or all its professed desire for a
strong dollar, the Bush administration has apparently decided that
letting the dollar slide is a good way to shrink America's trade
deficit. This is dubious economic policy. It provides a modicum of
relief to American exporters, but it increases the nation's
vulnerability to higher prices and higher interest rates, while
ignoring fiscal measures that would more assuredly anchor the United
States in the global economy.
The dollar, which has declined nearly 30 percent against the euro
since President Bush took office in 2001, fell to a record low this
week. The decline has not been as marked against other currencies,
largely because China and Japan prop up the dollar by investing
heavily in United States Treasury securities - in effect, lending us
money so we can buy their goods. Meanwhile, the Treasury secretary,
John Snow, has largely eliminated the phrase "strong dollar" from
his workaday vocabulary.
The underlying problem is that deficits in America's global
transactions are at record levels, putting Americans at risk of
either a slow deterioration in living standards or abrupt spikes in
inflation and interest rates. There are three ways to get that
deficit down: America can reduce the federal budget deficit, thus
lowering the amount of interest we pay foreign countries to finance
that deficit; trading partners like Europe and Japan can expand
their economies, increasing their demand for American goods; or
America can allow its dollar to fall to increase its exports.
The only lasting remedy is to reduce the federal budget deficit.
That, in turn, calls for specific policies, like - we may have
mentioned this before - rolling back the Bush tax cuts. Letting the
dollar weaken is a far less responsible approach, an unwieldy and
risky attempt to reduce the trade imbalance without the political
pain of deficit reduction.
During the Bush years, 92 percent of the nearly $1 trillion
increase in publicly held debt has been financed by foreign lenders.
Foreign ownership of Treasuries has tripled from the peak of the
Reagan deficits in 1983. Because of this enormous dependency,
anything that might affect foreign lenders' willingness to invest in
Treasuries - including dismay over the United States' long-term
fiscal disarray, better investment opportunities elsewhere, or
geopolitical or economic strife - could cause the dollar to tank.
No one knows if or when that would actually happen, though the
dollar's slide since the election doesn't inspire confidence. But we
do know that financial flows are quick and unsentimental. A fiscal
policy that esteems controlling the deficit over tax cuts is the
best way to avoid a debilitating dollar decline.
There is truth to the complaint that countries in Europe and
elsewhere are not doing enough to bolster consumption within their
own economies. But there's precious little the United States can do
about it. Instead of complaining, Washington should get its own
affairs in order.
The president, wed as he is to deficit-bloating policies, is not
likely to step up to that responsibility without a stern shove from
Congressional Republicans and Democrats alike. While they're at it,
they should press Mr. Bush to choose Treasury officials who are true
economic stewards, not merely cheerleaders for his "tax cuts above
all" policies. If leadership is not forthcoming, the invisible hand
of the global financial community is all too likely to provide the