In his op-ed piece, "When Weakness is a Strength," (The New York Times, November 26, 2004) Stephen S. Roach, chief economist for Morgan Stanley (investment bank) argued, essentially, that up is down and black is white as he assured us that the growing U.S. deficit and the decline of the dollar could be considered Good Things. Being a non-economist, I'm willing to listen.
Here is his basic exposition:
- The fall of the dollar is a "logical outgrowth of an unbalanced world economy....and America's gaping current account deficit [665 billion dollars, 5.7% of GDB]...is just the most visible manifestation of these imbalances."
- The decline of the dollar is basically a good thing because it will help with "a sorely needed rebalancing."
- A weaker dollar will relieve economic and "even political tensions among nations," helping to promote a more sustainable growth in the global economy."
- Global imbalances are a shared responsibility: the U.S. consumes too much, but the rest of the world doesn't consume enough.
- U.S. citizens don't save enough, but the rest of the world saves too much.
- The U.S. has to import foreign savings to make up for its own shortfall of savings. In fact the U.S. absorbs (like it's a favor we do) 80% of the world's surplus savings.
- Foreign investors have a responsibility to prevent a crisis by NOT demanding better terms for financing our "spending spree." If they DO demand better terms, they can cause the collapse of the dollar, soaring interest rates and a stock market plunge which of course would drag along the rest of the "America-centric" world along to disaster.
HOWEVER, not only can we avoid this scenario, but we can turn the current deficit to our advantage, and of course, the world's if the central banks of the world would only carefully manage "a gradual but significant depreciation of the dollar":
- The consequent gradual rise in U.S. interest rates would compensate foreign investors for "financing the biggest debtor in the world."
- Growth would be supressed in U.S. economic sectors -- housing, durable goods, business capital spending -- resulting in a higher domestic savings rate and reduced need for foreign capital," what Roach calls "a classic current-account adjustment. Roach sees this as a selective process which would be fairly gentle. That is, only certain sectors of the economy, those "most sensitive to interest rates like housing, consumer durables...and business capital spending" would be affected. He does not mention what would happen to employment in the U.S. if there were downturns in these sectors. The dorllar falling would cause other currencies to rise, as the euro has already been doing. And then those [nasty, uncooperative] Asian nations which have absolutely refused to let their currencies rise, would have no choice but to do so.
- More expensive exports from Asia and Europe to the U.S. would slow so that those areas would simply have to "stimulate domestic demand to compensate..." According to Roach, Asia and Europe need us: we're all in this together. They need to "unshackle" their internal demand.
- Somehow, the hoped-for restoration of "balance" might defuse global trade tensions with the weaker dollar increasing demand for U.S. exports (they become cheaper in foreign countries) and U.S. citizens will start being satisfied with domestic products (I didn't know we still made them).
- Roach says that the U.S. trade deficit should narrow, and the Euro should get some relief resulting in the lessening of overprotectionism and its risks. As I understand it, this means that if we're all on more equal footing, other countries won't want to put taxes and duties on products from us that compete with theirs because in a more "balanced economy," we could do the same to theirs.
- So this is all good because "A lopsided world needs to be put back into balance....A weakening dollar is an encouraging sign that the world's relative price structure...essentially the value of one economy versus another -- is becoming more sensible. If the world can manage the dollar's decline wisely [i.e. as we think they should] there is more reason for hope than despair."
Now the counterargument according to John Cassidy in this week's "Talk of The Town" in The New Yorker, Dec. 6, 2004). If you can, read the whole thing, it has a fair amount of grim humor. Maybe I'm a pessimist, but I wouldn't put all my savings eggs in one basket.
According to Cassidy "Since the nineteen-seventies, the dollar's value has been determined in the financial markets where traders buy and sell currencies like any other commodity." In recent weeks, its value has fallen sharply, meaning that whereas when they came into existence, you could exchange one euro for roughly one dollar. Today, you can exchange one euro for roughly $1.30. This means that say, a candy bar which just a little while ago cost one euro and one dollar today still costs one euro, but you'd have to pay $1.30, for it. This is what is meant by the depreciation of the dollar.
Cassidy points out that this reflects "two intractable, and related, problems:"
- "As manufacturing and production have shifted to countries with low labor costs, the trade balance has declined alarmingly: America cannot sell abroad as much as it buys." As I noted above, it's not simply the declining dollar, it's the declining manufacturing base. We no longer make much stuff like TVs in the U.S. Even if the world's central banks helped control the dollar slide, the import-export balance could not be restored. Our manufacturers have folded when they could not compete in price with low-labor-cost Chinese goods like sweaters and lawn furniture and everything else. We have very little of this sort to sell, and we couldn't start up again without paying unacceptably low wages (more Mexican immigrants, anybody?).
- "The United States has emerged as the world's biggest debtor." Let's take Cassidy's comparisons: "Ten years ago, the country ran a modest trade deficit...[but] as a consequence of investments that Americans made overseas, the rest of the world owed us trillions of dollars. Today the trade per cent is about five per cent of the gross domestic product -- bigger than it has ever been -- and we owe the rest of the world about three and a quarter trillion dollars. [Italics mine]
- Deficits aren't always bad. They are used by nations, especially poor ones, to invest "in industrial equipment, education, infrastructure" and the like needed for development. BUT we are not borrowing to develop ourselves. We are borrowing to finance the government's day-to-day expenses, and to pay for imported consumer goods, such as autos, toys and electronics." [Italics again mine]
- In other words, we are exhibiting "a classic symptom of a country living beyond its means."
More depressing facts:
- Whereas "twenty years ago Americans saved about nine cents of every dollar earned, today, they save less than a penny." (And I remember back then hearing we didn't save enough.)
- "The federal government is spending about four hundred billion dollars a year more than it raises in taxes....[T]his means it has to sell about 34 billion dollars' worth of bonds every month to remain solvent." [Italics mine]
- China and Japan are the biggest purchasers of the U.S. debt. According to Cassidy, last year alone, China and Japan purchased bonds totalling about 400 billion dollars of our debt.
- We depend on this purchasing of our bonds to support our currency.
- So we need them to buy our debt, and they use this advantage to keep growing their export business in our country.
- In addition, they keep their currencies from rising so that their stuff will stay even cheaper in our country than it otherwise would be. This means in spite of our indebtedness, we keep buying Asian stuff. Don't be outraged. Asians are just following the ruthless rules of capitalism, same as we do where we can. Or should I say our companies when they chase the cheapest labor. It is in large part because our own U.S. companies chase the cheapest labor that Asian products are doing so well.
- To sum up the process, Cassidy says, "We import consumer goods from Asia, and they lend us the money to pay for them, at fixed exchange rates."
Both Stephen S. Roach and John Cassidy agree on the lopsidedness and basically untenable situation we are in, but they disagree on what could happen, what we should do.
Roach puts the burden on the central banks of other nations. They should manage the decline of the dollar so that it is slow and steady. After all, he says, some of this is their fault for saving too much and spending too little. AND, he threatens in a veiled kind of way, if the U.S. had a serious recession, the rest of the "America-centric world would quickly follow."
Cassidy speaks in a way that appeals much more to my Northeastern understanding of responsibility, that is, that the burden is on us. Though his "solutions" are similar to Roach's, the consequences aren't. Cassidy notes that "at some point, all countries have to pay their own way, which means restoring the trade balance and paying down the debts." Where Roach says you cut back consumer spending by reducing imports, however, Cassidy says you cut back imports by reducing consumer spending. Cassidy sees this as producing a recession, not a gentle decline.
The other way to slow the decline, according to Cassidy, is for the United States to devalue our currency rather than some well-behaved foreign central banks. And, according to Cassidy, John Snow, our Treausry Secretary and good ole Alan Greenspan seem to be attempting this. This is risky because:
- It can (and already has) lead currency traders losing confidence in the dollar as a safe bet (see the euro and recent further declines on the currency markets as Greenspan talks devaluation). This could lead to the dollar crashing.
- The same financial scenario: record trade, deficits, huge foreign debts and "prolonged fiscal irresponsibility" have led to full-blow crises in any number of countries, including Mexico, Argentina, Brasil, and Russia. If investors panicked and tried to get all their money out of the U.S., the Feds would "be forced to raise interest rates...which in turn would torpedo the stock and real-estate markets. The economy would be plunged into a deep recession." And while this might be disastrous for us, I don't think it would necessarily be for the rest of the world. I am no investment banker, but I think the world's economy is decreasingly America-centric: Europe and Asia seem to be getting fairly strong and fairly independent.
- Already, Russia is considering changing some dollar reserves into euros which would "undermine the dollar's privileged status." And because the Bush administration tries to blame others for at least some of the problems (see Roach above), it is making other places pretty angry. A Chinese quote: "'China's custom is that we never blame others for our own problem. The united States has the reverse attitude. Whenever they have a problem they blame others.'"
- I have read elsewhere that if OPEC decided to require payment for oil in euros instead of dollars, it would have a similarly disastrous effect.
Cassidy concludes: "Ultimately, the value of a currency is an international verdict on the honesty and the competence of the government that issued it. President Bush may have recovered in domestic polls, but in the currency marekts his ratings are still falling. And, with his Administration determined to pursue further tax cuts and costly Social Security privatization, his numbers don't seem likely to turn around soon."
For me, the difference between the Bush loyalists, and the, what should I say, middle of the road, internationalist economist types is that the former seem to have a significant disability: they become entranced with surfaces: surface numbers, surface words, surface glitter which protects and in their minds enhances the status and worthiness of their own insider group. They cannot grasp the stuff of reality: the paths of history, the flesh and blood of people making and selling and buying, the fact of decent people elsewhere thinking of themselves before they bow down to us. They can't really understand that there are well-educated opinions, opinions vastly different from their own, which see alternative scenarios. The current army of the right is stuck in a narcissistic bubble which, if it bursts, will scatter us all to places unknown and probably unpleasant at best.
Resources for this article:
Stephen S. Roach, "When Weakness is a Strength," The New York Times, November 26, 2004. Stephen S. Roach is chief economist for Morgan Stanley. This article is available on the NY Times site for purchase (or on this site for free)
John Cassidy, "Comment: Going Down," The New Yorker, Dec. 6, 2004. This is in the hard copy of the magazine. It is no longer on the website. See the real world! Try your neighborhood library!
For a somewhat different, but no less alarming, take on the situation, see Larry Elliot, "US risks a downhill dollar disaster," The Guardian, November 22, 2004. http://tbrnews.org/Archives/a1221.htm. There are also a number of other interesting articles on the economy (and other things) on this site.
