[Mb-civic] NYTimes.com Article: Op-Ed Contributor: When Weakness Is a Strength

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Op-Ed Contributor: When Weakness Is a Strength

November 26, 2004
 By STEPHEN S. ROACH 



 

Suddenly all eyes are on a weakening dollar. In recent
days, the American currency has fallen against the euro,
the yen and most other currencies around the world. The
renminbi is a notable exception; China has kept its
currency firmly pegged to the dollar for a decade. 

The fall of the dollar is not a surprise. It is the logical
outgrowth of an unbalanced world economy, and America's
gaping current account deficit - the difference between
foreign trade and investment in the United States and
American trade and investment abroad - is just the most
visible manifestation of these imbalances. The deficit ran
at a record annual rate of $665 billion, or 5.7 percent of
gross domestic product, in the second quarter of 2004. 

While a decline in the dollar is not a cure-all for what
ails the world, it should go a long way toward bringing
about a sorely needed rebalancing. With a weaker dollar,
economic and even political tensions among nations would be
relieved, helping to promote more sustainable growth in the
global economy. 

Still, a debate persists as to the wisdom of allowing the
dollar to decline. The Bush administration seems to have
given its tacit assent, and Alan Greenspan, chairman of the
Federal Reserve, is finally on board. But outside the
United States, where policymakers have long been vocal in
their displeasure over America's deficits, officials are
now objecting to America's cure. Europeans have referred to
the dollar's recent decline as brutal. The Japanese have
threatened to intervene again in foreign exchange markets.
And Chinese officials have argued that global imbalances
are "made in America." 

In this blame game, it's always the other guy. Yet global
imbalances are a shared responsibility. America is guilty
of excess consumption, whereas the rest of the world
suffers from insufficient consumption. Consumer demand in
the United States grew at an average of 3.9 percent (in
real terms) from 1995 to 2003, nearly double the 2.2
percent average elsewhere in the industrial world. 

Meanwhile, Americans fail to save enough - whereas the rest
of the world saves too much. American consumers have
borrowed against the future by squandering their savings.
The personal savings rate was just 0.2 percent of
disposable personal income in September - down from 7.7
percent as recently as 1992. Moreover, large federal budget
deficits mean the government's savings rate is negative. 

Lacking in domestic savings, the United States must import
foreign savings to finance the growth of its economy. And
it runs huge current-account and trade deficits to attract
such capital from overseas. 

America's consumption binge has its mirror image in excess
savings elsewhere in the world - especially in Asia and
Europe. For now, America draws freely on this reservoir,
absorbing about 80 percent of the world's surplus savings.
Just as the United States has moved production and labor
offshore in recent years, it is now outsourcing its
savings. 

This is a dangerous arrangement. The day could come when
foreign investors demand better terms for financing
America's spending spree (and savings shortfall). That is
the day the dollar will collapse, interest rates will soar
and the stock market will plunge. In such a crisis, a
United States recession would be a near certainty. And the
rest of an America-centric world would be quick to follow. 

The only way to avoid this unhappy future is for the
world's major central banks to carefully manage a gradual
but significant depreciation of the dollar over the next
several years. America, and the world, would gain in
several ways. 

First, there would be a gradual rise in interest rates in
the United States - compensating foreign investors for
financing the biggest debtor in the world. That would
suppress growth in those sectors of the American economy
that are most sensitive to interest rates, like housing,
consumer durables like cars and appliances, and business
capital spending. The result: a higher domestic savings
rate and a reduced need for foreign capital - a classic
current-account adjustment. 

Second, when the dollar falls, other currencies rise. So
far, the euro has borne a disproportionate share of the
change. That puts increased pressure on Asian nations -
including China - to share in the adjustment by allowing
their currencies to strengthen. Most currencies in Asia are
now rising, but the renminbi has remained conspicuously
unmoved. 

Third, as the currencies of Asia and Europe strengthen,
their exports will become less attractive to American
consumers. This will force Asia and Europe to work to
stimulate domestic demand to compensate - resulting in a
reduction of both excess savings and current-account
surpluses. This is easier said than done, especially since
it may require painful structural reforms, like a loosening
of domestic labor markets, to unshackle internal demand. 

Fourth, a weaker dollar might defuse global trade tensions.
Dollar depreciation will support American exports, and
higher interest rates should slow domestic demand and
reduce imports. That means the United States trade deficit
should narrow - tempering protectionist risks. And with
Asian countries allowing their currencies to fluctuate,
Europe gets some relief and may be less tempted to resort
to protectionist remedies. 

What's certain is that a lopsided world needs to be put
back into balance. The dollar is the world's most widely
used currency, but its fall affects more than just
foreign-exchange rates. A weakening dollar is an
encouraging sign that the world's relative price structure
- essentially the value of one economy versus another - is
becoming more sensible. If the world can manage the
dollar's decline wisely, there is more reason for hope than
despair. 

Stephen S. Roach is chief economist for Morgan Stanley.


http://www.nytimes.com/2004/11/26/opinion/26roach.html?ex=1102491838&ei=1&en=6c81c06c71bdaab6


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