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10-22-2004, 11:01 AM
October 22, 2004
Is It Time to Stem Asia Deficits With a Weak Dollar?
By FLOYD NORRIS New York Times
HAT has gone wrong in the American economy in the last six months? That is not something being discussed on the campaign trail, but the answers provide an indication of the major policy problems the victor will have to address next year.
There is likely to be strong American pressure on much of Asia, not just China, to allow a major depreciation of the dollar. The details may be different depending on who wins the election, but the pressure will be there.
Such a ''weak dollar'' policy would raise the cost of imported goods, and thus hurt consumers. But the alternative is to see more and more American economic stimulus drain overseas as the trade deficit grows ever greater, making the eventual resolution that much more painful.
The main reason the recent American slowdown has gone undiscussed is that neither candidate wants to bring up the subject. To President Bush, such a question concedes that the recovery that seemed so impressive early this year has faded. For Senator John Kerry, such a question admits there was a recovery.
But the fact is that starting in May, the economic data began to provide unhappy surprises. American growth now is adequate, but it does not match what the administration or most private forecasters expected.
One explanation is that the prognosticators grew too enthusiastic. The surge in growth in the second and third quarters last year reflected a tax cut that sent checks to families with children, but excluded high-income families. It should have been no surprise that checks sent to parents in the summer would lead to a good back-to-school shopping season. Nor should it have been a surprise that there would be some retrenchment this year, when no similar checks arrived.
What else? High oil prices have had a dampening effect, but not nearly to the extent that many would have expected. Gasoline still takes up a smaller part of paychecks than before the first oil shock, in 1973. You'll know gas prices are hurting when you see headlines about plunging sales of sport utility vehicles.
But the real issue is that American demand is going overseas. ''The problem is that imports from Asia are soaring, and exports are growing modestly,'' said Robert Barbera, chief economist of ITG/Hoenig.
And that is where the campaign comes in. ''A centerpiece of the Kerry critique of Bush is the exporting of jobs to the rest of the world, and yet an opinion about the dollar is not at all front and center,'' Mr. Barbera said.
In the Bush administration, John W. Snow, the Treasury secretary, is always willing to declare, ''We support a strong dollar,'' as he did this week. But he also says he wants exchange rates to be determined by the market.
That does not happen in Asia. Instead, central banks buy Treasury securities by the bucketful to support the dollar. At the end of August, the combined holdings of Japan, China, Hong Kong, Taiwan, South Korea and Singapore were $1.1 trillion, up 22 percent from the end of 2003. Since President Bush took office, they have added to their Treasury holdings at a pace of nearly half a billion dollars a day. Instead, the dollar's fall has mostly been against the euro. That is one reason Europe's export-led recovery has begun to weaken, with industrial production turning lower and trade surpluses narrowing.
If Mr. Bush gains a second term, he need only recall what his role model, Ronald Reagan, did. After cutting taxes in the first term and seeing the trade deficit rise to previously unimaginable levels, he engineered the Plaza accord in the first year of his second term. The dollar fell and the trade deficit gradually narrowed. It is time to consider such a policy again. And whoever is elected may want to get that process started sooner rather than later
Is It Time to Stem Asia Deficits With a Weak Dollar?
By FLOYD NORRIS New York Times
HAT has gone wrong in the American economy in the last six months? That is not something being discussed on the campaign trail, but the answers provide an indication of the major policy problems the victor will have to address next year.
There is likely to be strong American pressure on much of Asia, not just China, to allow a major depreciation of the dollar. The details may be different depending on who wins the election, but the pressure will be there.
Such a ''weak dollar'' policy would raise the cost of imported goods, and thus hurt consumers. But the alternative is to see more and more American economic stimulus drain overseas as the trade deficit grows ever greater, making the eventual resolution that much more painful.
The main reason the recent American slowdown has gone undiscussed is that neither candidate wants to bring up the subject. To President Bush, such a question concedes that the recovery that seemed so impressive early this year has faded. For Senator John Kerry, such a question admits there was a recovery.
But the fact is that starting in May, the economic data began to provide unhappy surprises. American growth now is adequate, but it does not match what the administration or most private forecasters expected.
One explanation is that the prognosticators grew too enthusiastic. The surge in growth in the second and third quarters last year reflected a tax cut that sent checks to families with children, but excluded high-income families. It should have been no surprise that checks sent to parents in the summer would lead to a good back-to-school shopping season. Nor should it have been a surprise that there would be some retrenchment this year, when no similar checks arrived.
What else? High oil prices have had a dampening effect, but not nearly to the extent that many would have expected. Gasoline still takes up a smaller part of paychecks than before the first oil shock, in 1973. You'll know gas prices are hurting when you see headlines about plunging sales of sport utility vehicles.
But the real issue is that American demand is going overseas. ''The problem is that imports from Asia are soaring, and exports are growing modestly,'' said Robert Barbera, chief economist of ITG/Hoenig.
And that is where the campaign comes in. ''A centerpiece of the Kerry critique of Bush is the exporting of jobs to the rest of the world, and yet an opinion about the dollar is not at all front and center,'' Mr. Barbera said.
In the Bush administration, John W. Snow, the Treasury secretary, is always willing to declare, ''We support a strong dollar,'' as he did this week. But he also says he wants exchange rates to be determined by the market.
That does not happen in Asia. Instead, central banks buy Treasury securities by the bucketful to support the dollar. At the end of August, the combined holdings of Japan, China, Hong Kong, Taiwan, South Korea and Singapore were $1.1 trillion, up 22 percent from the end of 2003. Since President Bush took office, they have added to their Treasury holdings at a pace of nearly half a billion dollars a day. Instead, the dollar's fall has mostly been against the euro. That is one reason Europe's export-led recovery has begun to weaken, with industrial production turning lower and trade surpluses narrowing.
If Mr. Bush gains a second term, he need only recall what his role model, Ronald Reagan, did. After cutting taxes in the first term and seeing the trade deficit rise to previously unimaginable levels, he engineered the Plaza accord in the first year of his second term. The dollar fell and the trade deficit gradually narrowed. It is time to consider such a policy again. And whoever is elected may want to get that process started sooner rather than later