Talking about the dollar
■"Talk in Japan About the Dollar Stirs Up Markets," by Jonathan Fuerbringer, New York Times, 11 March 2005, p. C1.■"2 Fed Officials Offer Different but Upbeat Views on Debt: Some outside analysts fear the dollar's value may fall because of rising trade deficits," by Edmund L. Andrews, New York Times, 11 March 2005, p. C6.
Japan's PM makes remarks that sound like his central bank will dump dollars. The Ministry of Finance immediately follows up to suggest otherwise. The dollar falls, but not too much.
This comes after similar suggestions and retractions by China and South Korea, making you wonder if this isn't the chosen method of driving down the dollar slowly: hinting every so often that the dump is going to occur but then always denying it to limit any one drop to a manageable amount. The cumulative effect? The slow-but-steady decline of the dollar, which everyone, including America, seems to want.
This, my friends, is collusion among great powers of the best sort.
Meanwhile, Fed officials, to include Greenspan, speak sanguinely about the plus-up in private debt and the trade deficit. Greenspan says this is a one-time shift of financial flows toward the U.S. that won't last. It happens because globalization reduces the "home bias" of capital and for now, we remain the best bet for long-term, steady growth, so our currency wins as the reserve:
Globalization—the extension of the division of labor and specialization beyond national borders—is patently a key to understanding much of our recent economic history.
But Greenspan cautions that "the free lunch has yet to be invented," which is his cute way of saying that this situation can't last indefinitely. Asia won't be so savings-oriented and so export-driven, and the rise of the Euro will provide a correcting mechanism—an alternative. For now, both inevitable trends await culmination, or tipping points, so America's ability to sell debt remains strong. It's possible that Asia will always prefer relying on America's long-term growth potential over that of Europe, but eventually Asia's "saving glut" will go away as internal development trumps an export-driven strategy.
The clock is running on America's strategic task of locking in China at today's prices into a series of security, political and economic alliances. We can do it under conditions of strength or duress, but we will end up having to do it.