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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (44737)	10/2/2003 3:54:12 AM
From: IQBAL LATIF	Read Replies (1) \| Respond to of 50167

The Economist's Buttonwood Tree Speaks The Economist's Buttonwood Tree column speaks, and apologizes to the rest of us for assuming that "George Bush and his administration were not as stupid, short-sighted, parochial and economically illiterate as they sometimes appear. Buttonwood now realises that this was a mistake and retracts this view as hopelessly optimistic and naive." That's OK. Every young tree is allowed a few mistakes. But don't let it happen again. Economist.com: Underlying some of this column's cheer these few weeks past has been an assumption that President George Bush and his administration were not as stupid, short-sighted, parochial and economically illiterate as they sometimes appear. Buttonwood now realises that this was a mistake and retracts this view as hopelessly optimistic and naive. Over the past couple of weeks, the risks to the world economy and financial markets everywhere have risen as the full force of their economic myopia has visited itself on the world stage. The reason for this column's volte face was the outcome of the G7 meeting in Dubai. The communiqué issued by the group of industrialised rich countries on September 20th called for "more flexibility" in exchange rates, which sounds innocuous enough but most certainly wasn't. Whatever other countries thought this meant--and the British and the Japanese denied it--the signal the Americans wanted to send was unambiguously clear: the Bush administration wants a lower dollar. John Snow, the treasury secretary, even called the statement "a milestone change". Perhaps he was even hoping for a new version of the Plaza Accord, an agreement reached by the then G5 in 1985 to drive the dollar lower. Certainly, the currency markets thought something along those lines: since the meeting the dollar has fallen another 5% against the yen, to stand at three-year lows, and has dropped against other currencies as well. None of the noises coming from Capitol Hill suggest that the markets are wrong in this view. This week, Medley Global Advisors, a consultancy run by Richard Medley, a former advisor to George Soros and a man with strong links to administrations past and present, issued a report saying that it was indeed the government's intention to push the dollar lower. And a junior apparatchik in the Treasury claimed that, specifically, it wanted to lower the value of the dollar against the yen (since the Chinese are unlikely to play ball). Thus has the strong-dollar policy long espoused by Robert Rubin, Bill Clinton's treasury secretary, metamorphosed into a weak-dollar policy. Mr Rubin, a former boss of Goldman Sachs, and as safe a pair of hands as could be wished for in troubled times, is said to be spitting blood at the stupidity of such a move... Unfortunately, there is no one of Mr Rubin's calibre close to Mr Bush; no one, indeed, in whom financial markets place much trust at all. Mr Bush has surrounded himself with businessmen such as Mr Snow and the likes of Karl Rove, his chief political advisor and a politician to his bones. Mr Bush wants to get re-elected, whatever the cost. One of the biggest threats to this is the "jobless recovery", which is being linked politically (regardless of any economic arguments to the contrary) with the trade deficit. Politically it plays well to bash foreigners (particularly the Chinese, the new whipping-boys) for "rigging" their currencies. Protectionist noises are becoming louder by the day. Legislation has been introduced in both houses of Congress that would slap hefty tariffs on Chinese imports. Congressmen in both parties are in favour and if anything the administration is egging on such sentiment. Though such rhetoric plays well with voters it has played very badly indeed with financial markets for the simple reason that such measures would undermine growth, not just in Asia and Europe but in America too... It does seem beyond the intellectual capabilities of Bush administration decision makers to recognize that their are constructive and destructive ways of talking down the dollar. The constructive way is to convince foreign investors that U.S. interest rates are going to stay very low for quite a long time to come: that reduces the overvaluation gap between the dollar's current value and its long-run fundamental value, and reduces the chances that that overvaluation will somehow get us into trouble. The destructive way to talk down the dollar is to make foreign investors think that the dollar is a risky investment--that the Treasury is not concerned with preserving the capital of those who buy dollar-denominated bonds. This kind of talking-down the dollar lowers both the current and the long-run fundamental value by roughly equal amounts, and does nothing to diminish the degree of overvaluation. Guess which way the Bush administration chose? It's been nine months since the Bush administration revamped its economic team. Its time for that revamping to produce results in the form of less incompetence in economic policy making--a real deficit reduction program, or an elimination of the mistaken steel tariff, or a revival of the Doha Round. Failing any of those, it will soon be time for some resignations on principled disagreement with Bush administration policies. Posted by DeLong at 08:36 PM