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[TTHQ Staff]

BEING STREET SMART ____________________ Sy Harding FOREIGN AFFAIRS! November 26, 2004. The U.S. economy increasingly needs the cooperation of foreign countries. We almost desperately need foreign consumers to fall back in love with U.S. products. But they seem to be acting toward U.S. products as U.S. consumers acted toward French wines after France declined to back the U.S. on Iraq. The U.S. trade deficit with the rest of the world continues to set records, with U.S. consumers gobbling up imported products at a feverish pace, while the products of U.S. corporations are increasingly spurned by consumers in foreign countries. That in spite of the U.S. dollar having been in a serious decline against most of the world’s other major currencies for more than three years, making U.S. goods considerably cheaper for foreign consumers. Meanwhile, foreign countries increasingly stew about the plunge in the dollar’s value against their currencies, since the weak dollar makes foreign products more expensive for U.S. consumers, and U.S. products less expensive for their consumers. Their complaint is that by allowing the dollar to plunge so precipitously the U.S. is trying to help its own economy recover at the expense of the struggling economies of Europe and Asia. The U.S. Dollar Index has now declined 31% against a basket of international currencies. Washington is wedged between the proverbial rock and a hard place. Not wanting to create a panic bail-out of dollar-denominated assets, the Administration officially claims it has a strong dollar policy, while quietly doing nothing about the situation, allowing the dollar to plunge. In reality it has no choice. The U.S. economy is still in recovery mode from the 2001 recession, with its sustainability in question, and since U.S. consumers already spend more than they earn, the best hope for the economy is to increase U.S. exports. One way to do that is to create a cheaper dollar. But after more than three years of a plunging dollar, the trade gap continues to grow, and economists are worried the situation may get worse before it gets better. A poll of consumers in Europe last spring showed that while 75% disliked the policies of the U.S. Government, 75% still liked the American people. After the U.S. election, a similar poll shows that 75% still don’t like the U.S. government, but now 75% also don’t like the American people. In addition to allowing the dollar to decline, the U.S. has been trying to reverse the situation by imposing sanctions and duties on foreign imports. But those strong-arm efforts seem to only create a backlash, the most recent example being Friday’s announcement that the World Trade Organization has approved sanctions against a number of U.S. exports in retaliation. The trade deficit, currently running at $50 billion monthly, not only takes sales away from U.S. companies, costing too many U.S. workers their jobs, but also creates what is known as a current account deficit. The $50 billion that flows out of the U.S. every month has to be offset or financed by selling stocks, U.S. bonds, or IOUs, to foreigners. But as the dollar declines, a situation that eventually might still help the trade gap, it creates another worry, that foreigners will be less willing to buy or hold dollar denominated assets while they watch the dollar continue to decline in value. It’s extremely important since more than half of all outstanding U.S. debt in the form of bonds is now owned by foreign governments and foreign investors, and the U.S. needs them to continue buying and holding still more U.S. debt each month to finance the monthly trade gap. Should they stop buying U.S. bonds, or worse, start selling the vast holdings they have accumulated, the decline in the dollar may begin to feed on itself. U.S. bonds have now been down for five weeks in a row on those fears. Alan Greenspan was quiet about the situation prior to the election, but spooked the markets the following week when he said that at some point foreign investors will have “a diminished appetite for dollar-denominated assets”. The European Central Bank describes the dollar’s decline, and therefore the rise in the value of the Euro as “brutal” and “unwelcome”. The dollar’s decline against the Japanese Yen has prompted rumors that Japanese monetary authorities are contemplating intervention in international currency markets to prevent a further decline in the dollar against the Yen, regardless of the negative impact that might have on U.S. exports. Meanwhile, China pegs the value of its Yuan to the dollar. That causes Europe and Japan to bear the brunt of the dollar’s decline, hurting their exports and restraining their already-weak economies. For several years the U.S. has been putting pressure on China to allow its currency to float against the dollar, as do the Euro and the Yen. That would cause the Chinese Yuan to also rise against the dollar, so that China’s economy would bear some of the negatives of the falling dollar, and alleviate some of the problems the falling dollar creates for Europe and Japan. But so far China has adopted a policy similar to that of Washington’s toward the dollar. Just as Washington tries to assure other countries that it has a strong dollar policy but allows the dollar to decline, so China talks of wanting its Yuan to float against the dollar, but does nothing to make it happen. The whole situation is just another sign of how it has increasingly become one-world economically, if not politically, and how dependent even the powerful U.S. is on cooperative international relationships. Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.