Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, March 16, 1995 TAG: 9503160039
SECTION: EDITORIAL PAGE: A-11 EDITION: METRO
SOURCE: RAY L. GARLAND
DATELINE: LENGTH: Long
A falling dollar hurts Americans buying things made overseas or going there. It also makes American investments abroad far more costly. Unless, that is, you are a multinational company. If General Motors wants to expand in Europe, it can use the profits of Opel banked in marks and francs to do so.
On balance, a not-so-strong dollar probably helps America more than it hurts - especially when two of our leading trading partners, Canada and Mexico, have currencies even weaker than our own. But a weak dollar will ultimately create strong inflationary pressures.
The value of a currency is a curious thing. When the British pound hit a historic low of $1.08 in January 1985, Americans found London a cheap place to visit. But the British had no sense of that, and saw the cost of living as out of control.
A few years back, when people were talking about the coming Age of Japan and it cost an American $100 to take a taxi in Tokyo, the supposedly wealthy Japanese enjoyed a standard of living that seemed impoverished by American standards. Only when Japanese traveled abroad did they have a sense of being rich. Their sense of value was so warped they ridiculously overpaid for such American properties as Rockefeller Center and the Pebble Beach golf course. Understandably, many of these investments have gone sour.
Aside from a few billion dollars in permanent float in Russia and the Third World as a secure means of exchange, dollars are good for only two things: buying American goods or investing in America. The current debacle is certainly a disincentive to invest in America. German and Japanese holders of American securities have suffered a tremendous loss.
But America is still the largest, most important and politically secure market in the world. While layers of wealth and strength accumulated over many years can be peeled away - as Britain has proved - we are a long way from having the wolf at the door.
So, why has the dollar fallen so low? Conservative politicians point to the recent failure of the balanced-budget amendment in the Senate and our growing national debt, now nearing $5 trillion. Others point to excessive money creation by the Federal Reserve and record deficits in our balance of trade. Certainly, when we buy $108 billion more abroad than we sell, as happened in 1994, it means foreign holders must either spend dollars here or swap them for a currency they consider more useful or secure. In other words, too many greenbacks chasing too few yen.
The U.S. trade deficit, while high, is an old story. Ditto the deficit. In fact, when expressed as a percentage of our $6 trillion economy, the deficit is less than it was when the dollar was stronger. I would doubt that sophisticated foreign investors ever paid much attention to a rambling amendment to the U.S. Constitution that would take effect in seven years if 38 states ratified it.
You might ascribe the dollar's downfall to the incoherence of the Clinton administration and the political gridlock between Congress and the president almost certain to prevail for the next two years. But you have to come back to Mexico as the trigger. As a component of the world economy, Mexico is a bit player. As the guarantor of its solvency, however, the U.S. dollar is perceived as tied to the peso's fate. And fear is growing that Mexico could be a bottomless pit of woe.
Disappointed hopes are the cruelest of all. After the terrible economic pain of the 1980s, Mexicans were entitled to hope the worst was behind them. It is by no means certain their political system can survive the shocks likely in store for it. A political explosion in Mexico would present America with its most difficult challenge in recent history. In that context, Clinton's $40 billion rescue seems right.
The U.S. Congress was glad it didn't have to make a decision on Mexico, as Clinton originally asked. The new Republican majority can get back to the business of trying to roll back the welfare state and balance the budget. But these labors lack real conviction: Nothing of great substance can be accomplished unless the GOP victory of 1994 is validated by an even more complete victory in 1996.
For the next 20 months, Democratic filibusters in the Senate, backed by Clinton's veto when needed, will stand in the way of implementing much of the GOP's Contract With America. Clinton has no real alternative. He can save his presidency only by rallying his party's core constituencies and hoping for a Perot-style savior in 1996. The current bitter debate over the free lunch (and breakfast) program in the schools is only a curtain-raiser for what will happen if Republicans really go to work eliminating the deficit.
Aside from an abstract conviction that a balanced budget would be a good thing, Americans agree only that it should not be accomplished at their personal expense.
The American financial panic, when it comes, is likely to take a form similar to what is happening in Mexico: soaring interest rates to entice foreign holders of our paper accompanied by devaluation, inflation, recession and political instability. The sad part will be how easily it could have been avoided by timely action.
While many explanations will be offered, one will stand out: too many tax dollars taken from those who earned them and given to those who didn't, either in the form of free lunches or pensions of $100,000 a year for Al Gore Sr., who departed Congress 24 years ago. To gain the moral standing to cut entitlements, Congress must begin with its own.
The sad fact is, government has made commitments it cannot honor indefinitely. The sooner these are modified, the better chance we have of escaping Montezuma's revenge. But the time, alas, is not quite now.
Ray L. Garland is a Roanoke Times & World-News columnist.
by CNB