Here's the trillions of dollars question this
Tuesday 26 September 1995
Now ponder a bigger question: could this upturn of the dollar be more than just cyclical? Put another way: could the long decline of the dollar since the break-up of the Bretton Woods system in 1972 be over?
For many people this possibility is so unlikely as hardly to be worth consideration. It is not just that it would mark the reversal of a generation- long trend; it would also seem counter-intuitive given the large current account and budget deficits the US has had for more than a decade and the enormous net deficit position of the country as a result.
Maybe. But let's look at the counter argument, which, in a nutshell, is that there have been two radical changes in the US since the late 1980s, the scale of which the foreign exchanges have fully yet to grasp. The first concerns US competitiveness; the second, US savings.
On competitiveness, it is now pretty clear that US industrial companies have made dramatic improvements in productivity since the middle 1980s. The most obvious sign of this has been a negative one: the downsizing of the workforce of the giant corporations. But of course the positive one has been reflected in the recovery of the US automobile industry, the return to top position in international productivity, the rise in the earnings per share of Fortune 500 companies and so on. Unit labour costs in manufacturing, as the graph shows, have been zero or falling since the beginning of 1993.
There are two further aspects to this commercial renaissance on the services side of the economy: a rise in productivity of existing industries and the creation of wholly new ones.
The figures on the improvement of service industry productivity seem to have been less impressive than that of manufacturing: a vast amount of money has been invested in personal computers, information technology and the like without any obvious return. Productivity in service industries is notoriously hard to measure but in the last couple of years there does seem to have been evidence this investment has been paying off. That is also shown in the graph: look at the way unit labour costs for the whole economy have remained low for the last year despite the fact manufacturing is contributing less of an advantage than it was last year. It is almost as though it took several years of experience in using the kit before US companies and their employees began to grasp its potential for improving efficiency.
More dramatic is the creation of new industries. There are obvious ones, like computer software, but also the less obvious, like the computer graphics industry that has developed to support film-makers.
The Internet itself has generated vast economic activity that is not yet being caught in the statistics. This is a world-wide activity, but it remains anchored in the US.
It is at least possible to support the argument that there have been radical changes in US commercial performance with hard facts. It is not really possible to do the same about US savings. True, the Federal budget deficit is only 2.3 per cent of GDP this year - unlike the whole of Europe, bar Luxembourg, and Japan, the US would qualify for all the Maastricht convergence criteria.
The US does well on inflation, too. Though consumer prices have remained at about 3 per cent since the beginning of 1992, as the other graph shows, the best measure of prices for the whole economy, the GDP deflator, has fallen to only about 2 per cent.
But the problems of the US through the 1980s and early 1990s has not been so much that the budget deficit was so big; rather that domestic savings were insufficient to finance it. So the issue is whether there has been a significant change either in the political forces that determine the US fiscal stance, or the social forces that determine personal savings.
On politics, the debate rages. The balanced-budget requirement was one bit of the Republican's programme Con- gress failed to enact. But the pressure for fiscal responsibility has not gone away. Only yesterday the White House attacked Newt Gingrich, speaker of the House of Representatives, for a statement that he would not pass an increase in the US debt ceiling until the president approved the Republican plan to balance the budget. "The president," a White House spokesman said, "finds it difficult to believe the speaker would mean anything so irresponsible."
The current ceiling on US national debt of $4.8 trillion will be reached in mid-November. Presumably some kind of deal will be reached, and there has been similar brinkmanship before. But the pressure to cut spending will remain, for the call for a balanced budget is not just a Republican plot: it has considerable bi-partisan support.
What about savings? There is little evidence of a change in habits in the figures. In the press there is much more talk of the need to save, and the rationale behind Republican pressure for income tax cuts (which on the face of it sits oddly with the balanced budget stuff) is that by switching the burden of taxation to spending, people would be able to save more.
As job insecurity increases there is certainly a strong case for people to save more against hard times. Maybe, too, a need to save fits the more general mood of a large part of grass-roots America that people should take more responsibility for their own behaviour. But while it would be dishonest to pretend there is much evidence yet of social change, this is an area to watch closely for anyone seeking to judge whether the dollar's long decline is over at last.
So the only sensible answer to the big question posed at the beginning is that it is too early to answer. My hunch is that it is better than a 50/50 chance that the dollar's decline is indeed over. But that is only a hunch.
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