11:26 PM CST on Tuesday, December 7, 2004
By JIM LANDERS / The Dallas Morning News
Is the delicate balance that has kept the global economy going despite jaw-dropping U.S. debts about to give way? A growing number of economists think so.
Harvard University president Larry Summers has dubbed this the "balance of financial terror." He and other economists fear a crisis that will lower U.S. living standards.
The current arrangement, where America buys and borrows while Asia sells and saves, is creaking under the weight of exchange rates that many analysts say are coming apart.
If the analysts are right, American consumers may soon confront sticker shock at favorite retailers such as Wal-Mart and Home Depot. American automakers, on the other hand, might get a chance to climb out of a bathtub of red ink.
The Bush administration says don't panic: White House advisers say global debts and exchange rates would sort out smoothly if the rest of the global economy would follow the growth path America is walking.
Economists with Germany's Deutsche Bank say recycling dollars from America to Asia and back again will keep rewarding both sides. Michael Dooley, David Folkerts-Landau and Peter Garber see it as a new Bretton Woods Agreement, an international system devised in 1944 to stabilize exchange rates that lasted for almost 30 years.
"Our story has been that the countries in Asia that have been lending us money will find it in their interest to continue to do so," Mr. Dooley said. "And the United States will still get enough foreign money to keep interest rates low and continue to use world savings for both investment and consumption."
Fort Worth-based Pier 1 Imports Inc. has turned away from Italian designs because of the high value of the euro, but it otherwise weathering the storm without raising prices, said executive vice president Jay Jacobs.
"Obviously we're not real happy with it, but we compete with other U.S. retailers, and we're all in the same boat," he said.
Asian trade concerns
Other economists don't see how that approach can be sustained.
The United States is borrowing $600 billion a year to finance its trade and budget deficits. Most of the lenders are Asian governments. China has bought more than $500 billion in U.S. Treasury bonds. Japan holds more than $720 billion. South Korea, Taiwan and Hong Kong each hold more than $100 billion.
The Asians are lending to hold down the value of their currencies, say U.S. economists, which keeps prices low for Asian exports to the United States. If an Asian currency begins to rise against the dollar – which is happening to Japan's yen – it gives the others a pricing advantage in the U.S. market.
Sure enough, Japanese officials complained Wednesday that the dollar was too weak and suggested that Europe and Japan push it back up.
John Williamson of the Institute for International Economics in Washington argues that the International Monetary Fund must knock heads to produce a 10 percent to 30 percent rise in Asian currencies against the dollar.
"At some stage, American consumers are going to have to recognize they've been living beyond their means," he said.
An orderly realignment of exchange rates would be less painful than a recession, which is the other way to curb U.S. borrowing, Mr. Williamson said.
Lowering the value of the dollar gives the United States an advantage over every other debtor. Other countries borrow dollars and have to pay interest in dollars, even if their own currencies collapse. But the United States can inflate away its debts.
For example: $100 borrowed from a Japanese bank in 2003 was worth 10,800 yen. The face value on the debt is still $100, but now it's worth only 10,300 yen. The Japanese bank has lost 500 yen because of dollar depreciation.
With Japan holding $720 billion in dollar-denominated reserves, that's a lot of depreciation.
A weakened dollar would put a brake on U.S. imports because they'd be more expensive. It would also spur U.S. exports.
Roger Kubarych, senior economic adviser in New York with Germany's HVP banking group, said the existing exchange rate regime is largely responsible for U.S. automakers' $22 billion in losses since 2001. The beneficiaries have been Japanese automakers.
"If we don't do something about the car industry, we are going to have one or two companies go bankrupt," he said. "The car industry supports the retirement income and health insurance of 2 million people."
Economist Ray Perryman of the Perryman Group in Waco said some sort of government intervention is needed.
"I like floating exchange rates. But when there are players of this magnitude, manipulating the market, it may take some jawboning on this one," he said.
The dollar's value directly affects the income of oil-producing countries because oil is priced in dollars. When the dollar weakens, it drains income from Russia, Saudi Arabia and other leading oil exporters. So far, prices have increased far beyond the losses caused by a weakened dollar, but producers are inclined to hold on to their winnings.
Russia and Indonesia said last week that they might start buying euros and other currencies to lessen their exposure to a declining dollar. And the Bank of International Settlements on Monday reported a 13 percent shift in oil-producer reserves from dollars to euros in the last three years.
Global 'Ponzi scheme'
Clyde Prestowitz, president of the Economic Strategy Institute, sees a painful adjustment ahead.
"The whole global economy is kind of a Ponzi scheme," he said.
"Our job is to borrow and consume at ever-increasing rates. Everybody else – particularly the Chinese, the Japanese, the Koreans – saves and produces and exports, and provide us financing so we can go on buying."
"We get to live beyond our means, and they are happy to soak up unemployment," he said.
Mr. Prestowitz said the dollar is going to have to fall more than 50 percent against some currencies to bring global accounts back to balance – "which means a fall in the standard of living."
U.S. officials hint that the dollar should weaken (though by nowhere near 50 percent), and they've lobbied China to let go of the dollar, which is pegged to the yuan at a rate of 8.28 to $1.
Fed Chairman Alan Greenspan was mildly critical this month of the U.S. current account deficit (the measure of U.S. borrowing from the rest of the world). Treasury Secretary John Snow says markets rather than governments should determine exchange rates.
U.S. manufacturers, which suffer most from cheap imports, formed the Coalition for a Sound Dollar to argue that the dollar is valued too high.
"We really view China as the lynchpin in this," said Patricia Mears, the coalition's executive director. "China is looking for job creation and internal stability, and they have taken a currency position for export-led growth."
Deutsche Bank's Mr. Dooley agrees that China is the lynchpin. But he doesn't see Beijing strengthening its currency soon.
China's most pressing economic problem is finding jobs for the 200 million people moving from farms to cities. Manufacturing exports can solve it if the Chinese currency remains pegged to the currency of the major buyer of those goods – the United States.
The system can endure, even if U.S. bonds aren't paying much, as long as the labor surplus lasts. And once the Chinese workers are absorbed, India will follow the same path, Mr. Dooley said.
U.S. consumers will benefit from cheaper goods, but the U.S. labor market will have to adjust – even if that means shrinking the workforce or even the number of U.S. automakers.
"If we can borrow what we need, and keep interest rates low, why not?" he asked.
Full Story (The Dallas Morning News)