Dollar Pressure Points: Here’s what’s happening

National Review Online ^ | December 01, 2004 | Bruce Bartlett

[Pagey]

bttt

[groanup]

"My contention isn't that Greenspan caused the crash, but he triggered it with his reported statement. After all, I don't believe he'd even taken office yet."

He was indeed in office during the 87 crash. The statement to which you refer was made by Reagan's Sec of Treas at the time which the media loved to blame for the crash.

Zweig's premium hotline service was breathless in it's panic. The references were all to overbought indicators like put/call ratios, investor sentiment etc. There is some prevailing bullishness now but not enough euphoria to cause a sustained crash.

Remember though, that compared to 1974 and 2000 the 1987 crash was just a fire drill.

[dead]

Due you think the trade towers were a target of opportunity or were they a stratigic target. O.K., if it was stratigic, what was it's value.

It was a strategic hit on the financial markets. The primary targets were the financial wizards who worked there.

The other people there were the secondary targets. The buildings themselves were important third targets.

[expat_panama]

 

This article belongs in the comic section.
.
Bartlett seems to be saying that foreigners are about to make us raise our taxes against our will because the dollar is no good because we buy too much from the foreigners and once we get the budget deficit fixed that's as good as the fixing the trade deficit --ya seen one deficit ya seen 'em all! Anyone who thinks Bartlett has it right please explain why it is that ten years ago we had a cheaper dollar (compared to other currencies), a higher deficit and debt (percent gdp), and we were in Clinton's economic paradise.

[Moonman62]

Here is Jude Wanniski's take on what happened. While I don't care too much for his views these days, his opinion should count some because of his connections then.

Gee, Bob, now I learn you have written a book all about how we all have Alan Greenspan to thank for the wonderful shape of the U.S. economy, Maestro: Greenspan’s Fed and the American Boom. While I’m happy to see you did not write a book about how the boom is the result of President Bill Clinton’s 1993 tax increase, I’m surprised you did not call me for my comments on what Greenspan gave the economy and what he subtracted from it. Then again, if you wanted to give Greenspan nothing but credit for being the Maestro of the Universe, it was probably wise of you to leave me out of it, as I think you and I discussed his role in bringing about the Crash of 1987 after only two months as Fed Chairman. In the second installment of your book in the Saturday Washington Post you put together an account of the ‘87 Crash in which Greenspan plays a heroic role by writing a single sentence that said he would supply all the liquidity the banking system needed to stay afloat. If you would have called me, Bob, I would have told you that is all a bunch of malarkey. There was no liquidity problem in the banking system, which is why all the liquidity Greenspan provided simply piled up on the bank ledgers and sat there for a few days until the Fed called it back.

I hate to tell you this, old buddy, but Greenspan actually caused the Crash of ‘87!!! That is correct. I kid you not. He had been Fed chairman only a few months and did not know what he was doing, a bull in a China shop. When he was appointed by President Ronald Reagan, I was the only human being on the planet who openly opposed the nomination, on the grounds that Greenspan thought that inflation was caused by too much economic growth, and that recessions were necessary to bring down prices. I’d engaged him in discussions about this topic three or four years running at the annual conferences hosted by Autranet, a division of Donaldson, Lufkin & Jenrette, hosted by the late Jack Bober. Former President Gerald Ford also was in attendance -- as he had a nearby residence at the conference site, a ski resort at Beaver Creek, Colorado. As I recall, Greenspan was appointed Fed chairman in June or July and was confirmed in early August. The previous February, both Greenspan and George Perry of the Brookings Institution sat shoulder to shoulder at the Beaver Creek conference, agreeing that a recession would be necessary to bring inflation under control.

If you think back, Bob, the 1986 Tax Act the previous year sharply lowered marginal tax rates, but also raised the capital gains tax to 28% from 20% and left capital gains without the protection against inflated gains that indexing would have provided. In February 1987, though, Treasury Secretary Jim Baker III -- the same fellow who is representing George W. Bush in the Florida recount escapades -- signed an agreement with our major trading partners to keep the dollar/D-mark/yen rates stable. It all happened in Paris, so it was called the Louvre Accord. If we were going to keep currencies stable, there would be much less chance for inflation, so it would be no big deal that dollar capital gains were not protected against inflation. In case you don’t know, there is no worse combination than a high capital gains tax and inflation. Even Alan Greenspan would tell you that, if you bothered to ask. That’s because it takes some years for most investments to produce a capital gain, and if the tax rate is 28% on the gain, and most of the gain is nominal or just a monetary inflation of the original investment, the government essentially confiscates the capital. Knowing that’s what happens, investors don’t invest, and in fact sell equities.

Greenspan had only been chairman for a few months when Sylvia Nasar, then of Fortune magazine, asked him for an interview, and Greenspan agreed. (It was the last interview he has given to an individual publication for direct quotes.) In it, the Fed chairman stated his belief that the dollar was overvalued and would have to be devalued at the rate of 2% a year for some years until it got where he wanted it to be. Did he know he was telling Fortune readers that he either did not know about the Louvre Accord or did not care about it? My guess is that he was just as naive as former Texas Senator Lloyd Bentsen was when appointed Treasury Secretary by President Clinton in 1993. Remember when Bentsen said at an open mike that maybe the dollar was overvalued compared to the Japanese yen, and the currency markets shook for two days? A meek Bentsen promised never to do that again. In any case, the Fortune interview began appearing in Wall Street mail boxes at the end of the week before the Monday Crash.

I’m not saying that Jim Baker did not help cause the Crash. I’d met with him the Wednesday of that pre-Crash week, with a message from Robert Mundell, last year’s Nobel Prize winner. Mundell could see the Louvre Accord under attack and advised me to advise Baker to do everything he could to protect the dollar/gold price, including the sale of gold from Fort Knox if necessary. I spent an hour and a half in JBIII’s office with him and his secretary, who took notes, and left thinking I had done my bit. But by Friday, it looked like other folks had gotten to JBIII, arguing that the damned Germans were causing the problem. If you call former Fed Governor Wayne Angell, who is now the chief economist at Bear Stearns, he will confirm that he and I talked that Friday about JBIII’s threats to the Germans and he, Angell, told me: "He is playing with fire."

In the years since, here and there Baker has gotten some of the blame for the Crash, because there was a Sunday NYTimes story by Peter Kilborn, the Times Treasury reporter, citing "Treasury sources" about how the Germans were the bad guys in keeping the dollar/Deutschemark in line -- even though the DM gold price was steady and the dollar gold price on the rise. It has been my contention, though, that when the financial community read that the man in charge of the dollar, the new Fed chairman, talked of the need to devalue the dollar, that was the only match needed to light the Treasury fire.

See what I mean? All that baloney about how the wisdom of Alan Greenspan saved western civilization has gotten further entrenched because of your book. History, though, will show that it was Greenspan who made the mess to begin with. He and JBIII dynamited the Louvre Accord and thus signaled the markets that the dollar would remain volatile, putting capital and capital gains at serious risk. Before you write your next book, please give me a call.

[groanup]

What a great interview.

This is what we human investors do after a financial meltdown: We point fingers at everybody who has some sort of position of power or prominence. It's never our fault for bidding up the price of securities to astronomically unjustifiable levels. Look at what happened after the tech bubble. We started marching into analysts offices and handcuffing them, we made the big investment banks pay huge fines. It was all their fault. Never mind that WE were valuing companies at billions of dollars even though they had no earnings. Do you realize some companies were valued at the next 100 years of earnings?

Sure some catalyst set off the 1987 crash. The dollar? Interest rates? Greenspan? Baker? Who knows. I was sitting on a trading desk that day. No one saw it coming. But after it was over EVERYONE knew what had caused it. LOL! If it hadn't happened on Oct. 19, 1987 it could have happened on Oct. 19, 1988. Truth be told, bubbles and crashes are as inevitable as the rotation of the earth. About twenty or thirty years from now there will be another spike in equities because of something or other and everyone will be saying it's different this time and there will be proof that it is. There will be some new fangled brilliant "something" that has changed the investment world and you'd better get on.

And by all means you should get on. You'll make a lot of money during the bubble which could last for years. Problem is, you won't see the fall.

"It's not how much you make it's how much you keep." Martin Zweig.

[Capitalism2003]

The root of the problem is not a trade or budget deficit...It is the lack of a GOLD STANDARD. Politicians can not be held accountable when they can print endless amounts of money.

[Moonman62]

Truth be told, bubbles and crashes are as inevitable as the rotation of the earth.

Yep, and that's because manipulative government policies are inevitable. Sure the stock market was vulnerable in 1987 and 2000, but remember that the markets operate within an environment set by the government. It'd be real interesting to see what the stock market would if the government tried to achieve stable prices and full employment and leave everything else alone like it's supposed to do. At the very least it could stop blaming economic growth for inflation.

[Moonman62]

Bartlett seems to be saying that foreigners are about to make us raise our taxes against our will because the dollar is no good because we buy too much from the foreigners and once we get the budget deficit fixed that's as good as the fixing the trade deficit --ya seen one deficit ya seen 'em all!

What Bartlett is warning us against is a financial crisis brought on by a rapidly falling dollar. The government deficit is a major factor in that risk. Greenspan said the same thing in his November 19th speech.

Anyone who thinks Bartlett has it right please explain why it is that ten years ago we had a cheaper dollar (compared to other currencies), a higher deficit and debt (percent gdp), and we were in Clinton's economic paradise.

I guess you missed the Republican Revolution in 1994 brought on by Clinton's horrible economic policies his first two years in office. He changed his ways in 1995 and did his best to get along with the Republicans on economic policy. Government growth was restrained and the deficit shrunk to nothing. Something I wish the current administration would do rather than destabilizing our currency.

[Texas Songwriter]

Hey Moonman, I agree with your inference that the freefall in the dollar should stop. But please tell me what tools exist at the Presidents pleasure to stop this. You approach the answer when you observe that Greenspan is raising interest rates. Yes, but a 25 basis point increments. Excuse my French, but this is like pissin the ocean. If he was committed to stop the freefall he would reach to 400 or more basis points. That of course would stop the freefall, but unfortunantly the economy also. These problems were created with Greeenspans easy money policies, and now we are in this conundrum. Part of the answer is as you say, cut spending. Tell me the political leadership that exists as of now who will step forward and make such a proposal, either right or left. No one exists to do it. So that is not going to happen. They will not raise taxes overtly, but they will raise taxes with the historical sabre that is always pulled out..inflation. This is the hidden tax on every dollar that exists. And it is the only tool the policy maker have the balls to use, because no one will point the finger of delegated blame because the whole damn government has foistered this over on the American public. All of the ad hominem attacks on this thread will not avert the tidal wave of debt that is roaring like a tsumami at a slumbering population. As it exists now, it is neither right nor left as an ideology, any more than a smallpox plague can be blamed on the dems or republicans. It is a whole "nuther" story as to how we arrived at where we are, but here we sit. Look at the USDX just the past 3-4 weeks. There is a moderate support line at 81.5. Once this is breached for several days, it is nonstop to 71. That ought to make the naysayers feel warm and fuzzy about their childrens future. Just watch it blow past the little resistance of 71 and it will not, and cannot be stopped until 51. It will take on a life and velocity of its own. Neither President Bush, nor Greenspan will have the tools nor the inclination to stop it. Who then? The Janenese, the Chinese? Those who think debt is good and a dollar in extremis is a good thing, better do some more reading on the subject. Your future, and that of your family is being mortgaged and that debt will be paid. ALL DEBT IS PAID. No exceptions until you move to totalitarianism. Then it is paid in mysery, blood, violence, and massive shifts of wealth away from the middleclass to those who saw it coming. Yes, yes I know.. the sky is falling. Keep your mantra and keep repeating it. It should make you feel good about yourself when this bloodletting is extinguished.

[groanup]

Have another drink and stick to songwriting.

[groanup]

" Yep, and that's because manipulative government policies are inevitable."

I respectfully disagree that it's all the government't fault. These bubble are centuries old and have existed in every form of government over the years. Even in very limited government which existed at the beginning of this republic.

[Moonman62]

It's just 90% the government's fault. The government would love for us to blame it all on business cycles, bubbles, and Martha Stewart. I'm going to continue to blame the government where it's due.

As to the olden days, do you really think our financial system was as robust, informed, and adaptable as it is today?

[expat_panama]

Bartlett is warning us against is a financial crisis brought on by a rapidly falling dollar...   ...I guess you missed the Republican Revolution in 1994 brought on by Clinton's horrible economic policies.

Let's get serious. 

If the 1994 Republicans had any affect then they made the dollar fall further from 87 to an all time low of 79 in 1995.   Right now the dollar is trading at 92.   If we say a trading level of 92 is a crisis, then we have to call Gingrich's all time low a disaster.  That wasn't and this isn't.

Likewise with the "government" deficit.   Please bear in mind (all sarcasm aside) that a budget deficit and a current account deficit are two different things.   At times in the past we've had one shrink while the other grew and vise versa.   The present budget deficit 'crisis' is bogus -- unless we decide that Gingirch gave us a worse one.

[JeffersonRepublic.com]

It’s time for the dollar to come down. It will benefit many sectors in our economy. The biggest danger would come from a dollar increasing out of control. This would cause unbearable pressure on the manufacturing sector in America. Hopefully the declining dollar will pump life into American exports and slow the imports.

The countries that are worried about the dollar are the same countries that rely on us to buy their products, and undercut American industry.

[steve86]

Well, you seem to have thought it through, although the points are still debatable.

My problem is with the Pollyanna's who cheer lead it up OR down, as though our economy is invincible and can only get stronger.

[JeffersonRepublic.com]

“Bruce Bartlett is one of the smartest economic oberservers out there.”

The smartest economic observers would have to be John Maynard Keynes and Milton Friedman. Bruce Bartlett is a political hack.


Keynes argued that a slump was not a long-run phenomenon that we should all get depressed about and leave the markets to sort out. A slump was simply a short-run problem stemming from a lack of demand. If the private sector was not prepared to spend to boost demand, the government should instead. It could do this by running a budget deficit. When times were good again and the private sector was spending again, the government could trim its spending and pay off the debts they accumulated in the slump. The idea, according to Keynes, should be to balance your budget in the medium term, but not in the short run.

The US wants to see its currency weaken to ease its current account deficit which has been a factor behind the dollar's recent decline. Plus, it’s easier to fund the deficit if the dollar loses value.

Holtz
JeffersonRepublic.com

[groanup]

"I'm going to continue to blame the government where it's due."

Then I must ask you to give me an example of where the government was 90% of the reason for a market crash. I'll give you only one: the 30's recession when the Fed drained reserves instead of providing liquidity. But that was after the fact, after the crash.

[groanup]

"If the private sector was not prepared to spend to boost demand, the government should instead. It could do this by running a budget deficit."

So when times are bad the government should drain resources from the economy by issuing debt. Um Hum. Give that some thought, would you? You do know that the latter 20th century crises were handled by the Fed pouring reserves into the banking system. Not by the government issuing debt to drain financial assets away from the private sector. That is a recipe for disaster. Keynes had the unfortunate attitude that government could stimulate the economy by government spending. If that had any effect at all it was short term. Government deficit spending doesn't create any wealth or permanent jobs.

[Moonman62]

Everyone knows the 1930's economy was due to the 1929 bubble and all the "false" prosperty that went before it. FDR said so.

As to crashes look no farther back than Greenspan's rate hikes of 1999 and 2000. And before blaming all those crazy market players, please tell me you know what the Special Liquidity Facility was and how it affected the market. The stock market should never be attacked with monetary policy. The results were a disaster in 1929, 1999 in the US, and 1990 in Japan.