The dollar's place in the circle of debt

The dollar is losing value against the currencies of Japan and Germany much faster than the U.S. government is piling up debt. Meanwhile, Congress is considering tax cuts.

All three things are related.

The budget deficit is growing because Americans demand that their government provide more than they are willing to pay for.

To meet this demand, the government must borrow money, much of it from foreigners.

That sends dollars abroad in interest payments.

At the same time, the U.S. trade deficit is growing more insidiously than mold in a basement.

That is because while exports are booming, imports are growing even faster.

Again, this is caused by Americans' seemingly insatiable desire to consume.

A growing trade deficit also sends dollars abroad, joining those sent overseas to service the national debt.

The best estimate is that there are about 1 trillion U.S. dollars in foreign hands.

As more and more dollars find their way abroad, each dollar becomes less valuable, especially against the currencies of nations with which the U.S. has a trade deficit, such as Japan.

So eventually, the dollar must fall on foreign exchange markets.

These twin deficits are the underlying cause of the dollar's depreciation against the yen and mark in recent months. Against the currencies of nations that have larger foreign deficits, such as Canada and Mexico, the dollar is holding its own or even gaining value.

But while the present yen/mark crisis has an underlying cause, it also had immediate triggers.

One is a Japanese need to bring capital home, causing that nation collectively to sell dollars.

Another is a belief that U.S. interest rates have hit a cyclical peak, making dollar-denominated assets less attractive to investors.

A third is that "the trend is your friend," as currency speculators like to say. When a commodity such as the dollar is headed down, it takes a brave person to buy.

And there is a fourth item mentioned by some: the failure of Congress to pass the balanced-budget amendment to the U.S. Constitution.

That such an amendment was proposed at all is a sign of economic weakness it shows just how far Americans have lived beyond their collective means. It also is a sign of political weakness U.S. leaders do not need such a crutch to balance the budget, they need only the political will to do so.

So when the amendment died, it was taken as a symbolic failure by American leaders to summon the political will to discipline this nation's spending habits. Such discipline is the only way to stanch the trade and budget deficits and thus attack the dollar's underlying problem. Tax Cuts Create More Fear

And now politics is making matters even worse. Congress is seeking to pass tax cuts.

Republican leaders in the House of Representatives have proposed a $500 tax credit per child.

This would cost the government about $117 billion over five years.

Matching spending cuts are promised, but have not been completely outlined.

To the foreign exchange markets, this looks like an invitation to increase dollar depreciation on two levels.

First, it will increase borrowing requirements by the federal government at least until matching spending cuts are enacted.

Second, it will increase demand in the U.S. economy, a good portion of which will be satisfied by imports.

Tax cuts are popular, however, and it seems inevitable that some will be enacted. This is especially true now that President Clinton has abandoned his fight to lower the budget deficit.

So what can be done to help the dollar in such circumstances?

How about different kinds of tax cuts?

Instead of only subsidizing children and thus consumption why not use the $117 billion to subsidize savings as well?

This could be accomplished by allowing a $500 annual tax credit for money set aside in a special college savings account.

Or, if Congress wanted to more directly encourage savings, it would spend the $117 billion to:

m Allow the deduction of a fixed amount of interest income annually.

m Restore the deductibility of $2,000 annual contributions to individual retirement accounts by all taxpayers.

The cost to the Treasury of any of these could be matched by the same cuts that are promised to pay for the $500 child credit.

And if those cuts never emerged, at least spending the money to encourage savings would attack the underlying problems facing the dollar and the nation.

Readers can leave a message for Avrum D. Lank on the Milwaukee Journal Sentinel PressLine by dialing 223-2020, then entering 7205.

Copyright 1995
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