Save the Dollar? Save More Dollars
EDWARD BERNSTEIN has seen many a United States dollar crisis - and most other currency crises one can name.
Dr. Bernstein was present at the creation - the creation, that is, of the post-war international monetary system at a conference in Bretton Woods, N.H. in 1944. He was an economist in the United States delegation.
Commenting on the latest run on the dollar, he says: ``When the dollar falls as much as it has in the last year against the Japanese yen or the German mark, we ought to be disturbed.''
But not because US industry isn't competitive internationally. It is. To Bernstein, the problem behind the current dollar problem is inadequate saving in the US. Consumers have been spending so much on goods and services that imports have swelled. They have put aside relatively little savings. Further, the federal government has large deficits. Growing imports are responsible in degree for a large international payments imbalance that has lasted years; that is, the US pays more money to foreigners for imports, services, and return on foreign investment in the US, than vice versa. This deficit was covered by foreign purchases of US securities, especially US Treasuries. But recently, foreigners suffered losses on their US holdings as the dollar slipped. Fearing more losses, they have been taking funds out of dollar securities. This kicked off the current plunge in the dollar.
Bernstein has a unique historical perspective, having served as chief economist in the International Monetary Fund (created at Bretton Woods) and as a respected consultant to central and commercial bankers around the world.
Bernstein sees some encouragement in the rise in the US savings rate to about 5 percent of personal income in January and the last quarter of 1994 from about 4 percent previously. Moreover, consumers expanded their debt loads in January at the smallest rate in nearly two years. Nonetheless, consumers are spending about $100 billion a year of interest on their debts, he notes.
As a proportion of national output, the US budget deficit amounts to about 4 percent - less than in other industrial countries. But these nations have higher savings rates. ``How much of our savings can we spare for federal deficits?'' Bernstein asks.
Bernstein, now at the Brookings Institution, a Washington think tank, describes plans of both the Clinton administration and Congressional Republicans to cut taxes, thereby adding to the federal deficit, as ``real nonsense.'' The US, he notes, already has the lowest tax burden of the industrial nations (except for Japan).
When speculators and frightened investors have about exhausted their desire to flee the dollar, Bernstein would like the US to borrow Japanese yen and German mark from their governments to buy dollars on foreign-exchange markets. If this drives up the dollar's price and shifts market sentiment, the US could then repay the borrowed currency and make a large profit. This was done during the Carter presidency, he notes.
A recent report by the Federal Reserve Bank of Chicago shows how important the fate of the dollar - and its effect on trade flows - has become to the US economy. The study notes that exports of goods and services were equivalent to 12 percent of gross domestic product last year, more than 2.5 times the share in 1960. Imports were equivalent to just over 14 percent of GDP, nearly three times the share recorded in 1960.
But Bernstein says Federal Reserve action to raise US interest rates in defense of the dollar is ``pretty much out,'' considering growing signs of weakness in the economy. In the early 1970s, the late Arthur Burns, then chairman of the Fed, did raise the discount rate to deal with a dollar slump. But he weakened the positive effect on the dollar by saying there would be plenty of money available for the US economy, Bernstein says.
Mickey Levy, chief financial economist at NationsBanc Capital Markets in New York, says a ``recipe for disaster'' would be for the Fed to try to rescue the dollar by monetary means. Any further tightening in money, he says, could prompt a recession.
As for the declining role of the dollar as a reserve currency held by other nations, that has been happening for a long time, Bernstein notes. The dollar's share of foreign-exchange reserves last year was 61.4 percent, down from 79.4 percent in 1975. The yen's 1994 share was 9 percent and the mark had 16.1 percent.