Read this article and wonder if the circumstances we are in right now, with a devalued U.S. currency, rising oil prices, and terrorism used as a chest piece to support our military agenda, were not engineered by the current administration. Bear Stearns is gone. Freddie Mac and Fannie May have been absorbed by the U.S. government, which everyday seems to become more "communist" in its operation. And Lehman Brothers is next in the line-up. How many big corporations do American tax-payers have to bail out? Is it really for the good of all?
Notice the date of this article. It's fascinating to read it now.
Will the Bush administration's cheaper-dollar talk backfire?
By Matthew Benjamin
Wouldn't it be swell if there were a silver bullet that, with a single shot, could stem manufacturing job losses, shrink the huge and growing trade deficit, and hold deflation at bay?
Some economists say there is, and the White House is locked, loaded, and firing at will.
The bullet is dollar devaluation. Make the greenback cheaper relative to other currencies, and suddenly foreign imports become more expensive, U.S. exports become more attractive, workers are hired to manufacture them, and prices of many goods stop falling.
Savior. A cheaper dollar will also help rebalance a global economy that is overly reliant on the United States, says Morgan Stanley chief economist Stephen Roach. "It will save the world."
But some believe that the silver bullet could be a boomerang in disguise. "No nation that has debased its currency has done well in even the medium term, let alone the long term," says Jim Rogers, cofounder of the famous Quantum Fund, one of the hottest hedge funds ever.
It is more than an academic debate. Terrified that job losses in manufacturing will hurt its re-election chances, the Bush administration has hitched its wagon to a weaker dollar. Although publicly affirming a commitment to a strong currency, Treasury Secretary John Snow in May began hinting at the possible benefits of devaluation. The "weak dollar" policy was cemented in the minds of many economists and currency traders last month when the Group of Seven nations called for more-flexible exchange rates. Since then, the dollar--which had already been weakening since early 2002--has dropped 4 percent against both the euro and the Japanese yen.
Last week the dollar hit a 33-month low against the yen and a three-month low against major European currencies. "We're big bears on the dollar," says Michael Rosenberg, head of global foreign exchange research at Deutsche Bank. He expects the euro, now trading near $1.17, to rise to $1.40, while the dollar, which now buys 111 Japanese yen, will purchase less than 100 yen within three years.
"The strong-dollar policy is dead and buried," says Fred Bergsten, director of the Institute for International Economics. The IIE estimates that every 1 percent drop in the value of the dollar narrows the U.S. trade gap by $10 billion. A 10 percent drop could mean a $100 billion trade swing and lead to as many as a million new jobs, according to IIE economist William Cline.
Intervention. But there's a catch. China accounted for some 22 percent of the $468 billion U.S. trade gap last year--more than any other nation. Yet because the Chinese have pegged the yuan to the dollar, devaluation is no help there. Similarly, the Japanese, who also desire a cheap currency to boost their own exports, seem unwilling to let the yen sink below the 110 level and last week intervened in currency markets, selling yen to maintain that threshold.
And devaluation carries risks of its own, to the economy and the markets. If investors lose confidence in the dollar, watch out, says James Stack, president of InvesTech Research. Interest rates can rise suddenly and bring recessions and bear markets with them. That scenario played out in the mid-1980s, when the G-7 pushed for a weaker dollar, which was then trading at an all-time high relative to major currencies. For two years, the greenback fell sharply. Then in 1987 a sudden loss of confidence in the falling dollar brought on the October stock market crash, Stack says.
Of course, the dollar's current decline is less dramatic, and confidence in America's currency remains high, as foreigners continue to buy up U.S. treasuries. And there are few other attractive places for foreign investors to put their money. "We've got to take some responsible risk to rebalance the world, and the weaker dollar is it," says Roach.
Devaluation is strong medicine, though, and getting the dosage just right is the hard part. "Trying to predict when a falling dollar affects interest rates is like trying to catch a falling pitchfork," says Stack. "It's a neat trick if you can pull it off." http://www.usnews.com/usnews/biztech/articles/031013/13dollar.htm