A Cheap Dollar Boom
By David Ignatius
Tuesday, January 27, 2004; Page A17
DAVOS, Switzerland -- Discussing the falling dollar at a panel of the World Economic Forum here, a former U.S. senator said the greenback's decline was just a blip. The abiding fact was that for more than a century, in good times and bad, the world's investors have been in love with the American economy. And that ardor continues today.
Yes, responded a Chinese economist, but "love affairs always end." And, he might have added, new infatuations always begin -- as now seems to be the case with the Chinese economy.
Their exchange framed two key themes of this year's annual meeting of global economic leaders: first, the remarkable durability of the U.S. economy, which is surging again this year even though the dollar is weak, just as it did in the late 1990s, when the dollar was strong; and, second, the inexorable rise of China as a global economic superpower.
U.S. economic strength is probably the most important fact in this election year. On paper, the Bush administration's economic policies may seem profligate and potentially ruinous. But there was a consensus among business executives here that the falling dollar has been good for the U.S. economy. The cheaper dollar will stimulate demand for U.S. exports abroad and (in theory at least) reduce America's demand for imports. That should gradually lower the towering trade deficit.
The mood was upbeat even at a panel titled "What if the Dollar Declines Another 20 Percent?" The biggest worry was how a plummeting dollar would affect other economies. A former senior official of the Federal Reserve predicted a global redistribution of demand toward the United States and away from rising currencies such as the euro.
Top U.S. business leaders here said they can feel the muscle tone of the global economy firming, based on their order books. John Chambers, chief executive of Cisco Systems, said the weaker dollar only made Cisco's products more competitive abroad. Carly Fiorina, the CEO of Hewlett-Packard, said that while her company had operations around the world, the weaker dollar wouldn't do it any harm.
The only Americans who seem unhappy with the reviving economy (other than the Democratic presidential candidates) are short-sellers who have bet that with its spendthrift trade and budget deficits, the United States' stock and bond markets would inevitably decline.
"It's a squeeze play," said a man who for years ran the currency trading operations at a giant investment bank. He argued that the Bush administration was pumping so much money into U.S. corporations through its war spending and other fiscal measures that their profits will keep soaring -- and Wall Street will keep rising despite the weak macroeconomic fundamentals.
Contemplating all this bullish talk about the U.S. economy, a top European financial official was scratching his head. If European economies were facing trade and budget deficits like those in the United States, coupled with a sharply declining currency, European investors would be jumping out the windows. But for America, all news is good news.
Euro-pessimism was a common theme here. One British economist predicted that a strong euro, coupled with the continuing structural rigidities of the European economy, would produce "a decade of stagnation in Europe," worse than what happened in Japan after its bubble economy burst.
The rise of the Chinese economy seemed the other inescapable economic fact of life -- so much so that you couldn't help but wonder if Davos won't someday reconvene in Shanghai. The question here was how quickly the Chinese will want to take ownership of their accumulating wealth -- rather than investing it in U.S. Treasury bills and keeping their own currency artificially low.
The Chinese, in a nod toward reality, have said they will allow some upward flexibility in their currency this year -- and various Chinese bankers were offering teasing hints here about just when and how much the renminbi might rise. Indeed, a Davos parlor game was devising proxy investments that would allow you to place an advance bet on the inevitable rise in the Chinese currency once it becomes convertible. Ironically, the favorite proxy was the Taiwan dollar.
The one thing few here seemed to doubt was that China's economic power will someday rival that of the United States. I asked one Chinese investor whether he thought the dollar would remain the world's reserve currency 50 years from now. "Of course not," he said. "The reserve currency will be Chinese."
© 2004 The Washington Post Company