Posted on 11/28/2004 4:30:08 AM PST by risk
America’s privilege, the world’s worry
Nov 10th 2004
From The Economist Global Agenda
The dollar plumbed new depths against the euro this week. The greenback’s fall has unnerved European policymakers. But it is their Asian counterparts who have most reason to worry
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CHARLES DE GAULLE, founder of France’s fifth republic, famously resented America’s paramount position in the global economy of the 1960s. The United States, he complained, enjoyed an “exorbitant privilege”. Because its currency, the dollar, served as the world’s reserve asset, America could live beyond its means, unconstrained by the periodic shortages of foreign exchange that haunted other, less privileged nations. Nicolas Sarkozy, France’s spirited finance minister, wants to inherit de Gaulle’s mantle as president of the fifth republic. Though somewhat smaller in stature than the great general, both physically and politically, Mr Sarkozy seems to share his outsized resentment of America’s economic privileges.
Mr Sarkozy has more to envy than de Gaulle ever had. Today’s America lives beyond its means more flagrantly than ever before. Its government will spend about $427 billion more than it raises in taxes this year. The nation as a whole is running a deficit of $571.9 billion on its current account with the rest of the world. These twin deficits, Mr Sarkozy points out, weigh heavily on the dollar. The currency’s fall, interrupted in February, has resumed. On Monday November 8th, it plumbed a new low against the euro of close to $1.30. Only if America restrains its deficits will the markets regain confidence in the dollar, Mr Sarkozy warned. “This is a unanimous message from the Europeans and the International Monetary Fund that we send to the United States.” On Wednesday, the dollar dipped again, this time breaching the $1.30-per-euro mark.
Mr Sarkozy no doubt fears that his American counterparts are quite happy to watch the dollar fall. Their professed commitment to a “strong dollar policy” might disguise a policy of benign neglect. America’s net overseas liabilities amounted to 23% of GDP at the end of last year, close to the record debts it amassed in 1894, according to Ken Rogoff and Maurice Obstfeld of the National Bureau of Economic Research. Crucially, the bulk of these debts are denominated in dollars. Thus America may be sorely tempted to dishonour its dollar debts, not by defaulting on them, but by devaluing them.
The immediate casualties of such a policy would be America’s East Asian creditors. By the end of last year, Asian central banks held $1.89 trillion of foreign reserves, the vast bulk of them in dollars. If these reserves lost value, Asian economies would suffer an almighty capital loss in domestic-currency terms. A recent study by the New York Federal Reserve counted the costs. If the Chinese yuan were to appreciate by 10% against the dollar (and other reserve currencies), China would suffer a capital loss worth almost 3% of GDP, the study found. If the won rose by 10%, South Korea would suffer similarly. The toll would be even greater in Singapore (10% of GDP) and Taiwan (8%).
To avert such an appreciation, Asian central banks would have to amass ever greater holdings of dollars. But this would only expose them to greater capital losses down the road. Alternatively, they might seek to avoid the consequences of a dollar fall, by diversifying into other reserve currencies, such as the euro. But that would only bring the dollar crashing down all the more quickly. In other words, Asian central banks are caught in an awkward dilemma: either they try to break the dollar’s fall, or they try to escape from underneath its collapse.
Despite this dilemma, Asia’s central bankers created less of a fuss on Monday than Europe’s did. Jean-Claude Trichet, president of the European Central Bank (ECB), described the dollar’s fall against the euro as unwelcome and “brutal”, repeating the melodramatic language he adopted in January. But why all the worry? In some ways, the stronger euro will do Mr Trichet’s job for him. It will contain euro-area inflation, which has remained stubbornly above the ECB’s ceiling of 2%. It will offset the higher dollar price of oil—last month’s worry du jour. And if the euros in their pockets gain in value, European households might be more willing to spend them, overcoming the caution that has held the European recovery back for much of this year.
It is true that the dollar has never been weaker against Europe’s single currency since its birth in 1999. But as recently as 1997 it was weaker against a basket of the 12 currencies out of which the euro was fashioned. Back then, no one described the dollar’s movements as brutal. Indeed, at times it seems that European resentment of America’s privileges is a little exorbitant.
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| Copyright © 2004 The Economist Newspaper and The Economist Group. All rights reserved. |
Our government's solution to Social Security.... if you owe money.... make the value of the money less. Problem solved.
France's Nicolas Sarkozy and a "falling dollar" ping.
Does anyone want to argue further that part of the reason for the Euro strength against the US Dollar is resent towards American power and GW Bush?
I have posted this before, I'll post it again. European friends of mine wanted me to do business with them after Bush lost and Kerry won, claiming the slide of the US Dollar would lessen once we "threw out Bush from office."
But, they are only cutting their own throats with this arrogance. The debt of EU nations like Italy and Greece is worst by percentage than any US debt. The German economy is anemic for the 3rd straight year.
And your solution ...
You believe the dollar's slide is due to Europeans disliking W? If so, then you're way off on that one.
Tell me why not. Really.
Remember, it was initially issued at a value of $1.20, not far from where it is now.
George Sorros and his buddies could account for the long term difference all by themselves if anybody wanted to find a real reason for it. Or, we could blame it on the SUV's that decide to leap across the median strip and flip upside down, or maybe the guns that pull their own triggers.
Because -- at least I believe -- the financial markets are machines. They don't care about personality and only care about politics as far as it concerns economic policy. You could have a one-eyed, drunken, sword-waving dwarf in a diaper in the White House and as long as he (somehow) made good economic policy, the markets would respond favorably. Right now (again I believe) the machine of the financial markets looks at the U.S. and sees a massive amount of public debt, gigantic trade deficits and consumers in hock up to their eyeballs living in over-valued homes. And that's the cause for concern.
If you blame Soros (is he even still active in the markets?) then you also have to blame Warren Buffett. The most machine-like of all investors, he was going around a year ago talking about how the dollar was in for some hard times and that he was investing in Euros and other currencies.
I can't speak to the nuances of currency markets, but if the dollar was weaker during Clinton's term (as indicated here), then personality has nothing to do with it. After all, Monica Lewinsky was the personification of European attitudes toward Clinton.
I am sorry, but I don't agree that even economic policy is that ideologically pure. European political views cloud their judgment on morality, immigration, foreign policy, and social issues. But, we are asked to believe that the pillar of economic idealism is clear headed and sober. Sorry, I don't accept that.
When I lived in Europe during the transition to the Euro, there was much vaunted talk about how "our currency" would eclipse the "hated US dollar" in the world. I was doubtful the Euro would actually be adopted really. The news was filled with articles that the Deutsch-mark would be preserved in some fashion or another.
But it happened, and ever since, the Euro has paralleled the ambitions of some European nations to band together and throw out American dominance.
The irony is that a weak dollar actually hurts many Europeans. The layoffs in Germany continue. The strikes in France increase. The debt of Italy gets worse.
What I believe will be a result of all this is a catalyst towards a single world currency. I used to believe this would never happen. But the Asian markets are going to push for it now. Again, I never thought the Euro would happen, but it did.
For the record, China has zoomed by Italy as the 6th largest economy. That's why they were invited as a "guest" to the G7 meet a couple months ago.
Also, having known more than a few currency traders, I can pretty much say that whatever personal views they may hold (and I doubt they hold any) their main interest is making money by placing substantial long and short term bets. I used to think this was appalling, that the quality of people's lives hung in the balance in such a Vegas atmosphere. But that's the way the world works.
I like the idea of a weak dollar. Japan rose from the rubble to become an economic superpower on the basis of a weak yen. Only when the yen became strong did their economic machine falter. Lately China has done the same thing and has enjoyed growth rates of nearly 10%/year for 2 decades now. Now, we're obviously not a third world nation that can sustain that kind of growth, but a weak dollar should make our products much more competitive and that should help our economy so long as we don't get mired in inflation.
A great truism and a fact. But it is a red herring to the discussion of the Euro vs. the Dollar. Yes--we have a world economy, and Asian markets effect it, but this discussion centers around transatlantic economic policy.
Also, having known more than a few currency traders, I can pretty much say that whatever personal views they may hold (and I doubt they hold any) their main interest is making money by placing substantial long and short term bets.
Those are individual traders you are speaking of. I am referring to European Governments and the European Monetary Union (EMU).
Okay, I got you now. Do I believe governments would try to manipulate policy via American debt? For instance, what if China (second largest buyer of debt after Japan, but ahead of Great Britain) decided to put the screws to us? Would they do that for political reasons? Yeah, I'd have to say, maybe.
Well, yes, hang Warren Buffet too.
I traveled to Europe during 1999. As I recall the exchange rate for pounds was about $1.25 per pound.
The German mark was close to the same.
Not a whole lot of difference from now.
What am I missing here?
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