March 22, 1978

The Real Reason Dollar Is Sinking

The U.S. dollar-which was set free a few years ago to "float" in the international money market - has sprung a leak.

Instead of finding a secure spot in the fleet of world currencies, the American dollar sinks steadily and threatens to swamp the world economy.

Arm chair economists note our unfavorable balance of trade and the declining value of the dollar.  All would be well if only we could sell more computers abroad or import less oil.

A few experts even smile tolerantly, as with little children, and explain that a cheap dollar is a hidden blessing that stimulates our economy by making our goods more competitive.  Yes, German autos and Japanese cameras will cost more; but this will encourage us, and others, to patronize U.S. producers.

It is a plausible theory because it is half right.  Which is not good enough.  Half-baked policies and an imprecise understanding of the capitalist system has edged us uncomfortably close to a major depression.

In a representative democracy - such as make up the so-called Western Alliance -both the government and the citizenry must know how their system operates before they can safely tinker with it.  It is important, therefore, that we deal with facts as they operate in the real world of buying and selling, spending and saving.

The fact is that we currently are buying more from our overseas trading partners than we are selling them.  Two years ago we had a surplus of $11 billion in our "trade" account.  By the end of last year, however, our "balance" had tilted in the other direction with a "deficit" of more than $16 billion.

Note the quoted terms, for they are the conventional expressions used in foreign trade reports.  But it is not the whole story, as some of the more perceptive economists such as Milton Friedman, Irving Kristol and Robert Solomon try to point out.

In addition to the usual components of trade - manufactured goods and agricultural commodities-there is another large consideration that goes into the scale of a capitalistic economy: bonds, stocks, and other investment securities.

Money is used to complete trade transactions, but money also is used to buy and sell investments.  It is the flow of money between countries that determines the value of the various currencies.  We do not have a convenient term for this total measure so, in this column, we will call it "BALANCE OF CAPITAL."

A deficit in our balance of trade is not, in itself, a handicap.  In a growing, inflation-free economy a trade deficit is normal.  A growing country needs lots of goods.  This out-flow of dollars is tolerable if compensated by an in-flow of dollars from foreign investors buying shares in the growing country.

Thus, the United States ran a trade deficit without serious consequences for more than a century.  Foreign purchases of securities brought back more money than went out for trade.  The "balance of capital"-the bottom line -was in our favor.

The dollar is in trouble, real trouble, today because our balance of capital is tilting against us for one of the few times in history.

The out-flow of trade dollars is matched now by an out-flow of investment dollars.  During the first half of last year, $3 billion of private capital came into this country; but during the second half this swung to a $6.5 billion flight of investment money to Germany, Japan and other nations with lower rates of inflation.

It is disheartening to see our government stew about a $5 billion drop in trade, but ignore a drop in capital dollars nearly twice that amount.  Or, worse yet, our financial managers in Washington may be unaware of the broad picture.

President Jimmy Carter and his Economic Council dilly-dally over supporting the dollar in the foreign currency markets - holding back one day, rushing in with borrowed Treasury notes to "mop up" unwanted dollars the next day.

In reality these are pitiful moves that can be only temporary at best.  Inflation in the U.S. hit double digits last month, confirming what the money buyers abroad foresaw many months earlier.

Carter assures us the inflationary spurt is a one-time thing that will go away when warm weather comes.  The investor with capital in his pocket, and the international businessman gauging his market for our goods, is not convinced.  So the dollar is unwanted and sinks in value.

The printing of money to finance nonproductive social programs, and to buy back the dollars we sent overseas for oil, produces a boom atmosphere.  But it is a mirage seen only by ourselves.

Carter is trying to force Germany and Japan to "re-flate" their economies - to increase their inflation to match that of U.S.  But our best trading partners "obstinately" refuse, gritting their teeth and enduring the decline in their living standard.  A long and bitter experience with inflation - always ending in catastrophe - leads them to face economic reality sooner than later.

The downward slide of the dollar is an expression of the apprehension our trading partners have in the future of the U.S. economy.

It is a storm signal we must heed without further delay.

Author: Lindsey Williams