BEING STREET SMART November 26/04
by Sy Harding
November 19/04
FOREIGN AFFAIRS!
The U.S. economy increasingly needs the cooperation of foreign countries.
We almost desperately need foreign consumers to fall back in love with
U.S. products. But they seem to be acting toward U.S. products as U.S.
consumers acted toward French wines after France declined to back the
U.S. on Iraq.
The U.S. trade deficit with the rest of the world continues to set records,
with U.S. consumers gobbling up imported products at a feverish pace,
while the products of U.S. corporations are increasingly spurned by consumers
in foreign countries. That in spite of the U.S. dollar having been in
a serious decline against most of the world’s other major currencies
for more than three years, making U.S. goods considerably cheaper for
foreign consumers.
Meanwhile, foreign countries increasingly stew about the plunge in the
dollar’s value against their currencies, since the weak dollar makes
foreign products more expensive for U.S. consumers, and U.S. products
less expensive for their consumers. Their complaint is that by allowing
the dollar to plunge so precipitously the U.S. is trying to help its own
economy recover at the expense of the struggling economies of Europe and
Asia. The U.S. Dollar Index has now declined 31% against a basket of international
currencies.
Washington is wedged between the proverbial rock and a hard place. Not
wanting to create a panic bail-out of dollar-denominated assets, the Administration
officially claims it has a strong dollar policy, while quietly doing nothing
about the situation, allowing the dollar to plunge. In reality it has
no choice. The U.S. economy is still in recovery mode from the 2001 recession,
with its sustainability in question, and since U.S. consumers already
spend more than they earn, the best hope for the economy is to increase
U.S. exports.
One way to do that is to create a cheaper dollar. But after more than
three years of a plunging dollar, the trade gap continues to grow, and
economists are worried the situation may get worse before it gets better.
A poll of consumers in Europe last spring showed that while 75% disliked
the policies of the U.S. Government, 75% still liked the American people.
After the U.S. election, a similar poll shows that 75% still don’t
like the U.S. government, but now 75% also don’t like the American
people.
In addition to allowing the dollar to decline, the U.S. has been trying
to reverse the situation by imposing sanctions and duties on foreign imports.
But those strong-arm efforts seem to only create a backlash, the most
recent example being Friday’s announcement that the World Trade
Organization has approved sanctions against a number of U.S. exports in
retaliation.
The trade deficit, currently running at $50 billion monthly, not only
takes sales away from U.S. companies, costing too many U.S. workers their
jobs, but also creates what is known as a current account deficit. The
$50 billion that flows out of the U.S. every month has to be offset or
financed by selling stocks, U.S. bonds, or IOUs, to foreigners.
But as the dollar declines, a situation that eventually might still help
the trade gap, it creates another worry, that foreigners will be less
willing to buy or hold dollar denominated assets while they watch the
dollar continue to decline in value. It’s extremely important since
more than half of all outstanding U.S. debt in the form of bonds is now
owned by foreign governments and foreign investors, and the U.S. needs
them to continue buying and holding still more U.S. debt each month to
finance the monthly trade gap. Should they stop buying U.S. bonds, or
worse, start selling the vast holdings they have accumulated, the decline
in the dollar may begin to feed on itself. U.S. bonds have now been down
for five weeks in a row on those fears. Alan Greenspan was quiet about
the situation prior to the election, but spooked the markets the following
week when he said that at some point foreign investors will have “a
diminished appetite for dollar-denominated assets”.
The European Central Bank describes the dollar’s decline, and therefore
the rise in the value of the Euro as “brutal” and “unwelcome”.
The dollar’s decline against the Japanese Yen has prompted rumors
that Japanese monetary authorities are contemplating intervention in international
currency markets to prevent a further decline in the dollar against the
Yen, regardless of the negative impact that might have on U.S. exports.
Meanwhile, China pegs the value of its Yuan to the dollar. That causes
Europe and Japan to bear the brunt of the dollar’s decline, hurting
their exports and restraining their already-weak economies. For several
years the U.S. has been putting pressure on China to allow its currency
to float against the dollar, as do the Euro and the Yen. That would cause
the Chinese Yuan to also rise against the dollar, so that China’s
economy would bear some of the negatives of the falling dollar, and alleviate
some of the problems the falling dollar creates for Europe and Japan.
But so far China has adopted a policy similar to that of Washington’s
toward the dollar. Just as Washington tries to assure other countries
that it has a strong dollar policy but allows the dollar to decline, so
China talks of wanting its Yuan to float against the dollar, but does
nothing to make it happen.
The whole situation is just another sign of how it has increasingly become
one-world economically, if not politically, and how dependent even the
powerful U.S. is on cooperative international relationships.
Sy Harding is president of Asset Management Research Corp., publisher
of The Street Smart Report Online at
www.streetsmartreport.com and author of 1999’s Riding The Bear
– How To Prosper In the Coming Bear Market.