New York Times Editorial - Gambling on a weaker dollar
New York Times Editorial -Gambling on a weaker dollar
Copyright by The New York Times
MONDAY, MAY 22, 2006
For some time now, shortsighted lawmakers in the U.S. Congress have been threatening China with taxes for what they call its unfair currency practices. The Bush administration, to its credit, has generally resisted the protectionist rant, most notably by refusing to brand China a "currency manipulator" in an official report to Congress last week.
China responded to the administration's responsible policy and diplomatic courtesy last week when it loosened, a bit, the tether that binds the Chinese currency, the yuan, to the dollar. A stronger yuan implies a weaker dollar, as does the general strengthening so far this year of the euro and the yen. By making foreign goods sold in the United States more expensive and American goods sold abroad cheaper, a weaker dollar would, in theory, eventually help reduce America's huge trade gap.
The problem is this: Unless a falling dollar is paired with reductions in the U.S. budget deficit, it could do more harm than good by driving up interest rates, perhaps sharply. That's because the foreign investors who finance the administration's "borrow as you go" budget are likely to demand higher returns to invest in a depreciating dollar.
But if budget deficits declined over the long run, the government's reduced need to borrow would help keep interest rates low as the dollar depreciated. Then, after a lag, the falling dollar would shrink the trade deficit without risking big increases in interest rates in the process.
Unfortunately, the incessant tax cutting of the past five years precludes any serious attempt to reduce the budget deficit. So to keep interest rates in check as the dollar falls, the administration would have to persuade investors not to believe what they see: a dollar that is declining even as the United States does nothing to curb its borrowing.
That would be a difficult trick even for a Treasury Department that commanded respect. It will be especially difficult for Bush's Treasury team, which has suffered a diminution of esteem and credibility.
A weakening dollar, on top of intractable budget deficits and a chronic savings shortfall, is a recipe for recession. The question now is whether the United States will change direction in time. The portents are not good.
Copyright by The New York Times
MONDAY, MAY 22, 2006
For some time now, shortsighted lawmakers in the U.S. Congress have been threatening China with taxes for what they call its unfair currency practices. The Bush administration, to its credit, has generally resisted the protectionist rant, most notably by refusing to brand China a "currency manipulator" in an official report to Congress last week.
China responded to the administration's responsible policy and diplomatic courtesy last week when it loosened, a bit, the tether that binds the Chinese currency, the yuan, to the dollar. A stronger yuan implies a weaker dollar, as does the general strengthening so far this year of the euro and the yen. By making foreign goods sold in the United States more expensive and American goods sold abroad cheaper, a weaker dollar would, in theory, eventually help reduce America's huge trade gap.
The problem is this: Unless a falling dollar is paired with reductions in the U.S. budget deficit, it could do more harm than good by driving up interest rates, perhaps sharply. That's because the foreign investors who finance the administration's "borrow as you go" budget are likely to demand higher returns to invest in a depreciating dollar.
But if budget deficits declined over the long run, the government's reduced need to borrow would help keep interest rates low as the dollar depreciated. Then, after a lag, the falling dollar would shrink the trade deficit without risking big increases in interest rates in the process.
Unfortunately, the incessant tax cutting of the past five years precludes any serious attempt to reduce the budget deficit. So to keep interest rates in check as the dollar falls, the administration would have to persuade investors not to believe what they see: a dollar that is declining even as the United States does nothing to curb its borrowing.
That would be a difficult trick even for a Treasury Department that commanded respect. It will be especially difficult for Bush's Treasury team, which has suffered a diminution of esteem and credibility.
A weakening dollar, on top of intractable budget deficits and a chronic savings shortfall, is a recipe for recession. The question now is whether the United States will change direction in time. The portents are not good.
posted by Carlos T Mock at 10:21 AM
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