You are here
How can you tell if your gold jewelry is real?
Whoops! It's 1985 All Over Again
By Eduardo Porter
The New York Times
Sunday, December 19, 2004
http://www.nytimes.com/2004/12/19/business/yourmoney/19doll.html
The White and Gold Room at the Plaza Hotel in New York seems an
appropriate spot for big financial decisions. Chandeliers drip
crystal from high ceilings. White walls are bedecked in gold trim. It
was in this opulent place on Sept. 22, 1985, that officials of the
world's leading industrial powers convened to hammer out a plan to
save the world from economic turmoil.
Almost 20 years later, the Plaza's sumptuous settings could be put to
similar use again.
President Bush starts his second term facing a financial bugbear that
shares many of the same qualities of the crisis two decades ago: The
United States' budget deficit is bloated. Its trade deficit is
hitting records every month. The mushrooming growth of its foreign
debt is scaring financial markets. And foreign exchange rates seem
out of kilter.
In 1985, President Ronald Reagan managed to avert a storm. When he
started his second term, a large budget deficit and high interest
rates were fueling a relentless climb in the dollar, opening a huge
gap in the trade balance. Yet by 1989 the dollar had fallen 50
percent against the Japanese yen and more than 40 percent against the
West German mark, without prompting runaway inflation. And the
current account deficit - the broad gap between exports and imports
of goods and services - had finally begun to close.
A major component of Mr. Reagan's strategy was built at the Plaza,
where finance ministers and heads of central banks of the United
States, Japan, West Germany, Britain, and France agreed to intervene
in currency markets -- furiously buying yen and marks -- to reduce
the value of the dollar. The meeting also inaugurated a period of
monetary policy coordination and introduced an international
dimension to what had been strictly domestic discussions of fiscal
policy.
While the nation's economic tribulations today are not identical to
those faced by Mr. Reagan, some economists suggest that the process
of policy coordination formalized at the Plaza provides a map that
Mr. Bush may want to follow. "The second Bush administration should
take a page from the second Reagan administration and do a midcourse
correction," said C. Fred Bergsten, director of the Institute of
International Economics in Washington.
But other than exerting pressure on China to let its currency, the
yuan, fluctuate in value against the dollar, the Bush administration
appears uninterested in coordinating economic policy with other
countries. It has mostly just exhorted them to spend more to help
close the United States' trade deficit. And Congress, now controlled
by Republicans, has shown no more interest in taking action.
The world's finances today are balanced rather precariously between a
big spender -- the United States -- and several countries around the
world that are big savers.
In broad schematic terms, the United States imports and the rest of
the world exports; the United States borrows and the rest of the
world lends. Financial flows are so lopsided that last year America
soaked up nearly three-fourths of the surplus savings in the entire
world.
Not surprisingly, this state of affairs is adding to the country's
foreign debt. At the end of last year, the nation's financial
deficit - what the United States owes the rest of the world, minus
what the rest of the world owes the United States - amounted to more
than $3 trillion, about 30 percent of the country's annual economic
output. And it is growing. In the 12 months through October,
foreigners acquired nearly $885 billion of new United States
government and corporate debt.
That wouldn't be a problem if the world were comfortable lending ever-
larger sums to the United States to pay for American investment and
consumption. But this is unlikely.
The Federal Reserve chairman, Alan Greenspan, who hasn't been one to
worry idly about deficits, warned in a speech to German bankers last
month that foreigners would probably demand higher interest rates and
bond yields to hold American debt.
"The question now confronting us," he said, "is how large a current
account deficit in the United States can be financed before
resistance to acquiring new claims against U.S. residents leads to
adjustment."
That is, when does the debt become so big that foreigners begin to
worry about getting their money back with a reasonable return?
Some foreign investors are already jittery. In the last two years,
the dollar has fallen substantially against several currencies,
including the Canadian dollar and the euro, and has slipped somewhat
less against the yen. Investment from abroad has been falling since
March.
Some economists are worrying that investor fears over the country's
solvency could set off an uncontrolled run on the dollar, or
worse. "I think we are going to have a sharp increase in interest
rates and a collapse in bonds," said Jeffrey Frankel, a professor of
economics at Harvard who was a member of the Council of Economic
Advisers during the Clinton administration.
Addressing this conundrum requires multiple changes on a global
scale. Mr. Bergsten and other economists said they believed that
today, as in 1985, international cooperation could come in handy.
First, the dollar must decline further against the Chinese yuan and
other Asian currencies. The dollar's steep but narrow fall to date
has placed a heavy burden on the exports of a small set of countries,
while doing nothing to the exchange rates of China and some other
major Asian exporters. And with the yuan's value virtually pegged to
the dollar's, other Asian countries, like Japan and South Korea, have
been reluctant to let their currencies rise much.
American pressure on China to let its currency float has been
unsuccessful so far. But a multilateral approach -- one that could
guarantee that other Asian currencies rose in tandem so as not to
reduce China's export competitiveness in the region -- might work,
some economists say.
"I could see the Europeans, the Japanese and the Canadians being very
enthusiastic about this," Robert D. Hormats, a vice chairman at
Goldman Sachs International, said of such a multilateral
agreement. "They argue that they are taking the brunt of the dollar's
adjustment."
Many economists say a change in the dollar's value, however, is not
enough. If the adjustment is to work, Asians and Europeans need to
spend more and save less, reducing their pressure to export and
increasing their appetite for imports. Most important, demand in the
United States must fall. That means the budget deficit must be
trimmed from its current level of 4 percent of the nation's output.
Otherwise, interest rates will rise substantially to bring private
consumption down.
"It is not enough for finance ministers to announce that they are
unhappy with the current configuration of exchange rates," said
Maurice Obstfeld, an economist at the University of California,
Berkeley.
But how much can economic diplomacy achieve today? In the 1980's, the
Group of 5 leading industrial democracies, which was later expanded
into the Group of 7, or G-7, with the addition of Canada and Italy,
had a very compelling reason to stick together: the cold war. The
collapse of the Soviet Union in the early 1990's has made other
countries less willing to follow the United States.
"G-7 plus China would impress the world that under the pressure of
the developed nations, China gave in - that's not really
multilateral," said Xu Xiaonian, a Chinese economist who recently
became a professor at the China Europe International Business School
in Shanghai. "It's better than the U.S. versus China, but only
marginally better."
Even traditional allies don't see eye-to-eye these days. Mr. Bergsten
may want the yen to rise against the dollar, but the Japanese may not.
Moreover, some things are just tough to coordinate. To begin with,
fiscal policy is freighted with local politics and is virtually
impossible to coordinate internationally. Persuading the indebted
Japanese government to spend more or the European Central Bank to
lower interest rates is not likely to be achieved by a global meeting
at a five-star hotel.
"The sizable fiscal deficit of Japan and the convergence criteria of
Europe are obstacles to easy fiscal policy," said Tomomitsu Oba, a
primary architect of the 1985 agreement as Japan's vice minister of
finance for international affairs.
Then there is the issue of getting the United States interested. Mr.
Bush, in particular, has not shown a great enthusiasm for
multilateral solutions to the world's problems. And his economic wish
list -- led by the privatization of Social Security and a reform of
the tax code -- leaves little space for policies that would reduce
the bloated budget deficit.
"There is a strong argument for a Plaza-like agreement at the moment.
But the chances of having it are zero," said Barry Eichengreen, a
professor of economics at the University of California,
Berkeley. "The Chinese are going to say, 'If you want cooperation
from us, we want to know what your contribution will be,' and I don't
think they will accept Social Security reform as a quid pro quo."
The Plaza agreement itself provides an interesting insight into the
possibilities and limits of international economic collaboration.
In the view of the United States' allies through early 1985, Mr.
Reagan's economic policy had no place for international cooperation,
either. That policy, executed by Donald T. Regan, the Treasury
secretary at the time, was driven by an overriding belief in tax
cuts. The administration contended there was no reason to worry about
the trade deficit, and that a strong dollar was simply a measure of
America's economic potency.
Advisers who didn't toe the line were dispensed with. In February
1984, for example, the Council of Economic Advisers, then headed by
Martin Feldstein, blamed the budget deficit for the current account
deficit and noted that the market considered the dollar to be
overvalued by more than 30 percent. Mr. Regan dismissed the warning -
"as far as I'm concerned, you can throw it away," he said - and Mr.
Feldstein resigned in July. He is now the president and chief
executive of the National Bureau for Economic Research.
But the politics would change. The rising dollar through the first
Reagan term had been hurting some of the administration's most
important allies in the business lobby. In early 1985, the National
Association of Manufacturers said the $112 billion merchandise trade
deficit of 1984 -- then a record, and double the amount of the
previous year -- was a "disaster" that was crimping growth
and "radically changing the way American firms are doing business"
by "driving more and more of them abroad."
Moreover, Congress, then controlled by the Democrats, started
bubbling up with protectionist bills and resolutions. One proposal,
by Senator Lloyd M. Bentsen of Texas and Representatives Richard A.
Gephardt of Missouri and Dan Rostenkowski of Illinois, would have
imposed import surcharges on countries with large trade surpluses
with the United States. Another, by Senator Bill Bradley of New
Jersey, would have mandated intervention in currency markets to
weaken the dollar if the trade deficit hit certain triggers.
So as he started his second term, Mr. Reagan changed course. Mr.
Regan left the Treasury to become the president's chief of staff,
while James A. Baker III, the chief of staff, moved to the Treasury.
One of Mr. Baker's first statements was that the Treasury's policy of
nonintervention was "obviously something to be looked at." By
February 1985, the United States had started intervening in the
currency markets to weaken the dollar.
AT the Plaza seven months later, Mr. Baker and the Federal Reserve
chairman at the time, Paul A. Volcker, agreed with their counterparts
from Japan, West Germany, Britain and France to not only collectively
spend billions to weaken the dollar, but also to usher in an era of
economic policy coordination.
In 1986, West Germany, Japan, and the United States engaged in
coordinated interest rate cuts. While there was no sustained
coordination on fiscal policy, the multilateral process provided a
forum to talk about its contributions to the global imbalances in the
world economy. The United States even persuaded the Japanese
government to increase public spending.
"The Plaza was very successful, measured economically or
politically," said someone who participated in the talks, a high-
ranking American official at the time who spoke last week only on the
condition that he not be identified. "We didn't get protectionist
legislation, and the dollar's decline did not create problems in the
United States."
Some people dispute the notion that the Plaza meeting was a success.
For one, the collaboration was messy. The dollar fell further than
expected, leading the United States and its partners to quickly seek
a new accord, signed at the Louvre palace in Paris in 1987, to try to
stabilize the currency. And the wrangling among the allies over
monetary policy and exchange-rate coordination helped to prompt the
collapse of the United States stock market in October 1987.
What's more, the current account deficit kept growing for two years
after the Plaza accord. It started shrinking significantly only as
the budget deficit narrowed and the economy slowed later in that
decade.
Some economists argue that intervening in the foreign exchange
markets was an unnecessary expense and that the attempt at
coordination was pointless because countries followed their own
interests anyway. America's budget deficit started shrinking after
Congress passed legislation limiting public spending. The Fed cut
interest rates to support growth. Japan, West Germany and the other
European allies were also following their own interests in cutting
rates. The markets just responded to the economic fundamentals, these
critics say.
Richard H. Clarida, a professor of economics at Columbia University
who was chief economist at the Treasury during Mr. Bush's first term,
wrote in an e-mail message: "I view Plaza as a public statement that
conveyed to markets that the new Baker Treasury acknowledged that the
dollar had to fall (and indeed it had been falling gradually since
February 1985) and implicitly that monetary policy would be
consistent with that goal, and that budget deficits would be coming
down,"
Yet for all the skepticism, Mr. Hormats of Goldman Sachs said he
still saw a benefit from the efforts at multilateral coordination. He
was at the Plaza on Sept. 22, 1985, waiting to hear news of the
negotiations. "The Plaza was the one thing that created the notion
that we were willing at least to work with other countries on the
exchange rate," he said. "It changed a neglectful approach to one of
international cooperation."
-------------
Keith Bradsher contributed reporting from Hong Kong for this article.
----------------------------------------------------
To subscribe to GATA's dispatches, send an e-mail to:
gata-subscribe@yahoogroups.com
To unsubscribe, send an e-mail to:
gata-unsubscribe@yahoogroups.com
----------------------------------------------------
RECOMMENDED INTERNET SITES
FOR DAILY MONITORING OF GOLD
AND PRECIOUS METALS
NEWS AND ANALYSIS
Free sites:
http://www.cbs.marketwatch.com
http://www.capitalupdates.com/
http://www.silver-investor.com
http://www.thebulliondesk.com/
http://www.goldismoney.info/index.html
http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
http://www.investmentrarities.com
http://www.kuik.com/KH/KH.html
(Korelin Business Report -- audio)
http://www.plata.com.mx/plata/home.htm
(In Spanish)
http://www.plata.com.mx/plata/plata/english.htm
(In English)
http://www.resourceinvestor.com
Subscription sites:
http://www.lemetropolecafe.com/
http://www.interventionalanalysis.com
http://www.investmentindicators.com/
Eagle Ranch discussion site:
http://os2eagle.net/checksum.htm
Ted Butler silver commentary archive:
http://www.investmentrarities.com/
----------------------------------------------------
COIN AND PRECIOUS METALS DEALERS
WHO HAVE SUPPORTED GATA
AND BEEN RECOMMENDED
BY OUR MEMBERS
Blanchard & Co. Inc.
909 Poydras St., Suite 1900
New Orleans, Louisiana 70112
888-413-4653
http://www.blanchardonline.com
Centennial Precious Metals
3033 East First Ave., Suite 807
Denver, Colorado 80206
1-800-869-5115
http://www.USAGOLD.com
Michael Kosares, Proprietor
cpm@usagold.com
Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
http://www.ColoradoGold.com
Don Stott, Proprietor
1-888-786-8822
Gold@gwe.net
El Dorado Discount Gold
Box 11296
Glendale, Arizona 85316
http://www.eldoradogold.net
Harvey Gordin, President
Office: 623-434-3322
Mobile: 602-228-8203
harvey@eldoradogold.net
Gold & Silver Investments Ltd.
Mespil House
37 Adelaide Rd
Dublin 2
Ireland
+353 1 2315260/6
Fax: +353 1 2315202
http://www.goldinvestments.org
info@gold.ie
Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
http://www.gloomdoom.com
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889
gwestgaard@investmentrarities.com
Kitco
178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
and
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Canada
Toll-free:1-800-363-7053
Fax: 514-875-6484
http://www.kitco.com
Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
http://www.certifiedcoins.com
Ed Lee, Proprietor
1-800-835-6000
leecoins@aol.com
Miles Franklin Ltd.
3015 Ottawa Ave. South
St. Louis Park, Minn. 55416
1-800-822-8080 / 952-929-1129
fax: 952-925-0143
http://www.milesfranklin.com
Contacts: David Schectman,
Andy Schectman, and Bob Sichel
Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614
314-965-9797
1-800-280-9797
info@mocoin.com
http://www.mocoin.com
Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877
Metalguys@aol.com
Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
http://www.swissamerica.com
Dr. Fred I. Goldstein, Senior Broker
1-800-BUY-COIN
FiGoldstein@swissamerica.com
----------------------------------------------------
HOW TO HELP GATA
If you benefit from GATA's dispatches, please
consider making a financial contribution to
GATA. We welcome contributions as follows.
By check:
Gold Anti-Trust Action Committee Inc.
c/o Chris Powell, Secretary/Treasurer
7 Villa Louisa Road
Manchester, CT 06043-7541
USA
By credit card (MasterCard, Visa, and
Discover) over the Internet:
http://www.gata.org/creditcard.html
By GoldMoney:
http://www.GoldMoney.com
Gold Anti-Trust Action Committee Inc.
Holding number 50-08-58-L
Donors of $750 or more will, upon request,
be sent a print of Alain Despert's colorful
painting symbolizing our cause, titled "GATA."
Donors of $200 or more will receive a copy
of "The ABCs of Gold Investing" by Michael
Kosares, proprietor of Centennial Precious
Metals in Denver, Colorado.
GATA is a civil rights and educational
organization under the U.S. Internal Revenue
Code and contributions to it are tax-deductible
in the United States.
