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Politics : Idea Of The Day

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To: IQBAL LATIF who wrote (44698)	9/27/2003 4:25:52 AM
From: IQBAL LATIF	Read Replies (1) of 50167

Stephen Roach Has Hopes and Fears Morgan Stanley's Stephen Roach likes Treasury Secretary Snow's new policy of talking down the dollar: Morgan Stanley: As expressed in Dubai, the G-7's vision of market-determined exchange rates fit the script of global rebalancing like a glove. It promised the one shift in relative prices -- a weaker dollar -- that a lopsided, US-centric world so desperately needs. For a world beset by massive and unsustainable external imbalances, the G-7 recipe offered the best possible endgame -- a balanced global economy. It was the perfect ending to my bad dreams of the past four years. It's not clear why he likes it. As I've said before, there are two ways of announcing changes in exchange rate policy. The first is to announce that monetary policy will be different--say, if Chairman Greenspan were to say something like: One of the considerations impelling the Open Market Committee toward continued monetary ease for a considerable period of time is the sense that the appropriate value of the exchange rate should produce a trade balance equivalent to desired fundamental long-term capital flows; and that the current level of the U.S. exchange rate seems to be associated with a perhaps excessive inflow of short-term finance into the United States. A crystal-clear and easily-comprehendable announcement like that would lower long-term U.S. interest rates, reduce the value of the dollar, provide some small stimulus to aggregate demand, and start the process of "rebalancing" that Stephen Roach so dearly wants to see. But that's not what Treasury Secretary Snow did: he added risk to investments in dollar-denominated securities, and so boosted U.S. interest rates and generated a small reduction in U.S. aggregate demand while--I think--doing nothing to shrink the difference between the dollar's current value and its long-run sustainable value. Roach seems to be focusing on the size of the capital inflow and the U.S. international net asset position. But the important thing is not their magnitudes, but the gap between their current magnitudes and long-run sustainable levels. Posted by DeLong at 09:17 AM

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