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Georges Ugeux Headshot

It's the Dollar, Stupid

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As hard to believe as it might be, the US authorities have discredited themselves in the handling of the so-called "currency crisis" and at the recent meeting of the G-20 finance ministers.

For months, the Administration has tried to convince us that the future of the world economy was dependent on the exchange rate of the Yuan. The reality is very different. The United States keeps its interest rates at historically low levels in order to stimulate the economy, and to indirectly support the banking system in its racketeering of consumers. By doing so, its interest rates no longer cover the "risk factor" that the markets consider to reflect its over-indebtedness. Such a policy is an answer to the slow economic recovery and high unemployment. It is perfectly coherent from a pure domestic viewpoint.

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At the international level, the insufficient remuneration of US Treasuries has a disastrous effect. First, it confirms the irresponsibility of the United States towards its international obligations. Nothing new. Since the "benevolent neglect" of the United States towards the dollar in the seventies, all US administrations have neglected their responsibilities as the issuer of the most important currency in the world. It is their way to make the rest of the world pay for their defense umbrella. Or so the story goes.

Regularly, the United States (and Larry Summers was the first engineer) went to visit foreign countries so that they act "responsibly" by increasing the value of their currency. Japan and China have been the prime targets of such policies. We fail to recognize that there might be some reasons why the dollar is structurally weak and neglected by its issuer: the Federal Reserve.

Behind the currency debate, lies a somber reality. Most of China's exports are the result of the relocation of production outside of the United States. It is American corporations that fuel the balance of payment deficit. Apparently this is for "competitive reasons." To be clear, they want to increase their profits by producing cheaper goods abroad, and so do their competitors. By doing so, they strengthen the Yuan to the detriment of the dollar. What the Chinese are telling the United States is that they are unwilling to increase the value of the Yuan at the pace that the United States demands. They will not let the US increase their competitiveness while losing value on their holdings of US Treasuries. They are indeed the largest lender to the US Treaury.

It is the weakness of the dollar that is the cause of currency disorders, not the disorder of other currencies. The United States has the right to have a currency policy totally driven by its self-interest. What does not work, is when the United States blames others for what is its own irresponsibility. That is plainly dishonest.

Adding to that situation, Secretary Tim Geithner at the meeting of the ministers of finance presented a "plan" that the Administration should be ashamed of. Not only was it inapplicable, but it exhibited how little this Administration knows about international issues. As the single largest debtor country in the world, a country which depends heavily on foreign lending, the US simply cannot act this way.

Geithner's plan is to limit the balance of payment surplus to a certain percentage of the GDP of each country. The balance of payment deficit/surplus is the difference between exports and imports and currently the US deficit is at least 10%. The surplus of China is above 10%.

How can champions of the market economy behave in such a contradictory manner? I suppose it's easier to blame other countries than to convince US corporations to produce more domestically! Maybe renouncing some of their bad habits (such as outrageous compensation) will make America competitive? Or perhaps we should export more and import less?

The answers to these questions lie in the United States, not abroad. A weak dollar will make US exports more competitive and imports more expensive. Casting blame on the world for your sins, while committing the most sins of all, is pure hypocrisy!

It's the dollar, stupid.