On Fri, 3 Aug 2001, Lawrence wrote:
> 2.) Why do you think they are doing this? Do you think this is their honest
> opinion, how they really feel, or do you feel this release is some kind of
> political play?
I think it's their honest opinion: that the US finally doesn't have to worry about inflation because the economy is weak for the first time in a decade; and that there is presently no other engine of demand on the world stage, which looks scary.
Paul Krugman made a similar argument last week:
NEW YORK TIMES
AUG 01, 2001
Blessed Are the Weak
By PAUL KRUGMAN
T reasury Secretary Paul O'Neill recently gave an interview in which
he dismissed claims that the dollar was overvalued, arguing that
concerns about our trade deficit are based on "trivial and wrong
notions." He also thinks that concepts like gross domestic product are
obsolete. I took his remarks as an indication that the dollar's
inevitable decline will probably come sooner rather than later. And
while that will be embarrassing for Mr. O'Neill, it will be a good
thing for our economy.
Why does Mr. O'Neill's nonchalance suggest that the strong dollar's
days are numbered? Because there is a clear analogy between the
soaring dollar and the recent tech bubble. As Robert Shiller pointed
out in his book "Irrational Exuberance," a gradually rising asset
price acts like a natural Ponzi scheme, in which each new wave of
investors creates capital gains for the previous wave. If this goes on
long enough, it can silence the doubters.
But eventually the process ends -- and you know that the end is nigh
when white-haired executives reject old-fashioned accounting. That
means that the mania has spread to the suits, and that the Ponzi
scheme is about to run out of suckers.
The dollar has been rising against the currencies of other industrial
countries since the middle of the 1990's. This sustained rise has made
dollar bears look foolish, but it has also priced U.S. products out of
world markets. Since 1995 the U.S. current account deficit, the
difference between what we buy from foreigners and what we sell to
them, has quadrupled to an astonishing $450 billion. It goes without
saying that this is the biggest such deficit in world history. More
startling is the fact that at 4.5 percent of G.D.P., the U.S. current
account deficit is a bigger share of our economy than the deficits of
Indonesia or South Korea on the eve of the 1997 Asian financial
crisis.
In the past, deficits this large have always led to a currency plunge.
True, one hears arguments to the effect that the rules have changed,
that this time is different. Those arguments were presumably what Mr.
O'Neill had in mind when he dismissed concerns about the payments
deficit. Alas, it would be easier to take those arguments seriously if
they weren't so similar to the arguments people used to justify the
high dollar of the mid-1980's, just before it started dropping.
More ominously, I heard exactly the same arguments -- especially the
claim that rising productivity justifies a strong currency -- used to
dismiss concerns about Mexico's current account deficit just before
the 1995 peso crisis, and again in Asia two years later.
But would a sharp drop in the dollar be a catastrophe? Probably not.
In fact, if the dollar is going to plunge one of these days, now would
be a pretty good time. I wouldn't have said that a year and a half
ago; but times have changed.
Not long ago a drop in the dollar would have been a clear negative for
the global economy. A weaker dollar, which makes U.S. goods cheaper
compared with the products of other countries, redistributes world
demand toward the U.S. and away from the rest of the world. Back when
the U.S. economy was booming, this would have been shipping coals to
Newcastle; we already had plenty of demand, while other economies were
depressed.
Now, however, the U.S. economy has stumbled, and the strong dollar is
one of the reasons the Fed is having trouble pulling us back from the
brink. So right now a weaker dollar is in America's interests. It
still might create some problems elsewhere -- but on the other hand it
might be just the shock needed to wake the European Central Bank and
the Bank of Japan from their policy slumbers.
Is that a call to action? Should we actively seek to drive the dollar
down? There's a precedent: In 1985 James Baker, who was then secretary
of the Treasury, organized an international effort to tame the
too-strong dollar. It's still debatable whether his efforts made any
difference; possibly the dollar would have fallen in any case. But it
was a political triumph: Mr. Baker managed to take credit for the
dollar's decline. Alas, Mr. O'Neill's ramblings have probably
prevented him from achieving any comparable feat.
But never mind Mr. O'Neill; the great dollar decline is coming, and we
should welcome its arrival.
Copyright 2001 The New York Times Company | Privacy Information __________________________________________________________________________ Michael Pollak................New York City..............mpollak at panix.com