The joys of saving could rekindle a mighty dollar

HAMISH McRAE

George Soros thinks it, so it must be right. The recovery of the dollar, derided a few months ago, now suddenly seems more secure. Indeed, people who were predicting a downward direction for the dollar for ever and a day are venturing the cautious judgement that for a few months at least the recovery should continue. The more radical catch the scent of something more lasting.

The short-term story is a simple one. The dollar weakness of mid-summer had gone too far, particularly against the yen. True, the underlying current account imbalance between the two countries remains as large as ever, with the US current account stuck at a deficit of 2.5 per cent of GDP and the Japanese at a surplus of 2.5 per cent of GDP. But the fiscal position of the US is much stronger than that of Japan - a deficit of 1.8 per cent of GDP, while Japan is projected to run a deficit of more than 4 per cent of GDP both this year and next.

This disparity is partly because they are at different stages of the economic cycle, but if you allow for pension liabilities, the US situation is not only vastly better, but projected to be much better through the first 30 years of the next century.

Against Japan, the case for a recovery is particularly sharp because of the degree of over-valuation of the yen. Against Germany, though the mark is also somewhat high on a purchasing power parity basis, the case is more on the changing economic fundamentals.

Whereas before reunification Germany had a large current account surplus and frequently also ran a fiscal surplus, now it has neither. It is in current account deficit to the tune of close to 1 per cent of GDP, and has a fiscal deficit of more than 2 per cent of GDP (acceptable but significantly larger than that of the US).

This would be enough of a case to underpin a straightforward bounce back by the dollar against both the yen and the mark, but there are two much more interesting possibilities. The first is that we are seeing not just a bounce, but a solid medium-term recovery. This view was articulated last month, before the recent recovery was really under way, by NatWest Capital Markets, whose projections are shown in the graph.

This is expressed in trade-weighted terms, but translated into currency rates, it would suggest, according to NatWest, a dollar peaking at 125 in two years, a DM1.80 rate, and a sterling rate of $1.25. (British would- be holiday-makers, planning a trip in 1997 should wait a bit: NatWest projects the pound back up at $1.57 by December 2000!)

NatWest has three main reasons for this view: real interest rate differentials shifting in its favour; a serious move to a balanced budget in the US; and a secular improvement in the current account. But, as the bands on the graph show, NatWest also believes the secular trend is still downwards.

That may well prove right, but it leads to the tantalising possibility that the very long-term downward trend of the dollar may reverse itself during the next century.

On a 40-year view, the yen and particularly the mark have been sound currencies, gradually increasing their value against the dollar. On a 100-year view they have been catastrophic currencies, having their value wiped out at least once. To point that out is not to argue that there will be a rerun of the great German inflation of the 1920s, still less a revival of the Japanese militarist tendencies of the 1930s. Rather it is to point out that we should not assume that a chronically weak dollar (or for that matter a chronically weak pound) will be with us for ever. It is at least conceivable that the early part of the next century will see a grand turning point in the fortunes of the dollar.

For that to occur, two things need to happen. First, there really does have to be a change in the savings pattern of the US. The balanced budget process must be secured, and US citizens have to rediscover the attractions of building personal savings. Second, there must be a recovery in the relative performance of the US economy vis-a-vis the rest of the world. What are the chances of these changes occurring?

The balanced budget story is the one that has attracted attention and NatWest's positive judgement may well be right, but I am more interested in a change in attitudes to savings. Looked at rationally, shifting a couple of percentage points of personal income from consumption to savings (less than a year's growth in income for many people) would over a decade transform the condition of most American families.

Economists talk in terms of the financial effects of shifts in the sectors of GDP, but the social impact of a shift taking place at a family level would mean much more to most people. And other grand changes are stirring in the US - the new emphasis on families, for example - which would chime in with a rediscovery of the joys of saving rather than spending.

As for the recovery in the relative economic performance, that is surely happening now. Not only has US industry greatly improved its competitiveness, but in the new "soft" industries such as computer software and entertainment, US dominance has increased dramatically over the past decade.

The key indicator is the US surplus on trade in intellectual property, where it is one of only three countries to be in the black (the other two being the UK, a long way behind, and Sweden a poor third). The largest deficits are those of Germany and Japan. As information becomes infinitely available, countries will find it harder and harder to hold much of a lead in physical trade; they will distinguish themselves by the extent to which they generate new ideas.

Of course it cannot be proved. But there is surely a solid possibility the US economy (and hence the dollar) will look relatively much stronger in 10 years than it does now. If so, then this summer may turn out to be more than just a cyclical turning point for the dollar.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?