The entire recession in the American economy over the past six months can be chalked up to a sharp decline in exports, in turn a result of a serious overvaluation of the U.S. dollar in foreign exchange markets, C. Fred Bergsten said yesterday. The high dollar rates, compared to European and Japanese currency, have seriously reduced the competitiveness of American products, he said.
The former Carter administration official, now working for the German Marshall Fund of the United States, told a House Banking subcommittee that flexible exchange rates--which he once strongly endorsed--are producing "a disequilibrium at least as great" as under the final years of the fixed-exchange-rate system.
In a telephone conversation later, Bergsten said he is "dismayed" by the way the foreign exchange markets "overshoot" underlying financial conditions.
In the case of the dollar, he said that the markets had overpriced the U.S. currency by at least 25 percent and by more than that against the mark and yen.
He said it is "imperative" that the present system of flexible exchange rates be examined by the U.S. Treasury--where he was assistant secretary for international affairs--and by the International Monetary Fund. His concern is that current distortions created by the markets' overshooting will lead to protectionist trade pressures.
Bergsten noted that statistics just published for the third quarter show that U.S. net exports declined by $6.7 billion compared with a $2 billion drop in the real gross national product. For the second and third quarters together, GNP is off $8.2 billion, while net exports are down $11.4 billion.
Bergsten, whose appointment as director of the Institute for International Economics of the Marshall Fund will be announced today, told the committee that the erratic nature of the foreign exchange markets especially hurts the United States.
He said that from the low points in October 1978 to the highs of August 198l, the dollar had appreciated by an average of about 25 percent against the paper money of other industrialized nations, by 40 percent against the yen and by 50 percent against the mark and a few other European currencies. In large part, the dollar appreciation reflected high interest rates here.
He said that the result was a loss of price competitiveness by a 15 to 20 percent average and "a massive deterioration of the U.S. trade balance and current account." The current account includes the balance on services as well as merchandise. Bergsten said that major American companies this year have experienced reductions of 40 to 50 percent in their export orders.
He also attributed a rapid increase in U.S. imports of steel and other products to the competitive edge gained by European and Japanese companies, which have the advantage for the moment of undervalued currencies. On the other hand, the excessive depreciation of European currencies this year brought Germany and other countries "severe inflationary pressures," he added.
Bergsten said the disequilibrium caused by exchange market "overshooting" will create a $10 billion current account surplus this year in Japan and one of between $15 billion and $20 billion next year, as well as a bilateral surplus of $25 billion with the United States in 1982, spurring "major new protectionist pressures against that country."
He didn't blame all international financial problems on flexible exchange rates, reserving some criticism for "the Reagan administration's loose fiscal policy," which created high interest rates and attracted huge inflows of capital.
He also said that "judicious intervention" in exchange markets--which has been ruled out by the monetarist-oriented policy of the Reagan administration--"could have at least braked the extent of the dollar appreciation."
To correct what he regards as the increasing distortions in the exchange markets, Bergsten advocated coordinated market intervention aimed at "target zones" of acceptable exchange rates, as well as a better mix of monetary and fiscal policies.
A major part of a revamped system would include for the first time "meaningful IMF surveillance over both the exchange-rate system and the underlying policies of major countries," Bergsten said. Treasury Secretary Donald Regan recommended new IMF surveillance powers at the recent annual meeting here.