Thursday, October 13, 2005


Does The US Want A 'Plaza Accord' Redux?

This Business Week article looks at what the central banks did in the 1980's and what that means today. "Back on Sept. 22, 1985, the Group of Five nations (the U.S., Japan, Britain, West Germany, and France) agreed to devalue the U.S. dollar vs. the Japanese yen and German deutschemark though a series of currency interventions. A year later, the dollar had depreciated by about 50% in one of the biggest and fastest currency realignments in post-war history. This move would not only revive U.S. competitiveness in exports but also contribute to a massive speculative bubble in Japan."

"In 1985, much like today, there were huge worries about massive budget and current-account deficits in the U.S. In 1985, the U.S. current-account deficit was about 3.5% of gross domestic product. Today, it's about 6%."

"Indeed, the U.S. is sending Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow to Beijing this week to urge Chinese monetary authorities to let the yuan appreciate against the dollar."

"As for China, my hunch is that Chinese President Hu Jintao's government has absolutely no intention of repeating the Japanese experience. So where does that leave us? Right now, the U.S. debt machine continues to grow more powerful with little consequence to either the U.S. economy or long-term interest rates. That's because both China and Japan continue to use their surplus savings and current-account surpluses to buy U.S. Treasury bonds."

"But what if the U.S. gets into trouble? What if interest rates soar to keep attracting foreign money? What if the U.S. turns to other economies and their Finance Ministers for some sort of coordinated currency regime to bail it out?"

"Let's hope it doesn't come to that because a U.S. economy in crisis would be bad for everyone. But this much is clear: The U.S. would likely face far more skeptical trading partners than it did back in the mid-1980s. The Plaza Accord may seem like ancient history to most folks, but not to those who count most. The Finance Ministries and central banks of Japan and China have very long memories."

I actually remember this revaluation well. I was in college studying economics and watched with amazement at the plunging dollar. It was at 240Yen/US$ and moved down to the low 100's.

I had a friend who had just bought a new Honda Civic for $6,000, and a year later it was over $9,000.
The worst part is, it still would not bring our wages anywhere close to being competitive in the realm of manufactureing.

I am running out of hypothetical options in my mind for any sort of economic soft landing for this debtor train we are on.
Right, the devaluation helped the government with its deficits, but we all paid for it through inflation. And we bargained away our manufacturing base. Where are all those up-and-coming chinese laborers that were going to buy from the US?
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