Magazine article The American Conservative

Dollars and Dragons

Magazine article The American Conservative

Dollars and Dragons

Article excerpt

How currency manipulation destroyed American manufacturing

TOKYO- In the mid 1990s, I published a book entitled Blindside: Why Japan Is Still on Track to Overtake the U.S. By the Year 2000. The prediction in the subtitle did not, as they say, pan out. But it was more soundly based than casual readers of the U.S. financial press might imagine. The book offered a view on exchange rates: I argued that a huge devaluation was desperately needed to save America's already fast-sinking manufacturing sector.

Had the Clintonites taken my advice, they would not only have halved the dollars yen value - taking it from around 100 yen as the book went to press to well below 50 - but they would have made similarly aggressive devaluations against other East Asian currencies. Basically, I was advocating another Plaza accord; the original one, drastic though it had been, was not enough. The Clintonites did the opposite, with results that are now abundantly clear to anyone familiar with global trade figures. Japan's current account surplus, already disconcertingly high in 1990, multiplied more than fivefold by 2010. America's experience was the mirror opposite: its current account deficit ballooned nearly sixfold.

The Clinton administration's dollar policy was to "let market forces take their course." This sounded fine, but in practice it gave the East Asians free rein to keep the dollar ridiculously overvalued, thereby delivering the coup de grace to America's once peerless manufacturing base.

The Blindside experience taught me two things: don't bet against East Asian financial bureaucrats, and don't overestimate American commonsense. As far as the second point is concerned, there has been progress since the 1990s. It is fair to say that many thinking Americans now realize there is no substitute for a strong manufacturing base. It is a bit late, however, as that base is gone.

In fact, the consensus among astute Americans has rarely, if ever, been darker. Certainly this was my impression at Mark Skousen's FreedomFest gathering in Las Vegas this July. The event's attendees - a mix of economic thinkers, libertarian political activists, and wealthy private investors - share a common interest in sound money. It was clear that their faith in the dollar has never been lower. Their forebodings are evidently shared in Washington and on Wall Street and have hardly been assuaged by the recent debt-ceiling crisis.

As a panelist in a FreedomFest discussion on China, I was asked how long the dollar might stay aloft before its final flameout. I guessed another five to ten years. I did not advance this with much confidence, however. We are in uncharted territory, and the case for the dollars continued role as lynchpin of the world currency systems hardly rests on solid fundamentals - at least not on "fundamental fundamentals" such as trade. On the contrary, the only thing saving the dollar from oblivion is an ardent desire throughout East Asia to keep it on life support.

Even this desire sometimes seems in question. Chinese spokesmen, with their occasional hints that they might abandon the dollar, like to kick sand in Uncle Sam's face. But in East Asia more than elsewhere, what matters is not what people say but what they do. Having now invested more than $1.2 trillion in U.S. Treasury bonds and other U.S. government securities, the Chinese are clearly walking the walk, even if they don't always talk the talk. As for the Japanese, South Koreans, Taiwanese, and Singaporeans, they too have been doing their considerable best to forestall a dollar collapse.

This is hardly to suggest the East Asians see U.S. Treasury bonds as a great buy. If anything they are more bearish even than the attendees at FreedomFest. So why do they keep loading up? They could, after all, invest in Europe - there are still some nations there that are not bankrupt. And, of course, there are plenty of hard assets around, not least land and natural resources in promising developing nations such as Brazil, Indonesia, and Russia. …

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