A tale of two money men and the US-German currency shifts
United States Treasury Secretary James A. Baker III and West Germany's central bank president, Karl Otto P"ohl, don't look like Tweedledee and Tweedledum. But they sound similar in some ways. The two were here this week for the International Monetary Conference, an annual gathering of mostly chief executives of about 110 of the world's largest commercial banks.
Both Mr. Baker and Dr. P"ohl are concerned about the sharp ups and downs in the value of their currencies in relation to other major currencies in recent years and the resulting trade imbalances. Both have shifted their national policies toward a greater effort to influence exchange rates. Both see the need for greater international cooperation among the industrial powers. Both contend that international financial concerns should have a greater effect on the making of domestic economic policy.
But agreement eases off when national interests clash.
In this case, the problem is the exchange rate for the German mark. The deutsche mark has climbed more than 30 percent against the dollar since it peaked in late February 1985. German manufacturers are thus having a tougher time exporting their products. They are having to raise prices or reduce profits to stay competitive.
So far, West German businessmen have not appeared so adversely affected as their counterparts in Japan, faced with a similar rise in the yen's value.
The Bundesbank's P"ohl insisted at a press conference here and in a speech to the Council on Foreign Relations in New York that the external situations of Germany and Japan are ``completely different.''
As evidence, he calculated that Germany's balance-of-payments surplus this year will be $25 billion to $30 billion -- not even within ``calling distance,'' he said, of Japan's more than $70 billion.
Further, Germany's deficit is already headed toward self-correction, P"ohl held. The increase in the international payments surplus this year is due solely to the cheapening of imports, especially oil, as the dollar has depreciated. In terms of actual trade volume, the 1986 surplus is declining noticeably. Import volume (vs. the money value of imports) is growing at a 3.5 percent annual rate, while export volume is growing at only 1 percent.
And unlike Japan, Germany is a major importer of finished products, he noted. Many big US companies manufacture directly in Japan and will benefit from the solid growth in the German economy.
P"ohl was justifying two controversial views.
One was that the mark has strengthened sufficiently for the time being. He suggested there should be ``some little pause'' in dollar-mark fluctuations for some six months. The ups and downs in the value of major currencies ``make no economic sense,'' he said.
The second was that Germany's payments surplus will shrink without further stimulation of the domestic economy.
P"ohl expressed a vague hope that the major industrial nations could agree on ``an acceptable exchange-rate structure.''
But he conceded that the United States might want to see the dollar weaker to reduce its trade deficit, that Japan might want the yen stronger, and that Germany would probably be somewhere in the middle.
``I am not sure we could agree,'' he said.
Treasury Secretary Baker had earlier spoken of the need for a weaker dollar. But in the last couple of months or so, he has avoided any such comment, perhaps figuring the dollar was dropping anyway without any need for him to jawbone, or fearing the inflationary impact of too rapid a decline in the dollar. In his talk to the bankers he exercised the same restraint on this sensitive exchange-rate topic.
Martin Feldstein, former chairman of President Reagan's Council of Economic Advisers, felt no need for such diplomacy. He predicted a ``substantial'' further fall in the dollar, though he would not be more specific as to the amount.
``Why?'' he asked rhetorically. ``Because the current level of the dollar still implies a substantial persistent trade deficit and therefore a continually rising current-account deficit for the United States. That current level of the dollar is simply unsustainable.''
(Besides the trade balance, the current account measures the balance in services such as shipping and insurance charges, tourism, and the net interest and dividends that Americans pay to foreign investors on the loans and investments they have made in the US.)
Dr. Feldstein, again teaching economics at Harvard University, predicted that by the end of the decade, the current-account deficits of the US will have added more than $500 billion to US obligations to the rest of the world. The US will be by far the world's largest debtor nation.
``The annual cost of servicing this increased international debt will be $40 billion a year or more,'' he told the bankers. That spiral of rapidly increasing borrowing ``cannot persist.'' Foreign investors will not be willing to finance the combination of continued huge trade deficits and increasing debt service costs. Moreover, any interest-rate advantage of investments in America is already disappearing.
So, Professor Feldstein continued, the dollar must fall to shrink the trade deficit and therefore the inflow of capital needed to finance it.
By the early 1990s, he asserted, the US will again be running a trade surplus.
Secretary Baker contended that ``exchange-rate change alone should not be relied upon to achieve the full magnitude of the adjustments required in external positions.''
In other words, a boost in economic activity in Germany, Japan, and other key industrial nations would result in their importing more goods from the US and consuming more of their own output at home. So the dollar would not have to fall so far to correct the trade deficit.
Dr. P"ohl maintains that the German economy will grow faster than that of any other industrial nation this year, some 3 to 3.5 percent, with the income of Germans in real terms rising a handsome 4 to 5 percent. He termed that growth ``quite satisfactory.''
Moreover, the growth of money in Germany is well over its target. If Germany were to lower interest rates, the Bundesbank would lose ``all its credibility,'' he said. And the German government will not enlarge an already sizable budget deficit to stimulate the economy.
So the German-US differences on appropriate economic policies continue as they have for months. But Baker and P"ohl will also continue their useful cooperation on policy when that is politically feasible at home.