`Devaluation Waltz' with the dollar has partners out of step

BENJAMIN FRANKLIN once said: ``This currency as we manage it is a wonderful machine. It performs its office when we issue it, it pays and clothes troops and provides victuals and ammunition, and when we are obliged to issue a quantity excessive, it pays itself off by depreciation.'' As the chief supplier of monetary reserves to the world, the United States has been reaping once more the benefits of dollar devaluation. Foreigners are seeing their dollar assets lose value.

Central banks around the world probably hold today close to 600 billion in dollars in their reserves. Since mid-October, the dollar has declined on average about 8 percent against major currencies. That means the bulk of those dollar assets have just been trimmed, in value in terms of their own currencies, by the equivalent of tens of billions of dollars.

Not every central banker will be looking at dollar losses. The relationship of the Canadian dollar to the US dollar hasn't changed much in recent months. And many developing countries depreciate their currencies along with the dollar or faster than the dollar.

But West Germany's Bundesbank, the Bank of England, the Bank of Japan, the Bank of France, and many other central banks may be reporting thinner surpluses this year.

Since central bank profits are normally turned over to government treasuries to help balance budgets, the shift will not be welcome abroad. Last year, the German Finance Ministry collected about $4 billion in marks from the Bundesbank. The Bank of Japan turned over about $7 billion in yen to its government.

It is no wonder that foreign central bankers have suggested that the US Treasury again issue some so-called ``Roosa bonds'' denominated in marks or yen or pounds rather than dollars. The US would then take the foreign-exchange risk, rather than foreign central banks, of a further decline in the dollar. Foreigners suggest this would indicate the US is serious about upholding the value of its currency. After all, only last week President Reagan told the American Council of Life Insurance that ``it is not our policy to drive down the dollar.''

The Treasury, however, has so far decided there is little reason for it to assume such a financial risk. So it has not followed in the footsteps of a former Treasury undersecretary, Robert V. Roosa, when the dollar was in trouble about 20 years ago.

Private investors are also hurt by the dollar's weakness.

``They have been beaten and battered and bloodied,'' says Robert A. Brusca, chief economist of Nikko Securities International Inc. in New York, the subsidiary of a major Japanese brokerage house.

At its peak in February 1985, a US dollar was worth about 250 yen. Now it is worth only 135 yen. Japanese investors in dollar assets have had massive losses in some cases. Nonetheless, Mr. Brusca expects these Japanese investors to ``come back for more.'' With Japan enjoying an international payments surplus of $85 billion or so, the Japanese must find some way of investing that money.

``They have no other alternative but to invest in the dollar sector,'' says Brusca. Most capital markets could not absorb such large investment sums.

It remains uncertain, however, how much of their surplus Japanese investors will put into the US - a little, some, a lot. Or will they be so afraid of a further dollar decline that they will take money out of the US? Much depends on how serious they regard the danger of the dollar's plunging further in value on foreign-exchange markets.

Japanese investment flows to the US have already been affected.

According to a securities industry survey in Japan, private Japanese investors last month sold off $1 billion in foreign bonds, down from a positive net purchase of $2 billion in September and a record $12.3 billion in June.

``The sentiment against the dollar is still very negative,'' notes Kevin Pakenham, managing director in London of Foreign & Colonial Management Ltd., a firm that regards itself as the oldest mutual fund management group in the world, now looking after about $3.5 billion of money invested around the world.

It is this aspect of sentiment which has made the negotiations in Washington on measures to reduce the budget deficit significant. Thirty billion dollars in deficit reduction is not large in terms of a $4.4 trillion economy. It will not brake economic activity by much at all.

But foreigners see the budget deal as symbolic of America's willingness to tackle its deficit and in turn help its trade deficit.

With that package done, the Group of Seven finance ministers is expected to quickly pledge to hold the dollar firm once more in its current range - a range considerably lower than when the group last made the same promise in late September in Washington.

Martin Feldstein, former chairman of President Reagan's Council of Economic Advisers, contends the dollar should be allowed to fall another 30 percent over five years to eliminate the $160 billion trade deficit.

Assertions that international economic coordination is central to a healthy international economy in general and to continued US growth in particular are unwarranted, Dr. Feldstein says. Efforts at coordination should be abandoned ``explicitly but amicably.''

``In reality, US economic performance is little affected by economic growth or inflation in Japan, Germany and elsewhere,'' he adds.

Rather, he continues, the Federal Reserve System should reassure financial markets that it will not distort domestic monetary policy to support the dollar.

Brusca says that following Feldstein's recommendations would result in ``a disastrous policy.'' He figures that if foreigners lose confidence in American investments, they will take out their money, forcing down the dollar, causing more inflation in the US, and eventually prompting a recession.

There must be a compromise among the industrial powers on domestic policies in order to stabilize currencies, he maintains. The US needs foreign money to help finance its deficits.

``When you are a net debtor [nation], somebody else calls the tune and we dance,'' he says.

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