[Marxism] Wall Street Journal editorial: "A Dollar Warning"

Walter Lippmann walterlx at earthlink.net
Tue Nov 23 09:47:19 MST 2004

by Walter Lippmann, November 23, 2003

Two weeks ago, the WALL STREET JOURNAL published a giant
attack on Cuba's de-dollarization policies. Now the WSJ is
sounding a nervous warning to readers against Washington's 
policies which are allowing the dollar's continued decline.

And while the WSJ surely hasn't changed its attitude on
Cuba, they're sounding an alarm bell now against what the
United States government is doing and failing to do about
the state of the U.S. dollar in the world today. Listen.

After these notes you will find an editorial and a column
by the WSJ's Deputy Editor, George Melloan, taking up the
danger to the U.S. dollar which is shaping up under the
administration of its Commander-in-Chief George W. Bush. 
Melloan has been with the WSJ for over THIRTY YEARS, so
he's someone whose views can be looked at seriously.

On November 12, 2004, the WALL STREET JOURNAL's Cuba-basher-
in-Chief, Mary Anastasia O'Grady, ran a massive essay in
which she denounced Cuba's policy which elminates the use
of the U.S. dollar as legal tender for business on the
island. Cuba's decision was a response to Washington's
efforts to disrupt Cuba's economic relations with those
U.S. firms with which the island has active economic ties
which are fully authorized under existing U.S. legislation.

So EVEN WITHIN THE CONTEXT of US law, which is committed to
the overthrow of the Cuban system, there is a small window
for legal economic activity, which the Cubans have seized
to purchase basic agricultural commodities to help feed 
Cuba's population. The Journal derided Cuba's decision to
de-dollarize the Cuban economy, saying Cuba was trying 
to shake down Miami Cubans. Nothing was further from the
truth, when the actual facts are known.

NOW the Wall Street Journal editorially warns both the 
U.S. government in Washington and the business community
in the United States that the US is risking disaster if 
it continues to allow the dollar to fall. I'm not an
economist, but Washington's occupation of Iraq is today
probably the biggest source of inflation, and therefore
the biggest source of trouble for the U.S. dollar. Bush
went to Iraq last year to brag about what he claimed was
the end of major combat operations. Iraq's resistance 
has continued and deepened substantially since then.

Washington evidently underestimated the strength and
staying power of the Iraqi resistance, but the Iraqis 
keep on resisting the occupation anyway. If a single
picture is worth a thousand words, consider this:

While the Journal fully endorsed the invasion and the
occupation of Iraq, and doesn't today question the US
role there, others, including the volunteered and the
pressurized soldiers and their families, may begin to
look at these things differently. They may begin to
see that the "Almighty Dollar" might prove much more 
like a poison pill than the Long Ranger's silver bullet.

As it turns out, Cuba's measures can now be understood
as conservative, prudent and as self-defensive steps to 
protect Cuba's currency and economy from pollution by 
a currency, the U.S. dollar, which is in decline in the
world market today. 



November 23, 2004
A Dollar Warning
November 23, 2004; Page A18

President Bush has let everyone know he intends to pursue
an ambitious second-term agenda. But if he wants to know
what could spoil his plans even before his second
Inaugural, he might consider the market reaction to his
Administration's weak dollar complacency.

Stocks and bonds both tanked on Friday, as the dollar fell
again and oil and gold jumped, the latter to its highest
level ($449 an ounce yesterday) since 1987. Investors may
recall that was the last time we had a dollar crisis, as
well as a little stock-market episode known as Black
Monday. The markets rallied yesterday, as the dollar firmed
and oil dropped. But we hope the point has been driven home
that investors don't bet on countries that debase their

All the more so when the nation's leading policy makers
seem blase, not to say clueless, about the matter. Treasury
Secretary John Snow has been roaming the world saying that
he favors a "strong dollar" policy even as he lobbies for a
weaker dollar against Asian currencies. Investors who
observe what Mr. Snow does tend to discount what he says.

Mr. Snow is also fond of repeating the nonsense that
exchange rates should be set by "market" forces. However, a
currency isn't just another commodity, like wheat or
copper; it is a store of value. And unlike other
commodities, its supply is determined by a central bank, in
the U.S. by the Federal Reserve, which has a monopoly on
dollar creation. The global currency markets are dominated
by a cartel of central banks, and currency values are a
function of their relative monetary policies. Isn't a
Treasury Secretary supposed to know that?

The larger worry is that the Bush Treasury, and perhaps Mr.
Bush himself, seem to have fallen for the notion that a
country can devalue its way to prosperity. This is the
patent medicine of the manufacturers' lobby, as well as the
kind of economist who has done so much for Argentina,
Mexico and other nations over the years. Britain tried this
in the 1970s, and had to call in Margaret Thatcher to save
the country from sinking to Third World status. The Carter
Administration also tried talking down the dollar and ended
up inspiring a global run on U.S. assets.

As we saw last Friday, those kinds of runs don't stop at
the water's edge but tend to whack U.S. stock and bond
prices too. Nothing will more quickly sap Mr. Bush's
hard-won "political capital," to borrow his phrase, than a
sharp weakening of global demand for American economic
capital. He can forget about Social Security reform if
there's a stock-market plunge.

Which brings us to that other chief U.S. economic policy
maker, Alan Greenspan. The Fed Chairman's remarks in
Germany helped to trigger Friday's market slide, because
markets interpreted them as also suggesting that the dollar
is going to have to fall.

Having read his remarks in full, however, we found them to
be a more thoughtful view of the long-term dilemmas
confronting the dollar and its role as the world's reserve
currency. One of his points is that the U.S.
current-account deficit, now at more than 5% of GDP,
"cannot continue to increase forever." Well, sure. But Mr.
Greenspan also noted that so far "we see only limited
indications" that the U.S. trade deficit "is meeting
financing resistance" from foreign investors. In short,
there's no immediate crisis -- unless we do something
stupid like talk down the dollar.

Mr. Greenspan is a crafty politician, and we also wouldn't
be surprised if he raised this issue now to deflect
attention from the Fed's own responsibility for the
dollar's fall. The Fed has been running an easy-money
policy for more than two years, continuing with negative
real interest rates despite such early inflationary
warnings as $50 oil, nearly $450 gold, and a 24% decline in
the dollar since 2002. Mr. Greenspan certainly knows that
the federal budget deficit isn't the cause of current
dollar weakness, especially since that deficit is now
declining. But he probably doesn't mind if the press corps
uses his remarks to blame any economic troubles on White
House fiscal policy instead of blaming the Fed.

Even some of our supply-side friends seem to think there's
no inflation to be seen these days, and that the dollar's
fall is no big deal. But these are the folks who also still
moonlight reading the entrails of M-1, M-2, and other
mysteries. We'd prefer to look at actual prices, and those
all tell us the Fed needs to pay more attention to its
primary responsibility of preserving the value of the

November 23, 2004


Talking Down the Dollar Is a Risky Game

November 23, 2004; Page A19

Well, what do you know? Both the U.S. Treasury secretary
and the Federal Reserve chairman waxed nonchalant about the
dollar in Europe last week and markets tumbled. All except
gold, of course. That usually reliable inflation signal
soared to $448 an ounce, the highest since the market bust
of 1987-88.

Should this have surprised anyone? When you talk down the
dollar, investors run for some other currency. That
happened in 1987, but perhaps 17 years is too long for an
institutional memory to be sustained. Treasury Secretary
John Snow has been playing with this fire for some months
now, presumably because he believes the hoary old theory
that a weak national currency is good for business. That
idea should have gone out the window in the 1970s, when
England's Old Labour government devalued its way into
oblivion. But again, that was a long time ago and people

Before last week, Mr. Snow's campaign against the dollar
hadn't excited the markets terribly. Perhaps they unwisely
underestimated Treasury's influence on monetary policy.
There was even a pre-election rally on opinion polls
showing a likely Bush victory. And overseas investors may
have been betting that the Federal Reserve would stop the
rot with a more vigorous escalation of interest rates after
the election.

But when Alan Greenspan told a bankers' meeting in
Frankfurt last week that he didn't see much prospect of a
dollar rally, the markets turned less sanguine. The Dow
fell 115 points and bonds sagged as well. Gold flashed its
caution warning. After all, Mr. Greenspan is the chief
custodian of the dollar, and if he doesn't think it will
recover, perhaps that means he plans to do nothing serious
to try to make it go up -- benign neglect, so to speak.

Bear Stearns economist David Malpass wrote that the
Greenspan remarks had triggered "a mild case of capital
flight." Dollar securities have been the favored safe haven
for investors for decades. Huge U.S. trade deficits have
put a vast amount ($2.6 trillion, by one estimate) in
foreign hands. Those dollars give market support for U.S.
securities, particularly the Treasury bonds that are a
favorite of Japanese and Chinese central banks. The U.S.
buys their goods and they buy U.S. debt, a mutually
beneficial arrangement as long as it can be preserved.

But some overseas investors are in a position to exercise
more discretion. If it appears that the euro is going to
continue its climb relative to the dollar, investing in
that currency looks like an attractive way to protect
value. The European Central Bank, which runs the euro, has
a single mandate, to preserve that currency's purchasing
power. The Fed, by contrast, has a dual mandate, since it
is also charged with promoting full employment, which has
caused it to err at times on the side of excess liquidity
and inflation.

So the euro has its own attractions as a safe haven. The
only problem is that the euroland economy remains sluggish.
That's not because of the strong euro. Europe was just as
sclerotic when the euro was worth only 80 cents as it is
now with a $1.30 euro. Mr. Snow was at least right in
counseling the Europeans that high taxes and excessive
regulation are their main problem, not the strong euro.

But just as a weak euro didn't foster a boom in Europe,
neither has a weak dollar been an important reason for
America's economic recovery. Indeed, it has been a
handicap, as the dollar price of oil has soared, for
example, relative to the euro price of oil. A continued
weak dollar will risk aborting the U.S. recovery. A flight
from the dollar, if it gets worse than the "modest" level
described by Mr. Malpass, would further weaken its value
relative to other currencies, commodities and manufactured
goods. A higher rate of inflation would be the result. The
stock and bond markets would suffer more damage as well.

In his speech in Frankfurt, Mr. Greenspan showed that he
well understands the dynamics of currency values when he
warned of a "diminished appetite for adding to dollar
balances" if the U.S. continues to pump such vast
quantities of dollars out into the rest of the world to
meet U.S. consumer demand.

A theoretical construct called the "J-curve" argues that a
weakening currency eventually corrects the trade deficit by
reducing the buying power of the currency. But when a
currency weakens, it takes more and more to buy the same
amount of goods, so it is not entirely clear that this
supposed self-corrective effect does anything more than
fuel inflation.

A more certain approach would be for the Fed to give a
clear signal to the world that it plans to harden the
dollar. It could do that very simply with a more vigorous
program of raising the federal funds rate, which is the
short-term interest rate it directly controls. The fear
that this would kill the U.S. recovery is exaggerated. The
economy is fueled mostly by long-term credit, mortgage
loans for example. And mortgage interest is likely to be
made more costly by what we saw last week, when the bond
market began to weaken. If 10-year bond prices fall, with
the result that their yields rise, mortgage rates will not
be far behind. In short, firming up rates might save the
recovery rather than abort it.

Of course, there are the usual voices saying that the
answer is to throw the Bush tax cuts overboard. Combined
with the dollar problem, that is a sure prescription for

One would like to think that there might be a subtle game
going on between the two top financial officers of the U.S.
government. Perhaps Mr. Greenspan was offering a little
demonstration to Mr. Snow of what can happen if the
Treasury secretary persists in his quest for prosperity
through devaluation. What can happen is more of what we saw
last week, only far more serious. But any hope that Mr.
Greenspan is just sending a message might be wishful
thinking. So keep tuned to see whether the Fed decides soon
to get serious about the dollar's slump.


George Melloan is the Journal's Deputy Editor,
International. He began writing "Global View" in 1990, when
he took over responsibilities for the overseas pages after
17 years as deputy editor in New York. During the first
five years of his present assignment he was based in
Brussels, traveling extensively from there to write about
such events as the fall of the Berlin Wall, the break-up of
the Soviet empire and the collapse of the Japan's stock
market and real estate bubble. He returned to New York in

Mr. Melloan invites comments to george.melloan at wsj.com 

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