The dollar needs a comedown, not stability

For two months now the United States and its four leading allies have been intervening successfully in the foreign-exchange markets. Is the world at long last moving away from the anarchy of free floating exchange rates? Is it moving back toward the exchange-rate stability of the gold standard and the Bretton Woods era of 1945-1971?

Don't believe it.

It is true that Rep. Jack Kemp (R) of New York and Sen. Bill Bradley (D) of New Jersey were hosts of a recent Washington conference of several hundred international experts. Person after person rose to speak for three to five minutes, with most endorsing some kind of a move back toward greater stabilization of exchange rates.

But it is also true that this Washington get-together was a non-event. Few newspapers found anything novel to report about it. The news weeklies were hard pressed to discover either a story line or some portents for future financial policy.

Treasury Secretary James Baker decided he had better attend to contain the possible harm. He could have saved himself the trip.

West German officials made clear, on the floor and in the corridors, that they are quite content with how their economy is moving. No new crusading spirit can be expected from that quarter.

The Japanese have been the key players in the post-September campaign to beat down the dollar relative to the yen. Official Washington has been pleased with the result. More important than the few billion dollars of official interventions has been the behind-the-scene suasions of the Japanese authorities, warning banks, insurance companies, and pension investors that they may well risk grave losses if they persist in buying dollar assets.

Should we regret the failure of all initiatives to restore exchange-rate stability? I, and a bare majority of international specialists, say, ``No.''

What ails the dollar is not its month-to-month or year-to-year variability. As far as United States manufacturing competitiveness is concerned, what is needed is dollar depreciation, not dollar stability.

St. Augustine prayed to be delivered from temptation -- ``but not yet!'' Those same supply-siders who landed America in its present structural fiscal deficit want permanent pegging of the US dollar -- but not at its current overvaluation.

Only the naive can believe that the Group of Five has the powers, if only it will bestir itself, to reset the currency clock at its once and forever position. After that, as in Newton's image of the watchmaker creator who starts off the planets in the solar system, the ensemble is supposed to run forever on automatic pilot.

The dream is flawed at every essential phase. President Reagan, Prime Minister Nakasone, King Canute, and Humpty Dumpty cannot together or separately engineer a yen-dollar parity that will balance out the US current account.

If President Kemp were fortunate enough to start off in 1989 with fixed exchange rates, long before his second term is finished the house of cards will have tumbled down.

Why? Because the Congress and the Federal Reserve -- to say nothing of the Kemp (or Bradley) White House -- will never subordinate the inflation and unemployment goals of the American people to some Laffer-Mundell ideology of exchange-rate stability. Nor at this state of the world should they.

What then are the realities for 1986?

The autumn pickup in US growth precludes much more Federal Reserve activism to bring down our interest rates.

Since its February 1985 peak, the dollar has declined more than 15 percent. Only after delays measured in years will the curative effects of this devaluation be felt in our manufacturing industries. For 1986 and '87 our international ink will still be the red.

So long as the world is awash in grain and oil, the outlook for inflation will be moderate enough to permit the leading nations to keep the world recovery going. It is no mean achievement to prolong the international expansion for several years.

The last decade in which recessions were held pretty much at bay was the 1960s. The Vietnam war brought to an end the long Kennedy-Johnson summer.

With a minimum of skill, world leaders can hope to stretch out the economic advance until late in the decade or beyond.

Dogmatic crusades to resurrect a pseudo-gold standard will only jeopardize the good fight.

Dr. Samuelson, institute professor emeritus of economics at the Massachusetts Institute of Technology, won the Alfred Nobel Memorial Prize in Economics in 1970. He has often served as an economic adviser to Democratic presidents and presidential candidates.

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