It was a post-election firework display
for Republicans waking up that Wednesday morning. Stock composites
across the globe were sparkling — the flares visible from
Wall Street to Tokyo. Here at home, the Dow Industrials and the
S&P 500 rallied, with listings rising at close to 3-to-1
margins on the NASDAQ and New York Stock Exchange. Out east, the
Nikkei jumped a point, and the London Stock Exchange closed at a
two-and-a-half year high.
- Sam Singer
The financial festivities came in anticipation of four more
years of pro-market leadership from Washington — another term
rife with economic stimulus packages, privatization programs and
with any luck, tax cuts — lots of tax cuts. Indeed, with
almost 18 consecutive months of the last two years consumed by
vigorous growth and employment recuperation, President Bush’s
reputation as a market-motivator seems to have preceded him. But as
the election-time smoke clears, economists are concerned that the
two-year-long, low-interest, high-spending joyride American
consumers have relished may have come with a hefty price tag
— the stability of the dollar.
This past week the price of the dollar sank to $1.30 against the
euro, a gold-medal trading low for our tumbling tender. Hardly news
to currency traders, the dollar’s recent decline places it
towards the bottom of a three-year-long foreign exchange slide. Yet
while staggering, it isn’t the expansive scope of the
buck’s plunge that troubles economists. More chilling is that
without the financial sustenance of a few central banks in Asia,
the drop would have been a lot worse.
The U.S. current account deficit has surpassed the $500 billion
mark, and foreign markets are being flooded with slowly
depreciating U.S. currency. In the month of September alone, the
United States imported $51.6 billion more goods and services than
it exported. Despite the currency’s low altitude, The
Economist contends that if left to pure market forces, these
record-breaking trade imbalances would bring the dollar’s
asking price even lower. The proof, it argues, is in the numbers.
Since 2001, the greenback has seen a 30 percent dive against the
euro, but only a 14 percent fall in general trade-weighted terms
throughout the same period.
The extra support has come from the coffers of Asia’s
central banks — the same financial institutions dollar
optimists have leaned on to make their case for the monetary status
quo. According to this camp, the U.S. economy can passively finance
its current account deficit by simply waiting for capital to arrive
from Asia. The conventional supposition among these idealists: In
order to keep exports competitive, budding Asian economies will
seek to hold their currencies down by amassing large reserves of
U.S. dollars. Thus, as long as the spirit of competitiveness
subsists in Asia’s export markets, there will be sustained
demand for the dollar, and the U.S. can continue down the path of
least resistance — right? Wrong.
The economies of South and East Asia are not the frail,
post-traumatic stress, currency-peggers they were in the late
’90s. As their markets have grown more robust, treasury
departments throughout the continent have come to terms with the
many hazards of dollar-dependence. Most profoundly, by accumulating
more than $1 trillion in U.S. currency reserves since 2001 (the
equivalent of almost two-thirds of the U.S. trade deficit over that
period), Asian banks have created a precarious, self-fulfilling
prophecy — the more capital they withdraw, the weaker their
remaining investment becomes. Left with an unsustainable currency
strategy and a waning buck, the banks are left with two choices:
weather the storm or jump ship.
Although the cyclical custom of refinancing the strength of the
ailing U.S. dollar will seem tempting, currency speculators are
slowly beginning to understand the concept of prolonging the
inevitable. Riding out a currency squall only makes sense when
there is land on the horizon. Although there is no definitive
timetable for an Asian banking exodus, intensified growing pains
within these rapidly maturing economies are likely to discourage
short-term capital outlays. Take China, where fears of a hard
landing have triggered the country’s first interest rate hike
in nine years, or Japan, where warnings of inflation, once solely
confined to the contents of economic mythology, have resurfaced in
consumer price indexes.
While growth surges are always fun for the whole family, the
Bush Administration cannot continue to fuel them at the expense of
the U.S. currency. If the dollar nosedives, the steep short-term
rate increase that will likely result would be enough to wipe out
the economic progress of Bush’s first term and then some.
Higher borrowing costs would prompt an increase in savings, and the
dramatic slowdown in consumer spending would herald the return of
the post-Sept. 11 economic lethargy that got us here in the first
place.
Singer can be reached at
“mailto:singers@umich.edu”>singers@umich.edu