No Bang for Our Cheap Buck

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http://www.nytimes.com/2004/12/15/opinion/15wed1.html?oref=login

December 15, 2004EDITORIAL No Bang for Our Cheap Buck

 

he Bush administration's de facto weak-dollar policy - its preferred " cure " for

the American trade deficit - is not working. Yesterday's trade deficit report

shows that imports outpaced exports by a record $55.5 billion in October. The

huge imbalance was worse than the gloomiest expectations.

 

So far, the administration has been hoping that the weaker dollar will raise the

price of imports, leading American consumers to buy less from abroad, and will

at the same time make our exports cheaper so foreigners will buy more American

goods. That's supposed to shrink the trade deficit and, with it, America's need

to attract nearly $2 billion each day from abroad to balance its books.

 

But the dollar has been declining since February 2002 - it's down by 55 percent

against the euro and 22 percent against the yen - and the trade deficit has

stubbornly refused to shrink along with it. The falling dollar has done nothing

to diminish America's appetite for foreign goods - such imports continue to rise

at a faster rate than exports. According to yesterday's report, imports were

some 50 percent greater than exports in October. Much of October's import growth

was caused by high oil prices, which have since subsided. But that's no reason

to shrug off the disturbing evidence of the weak dollar's failure to fix the

trade gap. The United States is now on track for a trade deficit of more than

$60 billion next June.

 

As the American economy heads for higher global imbalances, the need to borrow

from abroad grows. And the more we borrow, the weaker the dollar becomes. That's

because the markets that set the value of freely traded currencies, like the

dollar and the euro, punish indebted nations by pushing down their currencies.

The United States, by any measure - trade, the federal budget, personal

consumption - is by far the world's biggest debtor. The need to borrow in the

face of an already weak dollar portends higher prices and higher interest rates.

 

How high and how fast? Who knows? But one thing is sure: that American tourists

need to pay $5 for a demitasse in Paris will be the least of our worries if

mortgage rates spike, the stock market falls, and businesses curb their already

modest hiring.

 

A cheaper dollar would not be as threatening if it was part of a comprehensive

strategy to close the trade deficit. For instance, the United States must

demonstrate to our trading partners and the currency markets that it intends to

reduce the federal budget deficit - thereby lessening its need to borrow from

abroad and reducing downward pressure on the dollar. Unless and until it does

so, the United States will lack the credibility and the authority to press for

changes that need to occur in other countries to balance out global trade. There

are alternatives to a single-minded pursuit of a weak dollar fix. What is

lacking is the leadership to pursue them.

 

 

 

 

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" The price of apathy towards public affairs is to be ruled by evil men. " --

Plato