U.S. may be able to pass the buck for its falling dollar

Searching for the reason du jour that the dollar is slumping, some economists Thursday pointed to the perennially easy target: the U.S. Congress.

By passing a $189 billion tax- cut package Wednesday night the financing of which is dubious at best the House of Representatives effectively decided that federal budget-deficit reduction doesn't matter after all, critics say.

House Republicans argued otherwise. They claim that they'll pay fully for tax cuts with offsetting spending cuts. Unfortunately, the latter have yet to be identified. Given the federal government's 20-year track record of living well beyond its means, it's understandable that foreigners would assume we'll never balance the budget and, therefore, we'll flood the world with trillions of new dollars.

But if it's Congress that investors fear and if the Fed is the solution that isn't readily apparent from the direction of U.S. stock and bond markets.

Short- and long-term U.S. bond yields have been falling all week, suggesting absolutely no possibility of a Fed credit-tightening move in the near-term. In addition, blue-chip stocks are hitting record highs.

Even allowing for the support bonds would be getting from dollar-buying binges by central banks (they'd be putting dollars into Treasury securities), it's evident that U.S. markets aren't los Leg 1 ends here ing much sleep over the dollar's woes or over the potential negative implications of the House- passed tax-cut plan.

How can stock and bond investors stay so sanguine? Maybe because there's a rising wave of sentiment on Wall Street (and perhaps on Main Street) that the current "dollar crisis" isn't that at all, but rather is a yen crisis and a German mark crisis.

By that school of thought, the dollar hasn't been going down this year. Instead, the yen and mark have been going up. And therefore, the countries whose currencies are moving Japan and Germany bear the burden of restoring order in foreign exchange markets.

Granted, this may seem counter-intuitive. The United States is the sovereign state running massive budget and trade deficits, not Germany and Japan. Everyone knows how "irresponsible" America has been with its finances and its propensity to put consumption ahead of savings.

But virtually not discussed anymore is that the federal budget deficit has been falling for two years.

Nor is it discussed much that one reason for the nation's current-account deficit is that many foreigners are investing directly in U.S. assets, and that they're earning a handsome return on those assets.

The nation's merchandise trade deficit, meanwhile, admit Leg 2 ends here tedly has been widening. But is that solely America's fault for consuming too many foreign goods or is it also Japan and Germany's fault for being unwilling to allow economic growth to reach a level that would raise the appetite for U.S. exports?

As Japan's economy has deflated in recent years, its government has maintained a relatively timid approach to fiscal stimulus that might jump-start business activity.

Europe, meanwhile, is beset by excess industrial capacity and high unemployment in many countries. Yet Germany, as the central European power and the continent's key currency, has maintained a tight monetary policy in recent years that has helped keep interest rates higher than they otherwise might be and economic growth lower in much of Europe.

Darryl McLeod, a professor of economics at Fordham University in New York, says the actions of the dollar, mark and yen today are all about "who has to change course" in economic policy.

The U.S. government, and the Federal Reserve, are making it clear that "we would rather not change course," McLeod says. "The United States is where it wants to be," with the economy near full capacity, inflation still low and the rise in interest rates last year having apparently slowed growth to a more sus Leg 3 ends here tainable pace.

If Japan and Germany, in contrast, aren't where they want to be and see their economic livelihoods threatened by their too-strong currencies they will have to decide how to change that, McLeod and others contend.

That may mean lower interest rates or other stimulative steps in Japan and Europe, the net effect of which would be to send more of their excess dollars back to the United States.

"If the Japanese don't want to recycle the capital they're accumulating, then their currency is going to be strong," says Joseph Carson, economist at Dean Witter Reynolds in New York.

Tom Petruno's column now appears Saturdays in the Milwaukee Journal Sentinel.

Copyright 1995
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