controlled devaluation of the dollar? And given China's and Japan's own heavy debt problems, will they cooperate with the US Treasury in the devaluation of the dollar as Japan did in the Plaza agreement? If it is so clear that the US needs a devaluation of the dollar and that an upward revaluation of the Euro will mitigate inflationary pressure and allow the European Central Bank to pursue growth accomodative monetary policy, why is Treasury Secretary O'Neill so reluctant to intervene in the currency markets? Don't US businesses need foreign markets and protection at home? Or is there some reason that a strong dollar helps some, perhaps the most powerful, US-based businesses--for example, if one has a technological monopoly then a weak dollar only results in the US giving away what others cannot produce, as the rightwingers at the American Spectator would put it. If the US competes in foreign countries through sales from subsidiaries, doesn't a strong dollar give US based businesses a competitive advantage while tariffs and subsidies can be used to protect American business at home? At any rate, why does O'Neill seem so reluctant to intervene in the currency markets as his predecessors in the 80s did? The Muscle-Bound Dollar May Now Be an Achilles' Heel May 16, 2002 By JEFF MADRICK HE dollar has long been the wild card in the economic outlook. Its surprising strength in the 1990's helped keep inflation in check by reducing import prices. A high dollar also attracted hundreds of billions of dollars in investment to compensate for the low savings rate among Americans. And while the dollar rose more than 40 percent since 1995, the gross domestic product kept growing strongly, anyway. The high dollar greatly raised world prices for the nation's manufacturing exports, but record trade deficits only partly offset other fast-growing components of G.D.P. This pattern, however, has long been too good to stay true. As the expansion shows signs of weakness, it is time to encourage a modest decline in the dollar to stoke manufacturing sales, which have been hit hard by the high dollar. It is also time to recognize the serious imbalances the strong dollar has created. The United States owes trillions of dollars of debt it took on to finance current account deficits. As important, the high dollar has done longer-term damage to some industries by discouraging investment in globally competitive goods. Those most hurt are lining up in Washington to demand relief. Jerry Jasinowski, head of the National Association of Manufacturers, testified before Congress recently that the high dollar cost manufacturers $140 billion and 500,000 jobs the last 18 months. Thomas Palley, assistant director of policy at the A.F.L.-C.I.O., points out that more than 90 percent of lost jobs in the current recession were manufacturing jobs, though such jobs account for only 14 percent of total employment. But although vested interests may be clouding the debate, the arguments for a lower dollar are persuasive. The first is that a high dollar is going to restrain the expansion. America's rapid growth began in the mid-1990's, let us remember, when the dollar was 40 percent lower. Moreover, the last time the dollar was as high as it is now, in the early 1980's, manufacturing profits were at a low point. Profit rates did not begin to rise until the late 1980's, a couple of years after the Reagan administration arranged the Plaza Accord to bring the dollar down sharply - by some 50 percent, as it turned out. When the dollar took off in the mid-1990's, manufacturing profit rates declined again. Capital investment remained high only because of the inflow of capital from abroad and high stock prices. But now, Mr. Jasinowki's member companies report that their exports are on average 25 percent more expensive than rival products from other nations. Investment is way down. A second argument in favor of a lower dollar is that its level is unsustainable. As J. Fred Bergsten of the Institute of International Economics points out, the nation must import $4 billion in capital a day to compensate for its current account deficit and capital outflows. Moreover, stocks are unlikely to attract as much capital as they did in the 1990's. Mr. Bergsten is concerned that if the nation does not act now, a sharper fall is decidedly possible. The trade deficit has reached 4 percent of G.D.P. - not merely unprecedented in recent times but a point at which it has almost always become unsustainable in other nations. If the dollar falls too far too fast, it could ignite inflation and influence the Federal Reserve to raise interest rates so high as to weaken the economy. A third argument, too often ignored, is that over an extended period, a high dollar misallocates capital resources. Some export industries are neglected, while those that import low-price supplies, often services, attract more investment than is optimal. The 1990's boom disguised this impact, but it is harder to reduce a trade deficit when companies do not develop new export products because those products will be chronically overpriced in the world market. Technology-intensive industries have long run a substantial trade surplus, for example, but Mr. Jasinowski calculates they are now importing $20 billion more in goods than they are exporting. If the nation continues to grow much more rapidly than its trading partners do, there is an argument that the high dollar can be maintained. But almost certainly the gap in growth rates will narrow, if not turn in favor of other countries, in coming years. By traditional measures, Mr. Jasinowski, Mr. Palley and Mr. Bergsten argue that the dollar is overvalued 20 to 25 percent. Mr. Bergsten would like to see the Treasury "lean against the wind" and even buy undervalued currencies, like the euro or yen. Dollar policies usually make economists nervous. Some say intervention usually does not work, in part because it is offset by shifts in the money supply. But Mr. Bergsten notes that intervention did indeed work during the Plaza Accord and several times during the Clinton administration, including a coordinated action to lower the yen in 1995. The greater danger is that a change in dollar policy could precipitate a run on the dollar and the very collapse we fear most. Again, Mr. Bergsten says such routs have been stemmed in the past. In 1987, for example, central banks bought dollars after a two-year slide. There is no way to avoid risks when it comes to influencing currency levels. The question is whether the risk of dollar neglect is greater than the risk of pushing it down. Given questions about the strength of this expansion, the rapidly growing trade deficit and enormous levels of foreign debt, ignoring the high dollar will only make matters worse in a year or two. A lower dollar might even help the Europeans. While it would make their exports less competitive, it would enable the European Central Bank to reduce Europe's high interest rates because inflation would be less a threat. It is time to face forthrightly the imbalances created in the late 1990's rather than resort to outworn shibboleths about how the markets must set currency rates. http://www.nytimes.com/2002/05/16/business/16SCEN.html?ex=1022591020&ei=1&en=9c1212302a7d486e HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2002 The New York Times Company
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