[Viewpoint]Devaluing the dollar“We Americans are Romans of the modern day.” These were the gallant words of a famous U.S. historian during a lecture at Princeton University a few years ago. He said there were only two empires - in the truest sense of the word - in the history of the human race, and the first was the Roman Empire and the second was the American Empire, or the United States. As I am not a historian, there is no way for me to verify whether his words are true. However, if the United States truly considers itself an empire and not a republic, it would be interesting to look at the country in this light.
Empires conquer other countries and collect tributes from them to cover the cost for the maintenance and management of the empire. This was the way not only in the Roman Empire, but also in all empires that rose and fell in Europe and Asia.
However, this is not the way of the United States. It does not subjugate other countries or collect tributes. Instead, it sells bonds. The households and government of the United States overspend, and as the current account deficit accumulated, it secured necessary funds by selling bonds to other countries.
The United States also adopted the method of lowering the value of the dollar to reduce actual redemption burdens whenever foreign liabilities reached a limit.
Examples of this were the Plaza Agreement in the mid-1980s, and the devaluation of the dollar in 2002 and 2005. It does not collect tributes by force; rather it collects a sort of inflation tax called dollar devaluation.
The zero interest and unlimited funds supply policy adopted by the Board of Governors of the Federal Reserve Bank a few days ago is part of this pattern.
The zero interest and unlimited funds supply policy is an extreme prescription that was used by Japan to get out of long-term depression and deflation. It is known to have not been effective.
A deflation that occurred at around the same time changed the interest rate in Japan to a positive figure, and the economy failed to revive. At the same time, as financial restructuring was being delayed, cash did not flow despite zero interest.
However, Japan could lower the value of the yen by letting “Watanabe wives” turn their attention to overseas investment by lowering profit rates of domestic assets to an extremely low level.
This largely helped Japan avoid the strong yen that stalled the growth of its economy, and extended the mood of economic expansion for the longest period since 2002.
Zero interest is not a good policy at all. Considering that the fundamental reason for the U.S. financial crisis is not the fall of housing prices but great amounts of debt, zero interest cannot be a fundamental cure because it reduces savings, not debt.
In addition, as long as the financial crunch continues, there is a limit to how much zero interest and unlimited funds can improve cash flow. However, as the inflation rate of the United States is only at 2 percent so far, unlike Japan, certain economic stimulus effects can be expected at least for the meantime through an actual negative interest rate.
What is clear is that zero interest lowers the value of the dollar and will, in effect, force other countries to share the United States’ debt redemption burden.
The zero interest policy in the United States will help the international financial market, which has suffered recently from a dollar drought. Recently, it seems that Japan is also considering returning to zero interest.
However, from a longer-term perspective, this trend is no different from placing the international financial market in a new kind of fog. It could stimulate an international currency war and foreign exchange rate war. There is also a big chance that a new bubble will be created while an enormous volume of liquidity wanders around in the international financial market. Zero interest is not a panacea, but it could be a sign to beware.
If the United States is the one that has caused the problem, it must hold the key to the solution, too. If the U.S. repeats the existing pattern of selling bonds and lowering the value of the dollar, the future will be dark.
If the Obama administration, which promises “change,” recovers the spirit that considers frugality and diligence to be virtues, it will be a good sign.
If sound finance is restored, which will produce goods and reduce debt, the international financial market and the international economy will change drastically in the future.
*The writer is a senior researcher at the Korea Institute of Finance. Translation by the JoongAng Daily staff.
by Park Jong-kyu