US faces a dunning that will weaken dollar, economist says
From now on the financial balance sheet of the United States with the rest of the world will be moving into the red. And that, adds Stephen Marris, is one reason the recent strength of the American dollar is unsustainable.
The timing of such a decline is uncertain, however, warns Mr. Marris, an economist and senior fellow with the Institute for International Economics in Washington. "None of us know how far the richest country in the world can go into debt before people ask the bills to be paid."
Marris, in a telephone interview, likened the foreigners' position to that of a Bond Street tailor in London serving a "Lord So and So." For reasons of gentlemanly decorum, the tailor doesn't send a bill to the lord. Nor, however, does this nobleman send his tailor any money. Eventually, the tailor gets worried. Hearing rumors about his customer being in financial difficulty, the tailor screws up his courage and sends a bill.
When foreigners get anxious about the financial position of rich Uncle Sam, they will withdraw some of their financial investments in this country and as a result, the dollar will drop in value.
In speaking of the US going into the red, Marris was referring to financial assets alone -- such investments as Treasury bills, bank certificates of deposit , commercial paper, corporate stocks, and so on. He was excluding direct investment in plant and equipment.
For some decades, Americans have owned more financial assets abroad than foreigners have held in the US. But as a result of the current flood of investment money into the US and the huge trade deficits of recent years, US assets and liabilities are about balanced today, calculates Marris, a former chief economist of the Organization for Economic Cooperation and Development in Paris.
The balance will become negative as the US suffers further deficits in its international payments with other nations. America's "current account" deficit is expected to exceed $100 billion this year and continue negative at least through next year. The US will be piling up more debts -- like a developing country. And, Marris notes, it will have to service those debts, paying more than $10 billion in annual interest for each $100 billion on unpaid bills.
Why, if Uncle Sam is in such a shaky financial situation, is the dollar flexing its muscles? This week, for example, one dollar bought three West German marks for the first time since January 1973.
Mr. Marris offers this explanation for the mystery:
The United States economic recovery has been above average in strength. In the rest of the world, the expansion has been weaker than usual for postwar recoveries. So there has been a "striking growth gap" between the US and other nations. As a result, the US has pulled in more goods from abroad, and foreign nations have had plenty of goods to offer, considering their weak recoveries. At the same time, foreign industrial nations have been reducing their budget deficits in relation to national output, while the opposite has been true in the US.
In the years between 1981 and '84, the US structural deficit (that portion of the total deficit not resulting from the downturn in the business cycle) has enlarged by 1.5 percent as a proportion of gross national product. It has pushed up interest rates, luring foreign investment. In Japan, West Germany, and the United Kingdom, combined structural deficits have shrunk by 2 percent in the same period.
Moreover, private investment has jumped sharply in the US.Money put into residential construction, business plant and equipment, and inventory amounted to 12.5 percent of total national output when the recovery started about the first quarter of 1983; by the first quarter of this year it reached 17 percent.
Both the high government deficit and the high rate of private investment have needed to draw on savings not only from the US, but from around the world. High real interest rates in the US have stimulated that inflow of funds. In fact, Marris figures that foreign money has financed almost half of the increase in total private investment -- a record in relation to gross national product never exceeded before.
On balance, the US has been even more successful in drawing in foreign savings than foreign goods. That strong demand for the dollar has pushed up its price. In turn, the strong dollar means Americans can buy foreign goods cheaply and experience lower inflation.
At the end of last year, according to new statistics released by the Department of Commerce, the US had a positive balance in direct investment of $ 133 billion. Americans owned $266 billion of plant and equipment in other nations; foreigners owned half as much in the US.
Looking at all elements of the US international balance sheet, the US was still in the black by $105 billion at the end of 1983, down from $150 billion at the end of '82. But as the US continues to spend 20 percent more on goods and services abroad than it is selling, the rest of the world will at some point send its bill.