[INSIGHT]The economic bully is still at it

The defense budget of the United States is more than a third of the world's military expenditures and more than the military spending of the next nine largest powers. The United States enjoys an absolute predominance of military power in the world that a hostile country cannot dare to challenge. Even though the United States arbitrarily designated some countries as rogue states, it is an open question in international society if those countries could really be serious threats to the security of the United States.

But things are different in terms of economic power. The gross domestic product of the United States is less than a third of the world's total, and falls far short of the sum of the GDPs of the next nine powers. It is, however, wrong to say that the United States can influence the world economy as much as its economic size might suggest. Although no bombs are used in economic competition, the cold war-like confrontation among nations is as intense as a hot war.

Economists are debating whether the current economic direction is like a "W" or a "V." Some experts thought that traditional business cycles had ended when the "new economy" started in the 1990s, and argued that economic textbooks should be rewritten. When the new economy began to stagger after a decade-long great leap forward, their belief was also shaken. But they regained their nerve when business conditions were rekindled after Sept. 11.

People who believe that the economy bottomed out at the end of last year say there will be a sharp recovery -- a "V" -- while those who think the recovery will stall out are in the "W" camp. V-lovers cling to their faith in the new economy; the W-lovers are certain that the old economic laws have not been repealed. The financial anxiety in the United States last week that shocked world stock markets seems to support the latter camp. One dollar dropped to 1.015 euros. There is nothing magic about that exchange rate, except perhaps for some hurt American pride, and President Bush said he would not intervene to support the dollar.

I think the reason for the weak dollar is the new economy, a collaboration between information technology and a stock market bubble. Information technology took pride in the contention that the law of diminishing returns, which the old economy cherishes, had come to an end and an era of increasing returns had opened. But the new economy could not increase the employment rate and income as much as people expected. Stock prices were inflated; people began spending as if the bubble would never burst. U.S. imports increased rapidly and the balance of payments went to 430 billion dollars in the red. Nevertheless, the economy of the United States didn't collapse thanks to foreign capital. Businesses failed but avoided bankruptcy with loans.

An inflow of foreign capital needs a bullish stock market or a strong dollar. Non-market factors like terror and illegal accounting made it difficult for the stock market to keep its head above water. The Federal Reserve Board postponed its plans to raise interest rates in order to boost the economy, which put a brake on the strong dollar. As the stock market bubble burst, the U.S. economy entered a new phase of a weak currency and an outflow of foreign capital.

A strong euro could be a burden to the EU's exports, but the EU seems to be happy with the weak dollar, which brings in foreign capital and contributes to price stability there. Thanks to a much stronger yen, the strong won has not been a problem for Korea's exports until now, although exporters are recieving fewer won per dollar of exports. But there is now a forecast that the won-dollar exchange rate will drop to 1,100 won within the next year and that the won value will rise against the yen. We cannot enjoy the strong yen for long. Furthermore, China's already weak currency, the yuan, which is informally pegged to dollar, will increasingly threaten Korea's export position.

The Reagan administration in 1985 led the "Plaza Agreement" in order to devalue the dollar forcibly. The central banks of the G-5 nations intervened together in the market. Other countries wanted the United States to reduce its trade deficit by cutting government expenditures, but the United States wanted to force a change in the exchange rate. To escape from recession in the old economy, the United States used an iron fist to make a weak dollar. And to escape from recession in the new economy, they seem to be seeking strong exports with a weak dollar. They have a right to increase their exports with a weaker dollar -- Korea tries to do the same thing. But I want to ask why they always put aside domestic belt-tightening, which could be done without waving their fists at the neighborhood.

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The writer is an editorial writer of the JoongAng Ilbo.

by Joseph W. Chung