[Paleopsych] Warning From the Markets (NY Times editorial)
shovland at mindspring.com
Fri Feb 25 01:12:41 UTC 2005
Warning From the Markets
When a seemingly innocuous remark from the central bank of South Korea
makes the dollar tank, as happened on Tuesday, all is not well with the
United States' position in the world economy.
The dollar has been on a downward trajectory for three years, thanks in
part to the Bush administration's decision to try to use a cheap dollar to
shrink the nation's enormous trade deficit. (A weak dollar makes exports
cheaper and imports costlier, a combination that theoretically should
narrow the trade gap.) To be truly effective, however, a weak dollar must
be combined with a lower federal budget deficit - or even a budget surplus,
something the administration clearly hasn't delivered. So predictably, the
weak-dollar ploy hasn't worked. The United States' trade deficit has
mushroomed to record levels, as has the United States' need to borrow from
abroad - some $2 billion a day - just to balance its books.
Enter South Korea. On Monday, its central bank reported that it intended to
diversify into other currencies and away from dollar-based assets. And why
not? It holds about $69 billion in United States Treasury securities, or 4
percent of the total foreign Treasury holdings. Such dollar-based
investments lose value as the dollar weakens, leading to losses that any
cautious banker would want to avoid. But as the Korean comment ping-ponged
around the world, all hell broke loose, with currency traders selling
dollars for fear that the central banks of Japan and China, which hold
immense dollar reserves - a combined $900 billion, or 46 percent of foreign
Treasury holdings - might follow suit.
That would be the United States' worst economic nightmare. If it appeared
that the flow of investment from abroad was not enough to cover the
nation's gargantuan deficits, interest rates would rise sharply, the dollar
would plunge further, and the economy would stall. A fiscal crisis would
Tuesday's sell-off of dollars did not precipitate a meltdown. But it sure
gave a taste of one. The dollar suffered its worst single-day decline in
two months against the yen and the euro. Stock markets in New York, London,
Paris and Frankfurt dropped, and gold and oil prices, which tend to go up
when the dollar goes down, spiked.
Luckily, the markets calmed down yesterday, as Asian central banks said
they they did not intend to shun dollars. While such damage control is
welcome, it's no fix. Tuesday's market episode has its roots in American
structural imbalances that will be corrected only by new policies, not more
of the same tax-cut-and-weak-dollar deficit-bloating ploys.
If Mr. Bush were half the capitalist he claims he is, he would listen to
what the markets are telling him.
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