[OUTLOOK]The Dollar Value Affects Global Economy
Published: 05 Jan. 2003, 20:08
"The dollar is our currency, this is your problem." This is what Treasury Secretary John B. Connally in the Nixon administration uttered out to the world. He was right.
The Dollar is the U.S. currency, however, and everyone wants to possess more dollars and thus dollar fluctuations have a great effect on the world economy.
Some nations actually use the dollar as their official currency by adopting a dollarization policy. About 20 or so countries are known to possess a dollar-denominated deposit accounting for 30 to 40 percent of their own currency circulation.
As a result, it is estimated that about 70 percent of U.S. dollars are being circulated the outside of the United States. In other words, non-U.S. citizens are possessing about $400 billion issued by the U.S. Federal Reserve Bank. It means that the United States earns $20 billion every year - on an estimated interest rate of 5 percent per annum - only by exporting dollar bills.
Why do all the nations want to possess dollar bills? Simply, we can cite high confidence in the value of the dollar. What bolsters this confidence is the "strong dollar" policy of the U.S. government. The former Clinton administration manifested as its policy that a "strong dollar is helpful to the national interest of the United States."
So the Clinton administration has handled the strong dollar- related problems with "well-intended apathy." The Bush administration succeeded the Clinton administration's policy.
It is true that the strong dollar policy has greatly contributed to the long-term prosperity of the U.S. economy along with price stabilization for the last 10 years.
Through the strong dollar policy, the United States could make up for the current account deficit with the capital account surplus and retain interest rates at a low level.
As a result, the U.S. government could increase private consumption and corporate investment. And it could prolong the advent of economic downturn on the business circle.
However, whether the United States can indefinitely continue this strong dollar policy is in question. The biggest problem that has emerged from the strong dollar policy is the continuous extension of the current account deficit originated from import-export unbalance.
The amount of the U.S. current account deficit this year is estimated to amount to $500 billion, almost 5 percent of the U.S. gross domestic product. If it were not any other nation than the United States, the nation would worry about a financial crisis.
So the International Monetary Fund warned that the current account deficit of the United States had reached a level that cannot hold up any more and there was a possibility of steep dollar depreciation.
Manufacturing groups in the United States also began to press the government and the congress to give up the strong dollar policy.
Those groups assert that the U.S. dollar value has been too much appreciated by at least 30 percent higher than other major foreign currencies for the last decades.
They blame the appreciation for weakened export competitiveness in the world market and for inevitable massive layoffs in the U.S. companies.
The United States is still suffering from an economic downturn despite the government has seven times announced measures for tax cuts and downward readjustment of bank interest rates.
If this situation continues, the confidence for the dollar value will undoubtedly pitch and roll. Then it is also clear that the United States cannot insist in the strong dollar policy.
Therefore, it is natural for us to expect a weakening dollar if the U.S. economy does not show clear signs of recovery in the near future.
In relation with this projection, I am interested in whether the readjustment of the dollar value can land softly.
The plummet of the dollar value or "hard landing" will incur the plunge of U.S. stock prices and lead to the increase of interest rates.
The ramifications will aggravate a U.S. economic downturn and deter the world economy from recovering. That makes a vicious circle.
Fortunately, the U.S. economy looks relatively better than that of Japan and the European Union at present.
So it is not likely for the U.S. dollar value to drop sharply like the middle of 1980s when it plunged.
But the Korean government and companies have to forecast appropriate measures to the possible precipitous readjustment of the dollar value and exchange rate fluctuation between major currencies.
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The writer is the chairman of the Institute for Global Economics.
The Dollar is the U.S. currency, however, and everyone wants to possess more dollars and thus dollar fluctuations have a great effect on the world economy.
Some nations actually use the dollar as their official currency by adopting a dollarization policy. About 20 or so countries are known to possess a dollar-denominated deposit accounting for 30 to 40 percent of their own currency circulation.
As a result, it is estimated that about 70 percent of U.S. dollars are being circulated the outside of the United States. In other words, non-U.S. citizens are possessing about $400 billion issued by the U.S. Federal Reserve Bank. It means that the United States earns $20 billion every year - on an estimated interest rate of 5 percent per annum - only by exporting dollar bills.
Why do all the nations want to possess dollar bills? Simply, we can cite high confidence in the value of the dollar. What bolsters this confidence is the "strong dollar" policy of the U.S. government. The former Clinton administration manifested as its policy that a "strong dollar is helpful to the national interest of the United States."
So the Clinton administration has handled the strong dollar- related problems with "well-intended apathy." The Bush administration succeeded the Clinton administration's policy.
It is true that the strong dollar policy has greatly contributed to the long-term prosperity of the U.S. economy along with price stabilization for the last 10 years.
Through the strong dollar policy, the United States could make up for the current account deficit with the capital account surplus and retain interest rates at a low level.
As a result, the U.S. government could increase private consumption and corporate investment. And it could prolong the advent of economic downturn on the business circle.
However, whether the United States can indefinitely continue this strong dollar policy is in question. The biggest problem that has emerged from the strong dollar policy is the continuous extension of the current account deficit originated from import-export unbalance.
The amount of the U.S. current account deficit this year is estimated to amount to $500 billion, almost 5 percent of the U.S. gross domestic product. If it were not any other nation than the United States, the nation would worry about a financial crisis.
So the International Monetary Fund warned that the current account deficit of the United States had reached a level that cannot hold up any more and there was a possibility of steep dollar depreciation.
Manufacturing groups in the United States also began to press the government and the congress to give up the strong dollar policy.
Those groups assert that the U.S. dollar value has been too much appreciated by at least 30 percent higher than other major foreign currencies for the last decades.
They blame the appreciation for weakened export competitiveness in the world market and for inevitable massive layoffs in the U.S. companies.
The United States is still suffering from an economic downturn despite the government has seven times announced measures for tax cuts and downward readjustment of bank interest rates.
If this situation continues, the confidence for the dollar value will undoubtedly pitch and roll. Then it is also clear that the United States cannot insist in the strong dollar policy.
Therefore, it is natural for us to expect a weakening dollar if the U.S. economy does not show clear signs of recovery in the near future.
In relation with this projection, I am interested in whether the readjustment of the dollar value can land softly.
The plummet of the dollar value or "hard landing" will incur the plunge of U.S. stock prices and lead to the increase of interest rates.
The ramifications will aggravate a U.S. economic downturn and deter the world economy from recovering. That makes a vicious circle.
Fortunately, the U.S. economy looks relatively better than that of Japan and the European Union at present.
So it is not likely for the U.S. dollar value to drop sharply like the middle of 1980s when it plunged.
But the Korean government and companies have to forecast appropriate measures to the possible precipitous readjustment of the dollar value and exchange rate fluctuation between major currencies.
-----------------------------------------------------------------------
The writer is the chairman of the Institute for Global Economics.
by Sakong Il
with the Korea JoongAng Daily
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