Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, April 28, 1995 TAG: 9504280032
SECTION: EDITORIAL PAGE: A-12 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Medium
Against the Japanese yen, the once-mighty buck has fallen about 20 percent; against the German mark, about 10 percent. That's having real effects: weakening U.S. investment abroad, making imports into this country more expensive - and prompting Tokyo and Bonn to call on America to raise interest rates.
The Clinton administration has been right to resist such calls, even as they intensified this week during a meeting of financial ministers in Washington.
Export-dependent Japan and Germany are distressed about the prices of their products in the U.S. market, as well as other consequences of currency imbalances. "Do something," they say.
But the right "something" isn't a unilateral increase in interest rates.
A sizable rise, to be sure, would invite more foreign capital, bidding up the dollar's exchange rate. But the Federal Reserve, with extraordinary persistence over the past year, already has hiked up interest rates to prevent an outbreak of inflation. These higher rates have slowed the American economy. Further increases could tip us into recession. And guess what: Rising U.S. unemployment would do nothing to boost consumption of Japanese and German goods.
The more general problem is that today's currency imbalances aren't especially susceptible to technical adjustments in monetary policy. Currency movements reflect fundamental differences in national economic habits. Indeed, the sagging dollar has not guaranteed a shrinking trade deficit with Japan - even as U.S. goods have become cheaper and Japanese goods more expensive - because the Japanese would rather pay more for Made in Japan.
The best policy is to leave short-term currency fluctuations to the markets - to accommodate shifts and strains in a rapidly changing global economy - while working on long-term domestic economic reforms that will shore up the world's most important currency.
The three most-needed reforms:
Increase incentives for Americans to save more and consume less.
Avoid a sharp rise in federal debt as a portion of the U.S. economy.
Shift more public spending into investments in the future, such as education and research, as opposed to consumption-oriented categories such as transfer payments and entitlements.
If our "leaders" pursued these three policies instead of talking about them - or doing the opposite, as when they irresponsibly offer big tax-cut giveaways and promise to leave Social Security untouched - the dollar, rest assured, would take care of itself.
by CNB