Gość: Bert
IP: *.214.83.56.Dial1.Boston1.Level3.net
21.06.02, 07:13
US dollar?s "virtuous circle" may be turning vicious
By Nick Beams
18 June 2002
There are clear signs in financial markets that the
long-predicted day of reckoning for the US dollar may
be close at hand. Last week the dollar slid to a
17-month low against the euro, marking a decline of
nearly 14 percent from the levels of last July. Stock
markets around the world turned down with the Dow Jones
Index dropping 3.4 percent for the week and markets in
Europe and Asia generally reached their lowest levels
since the immediate aftermath of the September 11
terrorist attacks.
Predictions of the dollar?s decline have been based on
the implications of the unsustainable financial
position of the US economy. With imports exceeding
exports by about one third, the US has been running a
balance of payments deficit of more than 4 percent of
gross domestic product, requiring a foreign capital
inflow of more than $1 billion a day to finance it.
That did not present immediate problems during the
stock market boom of the late 1990s. As long as markets
kept rising, funds poured in from the rest of the world
to purchase shares, corporate bonds and treasury notes,
financing the foreign debt and keeping up the value of
the dollar. But the collapse of the share market bubble
and concerns over the real financial position of
corporate America in the wake of the Enron scandal have
started to shake the confidence of investors, prompting
fears that at some point there could be a massive
capital outflow.
There are signs that the turnaround may have already
started. Warning that the US dollar was ?very
vulnerable? to a change in sentiment about American
assets, the Economist of June 14 noted that there had
been a shift in the flow of funds to the US over the
past year. ?Foreign direct investment financed 91
percent of America?s current-account deficit in 1999.
By last year, that had fallen to 43 percent, having
been supplanted by more fickle capital flows.
Foreigners own no less than two-fifths of American
Treasury bonds, a quarter of corporate bonds and 13
percent of American equities.?
Long-time Australian economics analyst Max Walsh
commented in an article in the Bulletin magazine of
June 4 that while the US dollar was anywhere between 15
and 30 percent overvalued, this did not set the limits
to the potential fall because in the current era of
large capital flows, exchange rate movements developed
a momentum that fed upon itself.
According to Walsh, foreign investors hold US corporate
bonds with a value of more than $1.3 trillion, Treasury
bonds of more than $600 billion on top of $1.5 trillion
in corporate equities. ?A high proportion of this
capital is footloose, ready to take off if there is a
more promising investment at hand, or if the value of
US investment looks like contracting,? he wrote.
Some commentators have dismissed the prospect of a
capital outflow from the US on the grounds that
investment opportunities are no better in the rest of
the world. That may well be the case provided the value
of the dollar is sustained. However, if it starts to
rapidly lose value, then investments may well be
liquidated, not because there are better opportunities
elsewhere, but in order to try to avoid massive
exchange rate losses they would sustain by continuing
to hold dollar-denominated assets.
Investor nervousness is also being fuelled by the
continuing revelation that the much-vaunted strength of
the US economy is far from what was claimed.
At the macro level, figures show that since 1997
profits as a proportion of GDP have steadily declined.
Yet in that period S&P 500 companies have been
reporting earnings growth in excess of GDP growth. This
result has been achieved by a series of accounting
practices designed to inflate profit results in order
to boost share market values.
So rampant have been these practices that the Wall
Street Journal recently pointed to a ?growing awareness
of how deeply flawed ... US financial markets really
are.? One of the main problems, it said, was that the
so-called watchdogs, charged with keeping the financial
world honest, had lost credibility themselves. Outside
auditors bent the rules to please corporate clients,
analysts shaped stock recommendations to woo investment
customers, while government regulators were ?too timid
or too overwhelmed to keep track of the frenzy.?
According to the WSJ: ?Boasts about world-class
corporate disclosure, bookkeeping and regulation of
American financial markets have become laughable in the
wake of the Enron and Arthur Andersen scandals.?
But such concerns have been blithely dismissed by US
Treasury Secretary Paul O?Neill. Speaking after a
meeting of the Group of Seven finance ministers at the
weekend O?Neill said market fears about corporate
governance in the wake of the Enron collapse were
overdone and would eventually dissipate.
?The important thing is the fundamentals of what is
going on in the real economy, which I continue to
believe are quite good,? he said. The problem with this
and other optimistic assessments is, however, that such
is the state of accounting practice and the vast
overstatement of profit results that there is no
objective measure of one of the most important
?fundamentals? of any capitalist economy?the real level
of profits.
Brushing these issues aside, O?Neill said markets had
placed too much weight on concerns over corporate
transparency and accounting standards and in any case
he did not ?worry about things I can?t do anything about.?
Unsustainable trends
Whether or not the present turbulence is the start of a
sustained slide of the dollar, it is clear that the
economic trends of the past period cannot be
maintained, with major consequences for both the US and
world economy.
The dollar began its ascent in 1995 after reaching a
record low of 79 yen in April of that year. With
Japanese manufacturers facing bankruptcy because the
high value of the yen was pricing them out of export
markets, financial authorities agreed to lift the value
of the US dollar. While this resolved the immediate
crisis it had longer term consequences. In particular
the East Asian economies, whose currencies were tied to
the dollar, now experienced a downturn in export
growth, one of the factors that helped spark the
so-called Asian financial crisis of 1997-98.
For the US, the turnaround in the value of the dollar
resulted in a rapid inflow of foreign capital into its
financial and equity markets. This financial boom
sparked investment spending and the increase in US
economic growth in the latter years of the 1990s. This
increased US growth led in turn to a widening balance
of payments gap, requiring an increased capital inflow
from the rest of the world to finance it.
The hoopla over the ?new economy? at the end of the
1990s served to mask an increasingly untenable
situation in which world economic growth was becoming
increasingly dependent on the expansion of the US
economy, which, in turn, was going deeper into debt.
Now the stage has been set for a violent financial
adjustment.
Last March, US Federal Reserve Board chairman Alan
Greenspan pointed out that for the past six years about
40 percent of US capital stock had been financed by
foreign investment, requiring an ever-greater outflow
of interest and other payments. ?Countries that have
gone down this path,? he said, ?have invariably run
into trouble and so would we.?
If the dollar does continue to fall and sets off a
withdrawal of funds, this ?trouble? will confront
Greenspan in the form of a dilemma. On the one hand,
maintenance of economic growth will require that
interest rates be kept at their present low levels. On
the other hand, confronted with an outflow of dollars
and the threat of a run on the currency, the Fed will
be under pressure to increase offici
