What ails the American dollar anyway?
Not a thing, pal. In fact, it looks perkier than you do.
Don’t be a wise guy. Everybody knows the dollar is in the tank, down the tubes, up the creek. Getting clobbered by the Japanese yen and everybody else. Lowest level in history. Speculators treat it like a hot potato. Big black eye for President Clinton. Only higher interest rates will save it. Doom, gloom and ….
Calm down, my friend. If everybody knows the dollar is in trouble, that only means that everybody, as usual, is wrong. Basically, the dollar is OK. It could be stronger, but that wouldn’t do us much good. And there isn’t much that President Clinton can do about it-or should do, for that matter.
I don’t get it. I keep reading in the newspapers,
including yours, that the dollar is at an all-time low against the yen, that this is bad for us and that it all is some sort of thumbs-down on Clinton.
Right, wrong and wrong. Let’s take it step by step.
First, the dollar is truly at a postwar low against the yen, but this is part of a 30-year trend. At one time, it took 400 yen to buy one dollar. As recently as 1985, the rate was 200 yen to the dollar. Now, the rate is 100. That means it takes only half as many yen to buy a dollar as it did in 1985. Put it another way: The Japanese have to work only half as long as they did back then to buy a dollar’s worth of American goods.
So much for the yen. Elsewhere, the picture looks different.
The dollar is down a bit against the German deutsche mark this year, mostly because the German recession is ending. It’s about where it was when Clinton took office. Actually, the dollar was weaker against the deutsche mark when George Bush was president, and no one made a fuss about it.
The French franc is weaker than it was two years ago. Ditto for the Canadian dollar and the Mexican peso-and that’s important, because Canada and Mexico are as important as Japan or Europe when it comes to trade.
For the big picture, look at the “trade-weighted value of the dollar.” That’s an index that shows how the dollar ranks against an average of the currencies of 10 major industrial nations-in other words, how it’s doing against the world. Last week, that value was about 90. Over the years, it’s been as high as 143 and as low as 82. It was 86 when Clinton took office.
What you’re saying is that the dollar doesn’t have a worldwide problem. Instead, there’s only a specific problem with the yen.
Right. There’s a reason for this, but we’ll get to that later.
You still haven’t said whether these figures are good or bad.
It depends. Exchange rates count most as trading weapons. If you’ve got a strong currency, you can buy more of some other nation’s goods. Once we could buy 150 yen worth of Japanese goods for a buck. Now we can only buy 100 yen worth. So if we’re buying, a strong dollar is nice to have.
But if we’re selling, a weak dollar is better. That’s because a weak dollar makes American goods cheaper for foreigners. It’s like one big nationwide sale.
There’s a certain macho kick in a strong dollar. Ronald Reagan once said that “a strong dollar means a strong America.” But in trade, having the strongest currency means having the highest prices. In a competitive world, this makes no sense.
Let’s see if I’ve got this straight. A weak dollar is better for trade than a strong dollar, right? So a weak dollar against the yen must mean that we run a big trade balance with Japan, right? And if the dollar is strong elsewhere, that means we’re running a big deficit with the rest of the world, right? Somehow, I remember reading that this ain’t so.
You remember right. Economic theory says that, if you’re running a trade deficit with another country, your currency will fall-in effect, your prices will fall-until that other country starts buying.
This is what happens in our trade with the Europeans and other major trading partners. Year in and year out, this trade about balances-some years in surplus, some years in deficit. Currency fluctuations generally solve any problem. In other words, economic theory works.
But economic theory doesn’t work in Japan. In 1985, when the dollar brought 200 yen, we ran a trade deficit with Japan of $49.8 billion. Now, with the dollar worth half as much-and American goods theoretically twice as cheap-that deficit is even higher, about $60 billion per year.
That doesn’t make any sense.
It does to American exporters. Japan is the only really protectionist nation among the big industrial countries. It keeps its huge trade surplus with an impenetrable web of government regulations, informal barriers and a closed distribution system.
This is why our trade deficit with Japan goes up while the dollar goes down. Cheap prices do no good if your goods never make it into the store.
The Clinton administration is trying to batter the Japanese government into opening its market to imports. This hasn’t worked very well, partially because Japanese politics are in such disarray that they can’t focus on the problem. Japan has had four governments in the past year and the present one is the weakest of the lot.
Well, at least that should help the dollar. Presumably, a currency reflects its government’s reputation. If the Japanese government is that bad, that should lower confidence in the yen and bring it down like a bungee jumper, right?
You’d think so, but you’d be wrong. Again, let’s take this step by step.
One of the dollar’s problems is that there are so many of them out there. With U.S. stock markets slipping, American investors have put about $75 billion into foreign stocks in the first half of the year.
The law of supply and demand says that, if there’s too much of something, its price goes down. There are too many dollars, and their value is falling.
And then there’s Japan. A $60 billion per year trade deficit with the Japanese means that we buy $60 billion more there than they buy here. This, in turn, means the Japanese get 60 billion surplus greenbacks every year.
In the 1980s the Japanese used these surplus dollars to buy a little American real estate, like California and Manhattan. They got stung, big. They bought high and, when prices fell, they took a $320 billion bath.
They won’t do that again. So they’re sitting on $60 billion they don’t want to spend in the U.S. Instead, they invest it in Japan, which means they have to use the dollars to buy yen. Result: oversupply of dollars and big demand for yen, sending the dollar down and the yen up.
There’s a lingering hope the Japanese government will reform its trade practices, so we can sell there and bring this deficit down. But the current government is too weak to make any reforms like that. Therefore, the trade deficit will stay high, keeping the dollar in surplus and making the yen even stronger. In other words, a weak Japanese government translates into a strong Japanese currency.
Well, if you say so. But the U.S. has the world’s strongest economy just now. If our economy is so strong, why isn’t the dollar superstrong? In the long run, this only makes common sense.
My friend, the long run and common sense cut no ice on international money markets. Currency trading is a high-tension, fast-burnout business, and it attracts only traders who can stand the pace. These traders are post-pubescent cowboys with the reflexes of a third baseman and a long-range view of about 15 minutes. They get rich not by analyzing a government’s economic policy but by outguessing what other traders in London, New York and Tokyo are going to do next.
Does all this really make any difference?
Yes, some. Vacations in Japan are ruinously expensive. Buying goods made in Japan also costs more, although Japanese companies will cut export prices to the bone, even taking losses, to avoid losing overseas markets. They can do this by charging inflated prices at home, knowing they won’t be undercut by cheaper imports.
The main problem is perception-not inflation so much as the fear of inflation, not a weak dollar itself but a mob mentality among traders that leads to more selling of the dollar, driving it down further. These perceptions put on pressure to raise interest rates, which would shore up the dollar by luring foreign money to American securities, but could slow the economy. This is why Clinton would prefer a stronger dollar.
What should they do about it?
Probably nothing. The dollar is not that weak except against the yen and, as we saw, that’s a Japanese problem, not an American one. More interest rate increases this year could choke off the recovery.
So the government and the Federal Reserve have a choice. A stronger dollar would be nice, but the price we’d pay to get it is probably too high, especially since it will come back up on its own sooner or later.
In short, benign neglect. If we’ve got the nerves for it, that’s about the best we can do.
