- The Washington Times - Wednesday, May 8, 2002

The U.S. current account deficit is running at an annual rate of 4 percent of gross domestic product. That's about $1 billion per day.

For a number of years, the large U.S. current account deficit has been accompanied by a strong dollar. Could the dollar's strength be coming to an end?

Since January the dollar has declined almost 6 percent in value against the Euro, which has been a weak and uncertain currency since its introduction. Is this a harbinger that a large dollar overhang is beginning to worry those who are holding our currency?

In this third in a series on America's imperiled future, let's explore some of the reasons the dollar has been strong despite many years of accumulated trade deficits.

Perhaps the most important is that the dollar is the world's reserve currency. It is the world's money and has taken the place of gold in central bank vaults. In addition, in many countries the dollar is not only the preferred currency for daily transactions but also the required one for major purchases. Countless individuals in foreign lands keep their savings in dollars.

The worldwide role of the dollar is due to the size of the U.S. economy and to America's economic and political stability. Together these have created what has appeared to be an almost limitless demand for dollars. Many people in many places have been willing to hold the $1 billion per day that the U.S. pumps out to cover its current account deficit.

Can this go on forever? Conceivably, yes so long as there is no good alternative to the dollar that people can use to hedge their bets on America. The decade-long collapse of Japanese economic performance took the yen out of contention. The German mark has been replaced by the euro, to date a weak currency. Gold has not been a good investment and is costly to hold, especially during the last 20 years of rising values of U.S. financial assets.

There is another reason the dollar has kept its strength. Foreigners have been swapping their growing holdings of dollars for our real assets. They are also buying U.S. patents, brand names, and the rights to make economic choices.

Some commentators, who do not look at the figures closely, think the dollars that go out to cover our trade deficit are coming back to us in the form of businesses and jobs created by foreign investment in the U.S.

Unfortunately, this is not the case. The Survey of Current Business reports that "outlays by foreign direct investors to acquire or establish businesses in the U.S. were $320.9 billion in 2000." Of this amount, "$316.5 billion, or 99 percent," were "outlays to acquire existing U.S. companies rather than to establish new U.S. companies." The data for 2001 are not yet available.

In other words, foreigners are using our $1 billion per day trade deficit to buy up American firms.

Nothink says this doesn't matter, because the jobs stay in the U.S. However, putting U.S. profits in foreign hands contributes to the outflow of dollars. Moreover, if the dollar is being kept up in value by foreign purchase of U.S. companies, what happens to the dollar when foreigners decide they own enough U.S. holdings or own the entire economy?

Keep in mind that as foreigners are buying up American firms, many of the remaining U.S. companies are moving both production and research and development out of the U.S. Sooner or later the domestic economic base won't support a strong dollar.

If the dollar falls in value, those "cheap foreign goods" won't be cheap any longer. American consumers will be squeezed by a declining dollar and by the loss of domestic manufacturing and high-tech jobs.

The economic shock would take political stability with it, as politicians scramble to offset declining incomes with more income-redis-tribution programs. America's continuing importation of massive numbers of poor, uneducated, welfare-dependent immigrants from Third World countries will add to the political pressures. Politicians will further squeeze the incomes of those Americans who hold the shrinking supply of productive jobs, not yet moved offshore.

What is the solution? There might not be one. If crisis arrives, it is a good bet Washington will have no clue.


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