"Lex" Taylor likes the dropping dollar. Taylor's family-owned business in Louisville, Miss., makes heavy-duty industrial forklifts, and the last few years have been rotten. But now the cheaper dollar makes his forklifts less expensive to foreign buyers while reducing the competitiveness of foreign forklifts in the United States. "Business is improving," he says. "We're more competitively priced."
Call it the dollar gamble. A cheaper dollar is the Bush administration's latest economic attack plan. The target: the ailing manufacturing sector. For 33 straight months, factory employment has dropped, eliminating 2.3 million jobs. A manufacturing revival might improve the job market -- and confidence. Although manufacturing suffers from many problems, chiefly the collapse of business investment, a rising trade deficit ($484 billion in 2002, up from $77 billion in 1991) hasn't helped.
The cheaper dollar aims to change that. A year ago, the euro was worth only 92 cents; now it's $1.16. This means that European exporters (whose costs are in euros) must raise their dollar prices, reduce profits or accept a loss. Canada is the largest U.S. trading partner. Over the past year, the Canadian dollar has risen 12 percent (from 65 to 73 cents). Similarly, the yen has jumped 9 percent.
The administration isn't precisely guilty of manipulating the currency markets for political purposes. For years, economists have predicted that the dollar could fall. The growing American trade deficit flooded the world with dollars. Foreigners might not want to hold all the dollars they received from their exports. But the administration hasn't discouraged the shift. Just the opposite. Treasury Secretary John Snow has signaled that he favors a cheaper dollar.
Goaded or otherwise, the dollar may fall further. Economist John Makin of the American Enterprise Institute in Washington believes that another 10 to 20 percent decline is possible. He estimates that this could raise economic growth in the 2004 election year by 1.5 percentage points, which would mean a doubling of the recent rate.
Still, there are big risks. The world economy is in a state of "extraordinary disequilibrium," as Richard Duncan argues in his book, "The Dollar Crisis." Put plainly, the pattern of global economic growth since the early 1990s cannot continue. In this period, the United States powered the rest of the world. The expanding trade deficit boosted jobs and production abroad.
For a while, a circular process sustained this growth. Dollars earned in the United States by foreign exporters were recycled into U.S. stocks, bonds or corporate acquisitions (example: Chrysler by Daimler Benz). From 1997 to 2001, foreigners bought $536 billion of U.S. stocks and $773 billion of corporate bonds, reports Goldman Sachs. This kept the dollar high and, by propping up U.S. stock and bond prices, extended America's economic boom. But once the boom faltered, everything began to unravel.
Foreigners now face a dilemma, Duncan writes. Continuing to invest heavily in U.S. stocks and bonds may result in large losses. But converting their "dollar (export) surpluses into their own currencies . . . would cause their currencies to appreciate (rise), and their exports and economic growth rates to decline." The central question is: can Europe, Japan, the rest of Asia and Latin America grow without the narcotic of ever-increasing U.S. trade deficits? If not, the world economy may face prolonged stagnation that could boomerang on the United States.
There's another danger: A big foreign withdrawal from U.S. stocks could hurt the market or even trigger a panic. At the end of 2002, foreigners owned almost 12 percent of U.S. stocks, up from 7 percent in 1990. As the dollar drops, these stocks become worth less in foreign currencies -- even if the stocks aren't declining. Fear of further losses could cause foreigners to sell, depressing stocks and the dollar. Of course, a slumping stock market could lower Americans' confidence and consumer spending.
The administration's dollar gamble is that the American and world economies can escape the present "disequilibrium" without encountering these perils. Even Taylor recognizes that success could be iffy. The good news is that export orders for his forklifts have started to rise. The bad news, as he concedes, is that other countries' economies are so weak that they can ill afford to lose any business.
If a cheaper dollar rescues the American economy while plunging the rest of the world into recession, the triumph could be short-lived.
Washington Post Writers Group