Does the law of gravity
apply to the dollar?
Edmund L. Andrews The New York Times
Monday, September 30, 2002
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WASHINGTON After more than two decades
during which the United States bought and
consumed far more than it produced, has payback
time finally arrived?
A growing number of the bankers and finance
officials from around the world who gathered in
Washington over the weekend for the annual
meetings of the International Monetary Fund and
World Bank say it is near - and if it is not, they
suggest, then it should be.
"The current gaps between growth in real
domestic demand and real output cannot be
sustained indefinitely," the Fund warned in its
latest review of the world economy. The
imbalances in the U.S. economy, it said, are now
so big that they pose a "significant risk" to global
financial stability.
The U.S. economy has seemed to defy gravity for
years, running steadily bigger trade deficits
almost every year for the past two decades. Yet
because growth was so strong through most of the
1990s, the economy has also acted as a vacuum
cleaner, sucking in hundreds of billions of dollars
in foreign investment every year. The upshot has
been an impossible balancing act - a huge need
for foreign cash, yet an indefatigable domestic
currency - that has caused hand-wringing among
central bankers elsewhere who cannot believe the
United States keeps getting away with it.
The current-account deficit - the combination of
trade in goods and services and the balance of
income payments - totaled about $242.5 billion in
the first half and is on track to hit a record of
nearly $500 billion for the year.
According to the Fund, the United States now
absorbs about 6 percent of the world's savings to
finance its deficit. Japan, plagued by a stagnant
domestic economy, has been exporting about 1.5
percent of the world's savings, much of it to the
United States.
Economists at the Fund and elsewhere worry that
investors might abruptly sour on the dollar
because prices have simply become too high or
because they no longer believe the United States
can grow faster than the rest of the world.
"After the stock market bubble and the technology
bubble, the last obvious remaining bubble is the
dollar," said C. Fred Bergsten, director of the
Institute for International Economics in
Washington. A steep plunge in the dollar would
make foreign products more expensive in dollar
terms, choking off exports to the United States
and growth overseas. Exports to the United States
have been among the world's most important
sources of growth.
Bergsten says a collapse in the dollar remains
unlikely because the economic fundamentals of
the United States remain sound. But he argues
that a correction is inevitable and that the Bush
administration should act preemptively by
intervening in financial markets to nudge down
the dollar an additional 10 percent or 20 percent.
"The dollar did come down pretty steadily and in a
totally ordinary way in the first six months of this
year, and there was no adverse effect on inflation,"
he said. But since late July, the dollar has
climbed slightly.
U.S. manufacturers have been pleading for a
weaker dollar for years, saying the high dollar is
the main reason manufacturing exports have been
stagnant.
But Treasury Secretary Paul O'Neill has insisted
that exchange rates be set by market forces, and
he has even argued that the current-account
deficit is an accounting abstraction that means
little in the real world of business.
If foreign money floods into the American market
and keeps the dollar high, he says, that reflects
only the comparative appeal of the United States
as an investment target. "What exactly are we
supposed to do about it?" one senior official asked.
Fund officials acknowledge the problem, noting
that the "ideal solution" to the imbalance would be
for Europe and Japan to speed up their own
desultory growth by making their markets more
flexible and open.
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