Countries want to steer interest rates, but can't find a driver
Imagine seven people fighting for control of a car. One pushes the gas pedal, another hits the brakes. One swerves right, another yanks the wheel to the left. The last three shriek. That's what the world economy has been like the past three years. The dollar rises steadily, then plunges as the yen and deutsche mark zoom. Stock markets soar, then suddenly stall. Everyone feels like shrieking.
Wouldn't it be better, some economists ask, for the drivers to get together and decide where they want to go and at what speed?
The place to start would be the yearly economic summit meetings of leaders of the developed nations, says Yoichi Funabashi, a visiting fellow at the Institute for International Economics in Washington, D.C., and author of a study of recent exchange-rates politics called ``Managing the Dollar: From the Plaza to the Louvre.''
The next summit will be held in Toronto beginning June 19. Real economic policy should be thrashed out at these summits, Mr. Funabashi said in a telephone interview. The summit ``should be transformed into a more politically charged forum.''
Funabashi does not hold out much hope for Toronto, however. President Reagan, he notes, has not been keen on fighting the United States budget deficit, and West Germany has not been enthusiastic about policy coordination. The 1989 summit in France could be a better opportunity, he says.
``There's no incentive now,'' he notes, ``but next year would be high time to discuss reform of the international monetary system.''
Robert Aliber, professor of economics at the University of Chicago, contends, however, that exchange rates themselves are not the big problem. He says exchange-rate fluctuations are usually the byproducts of domestic monetary and fiscal policy, which might be necessary for other reasons - to decrease unemployment, for instance, or to fight infla-tion.
Only occasionally, he says, are exchange rates themselves the source of imbalance in the world economy, and at such times international stabilization can help.
The Sept. 22, 1985, Plaza Hotel accord among the US, Japan, West Germany, France, and Britain did succeed in driving the dollar down 10 to 12 percent through a costly six-week intervention in money markets. Unfortunately, the dollar kept slipping.
In February 1987 at the Louvre, these same nations (plus Canada) tried to hold the dollar to 154 yen. As the chart shows, however, the dollar has continued to fall. It now stands at about 125 yen.
If the dollar falls further, investors could lose confidence in US markets. If it rises too much, the US trade deficit could worsen. Central bankers and finance chiefs must consider this dilemma just now as they raise interest rates and try to cool inflationary forces at work in the global economy.
The tensions are obvious. As leading US banks raised the prime rate to 9 percent Wednesday, stock markets in Tokyo, London, and New York were hit with big losses.
But action seems imminent. Britain's chancellor of the Exchequer, Nigel Lawson, this week predicted an internationally coordinated boost in interest rates. Mr. Funabashi sees it as ``very natural to head for another round of interest-rate coordination now'' in order to ``maintain the margin between the dollar, the yen, and the deutsche mark.'' He thinks this can be done modestly, without precipitating a recession.
But he says it is important for the leaders of the big industrial nations to ``persuade the markets that this interest rate increase is implemented on a coordinated basis and convince the markets that this is not a repetition of the fall of '87.'' At that time, public divisiveness - especially between the US and West Germany over slow German growth - caused the dollar to plunge and the stock market to come unhinged.
In the rough-and-tumble of international competition, neither Japan, West Germany, nor the US wants to allow the other to seem dominant. Germany basically runs the European economy as a deutsche mark zone, Japan runs the East Asian economy as a yen zone, and the US runs the Americas as a dollar zone.
``Major currency countries are not ready to sacrifice monetary authority'' to allow more formal coordination of exchange rates, says Paul Krugman, a professor of economics at the Massachusetts Institute of Technology. For the foreseeable future, Dr. Krugman says, the system of secret monetary target zones is likely to persist.
The reason is largely political, he says: If things go well, countries can claim the credit; if not, ``there's plausible deniability.''
What coordination there is will continue to occur at the ministerial level, Krugman notes. Despite Funabashi's desire to see the summits turned into economic planning sessions, Krugman says, it is hard to imagine government leaders such as Ronald Reagan and Margaret Thatcher haggling over target ranges for currencies.