When Federal Reserve Chairman Paul A. Volcker was appointed in 1979, one of the major problems facing him was a declining dollar. This week the Federal Reserve Board lowered its discount rate at least partly because of its desire to weaken the dollar. Policy has come full circle.
There are several reasons why Volcker and others in the United States are concerned about the dollar's strength this year. One is that, at present exchange rates, American industry is finding it very hard to compete with foreigners.
The trade deficit has ballooned in recent months as exports to the rest of the world have declined and imports have climbed. President Reagan's chief economic adviser, Martin S. Feldstein, warned this week that "many experts now forecast that the trade deficit for 1983 will rise to the unprecedented level of $75 billion, about twice this year's level and three times the level of 1981."
A higher dollar helps American consumers, because it makes imported goods cost less. But it hurts companies and workers who make products either for export or for which there is strong competition from imports, because it depresses sales of American-made goods and raises demand for foreign products. The deteriorating trade balance has acted as a significant brake on the economy during this recession and has "become a crucial swing factor in the outlook for 1983 and 1984," economist Alan Greenspan commented recently.
A worsening trade picture has accounted for about two-thirds of the decline in the nation's real gross national product, after allowing for inflation, that has taken place since early 1981, Greenspan pointed out. New figures due to be published by the Commerce Department today are expected to show a sharp deterioration in the current account of the balance of payments -- which includes services, such as tourism and shipping, as well as merchandise trade -- in the third quarter of this year.
However, it is not just the strong dollar that has weakened U.S. exports this year. Another related problem is that the rest of the world is also in recession. The markets for U.S. goods thus would be weaker than usual even if the high dollar were not discouraging foreigners from buying American.
Moreover, many experts believe that the United States is to some extent responsible for the economic difficulties of the rest of the world. The high U.S. interest rates that have stifled the economy here and pushed up the dollar also have added to the near-crippling level of debt in many developing countries and to the pressure on other industrialized nations to raise their interest rates and deflate their economies to hold their own against the dollar.
Since the summer, interest rates have fallen sharply both here and overseas. But financial officials remain worried about the health of the world's money and trading system. Both Volcker and Treasury Secretary Donald T. Regan have been spending a great deal of time recently on international problems, sources say, and the Federal Reserve's latest discount-rate move was influenced more than usually by concerns over the international scene, market observers believe.
Some Americans, staring at 10.8 percent unemployment and record numbers of bankruptcies, may wish that Regan and others would concentrate on problems closer to home. But the credit crunch now affecting many Third World nations has a huge impact on the United States, affecting production and employment opportunities here, as well as the balance sheets of banks that have made what now appear to be bad loans overseas.
Mexico's financial crisis has been well-publicized. But more attention has been paid to the threat to banks -- with billions of dollars lent out to the nation -- than to the difficulties of U.S. companies that depend heavily on trade with Mexico. The shortage of dollars across the border has cut deeply into the earnings of some U.S. firms, and accounted for "fully 30 percent" of the total drop in U.S. exports in the first 10 months of this year, Greenspan said.
"Inasmuch as the Mexican situation is not expected to improve materially for some time, the export sector could be a drag on the early stages of a recovery in the United States," he warned.
Brazil and Argentina have joined Mexico in trying to cut back their imports from overseas to reduce dependence on foreign loans and meet the loan conditions of the International Monetary Fund. Others may not be far behind. Although these measures may improve the financial health of the debtor nations, they are another factor pushing down demand for U.S. goods.: U.S. FOREIGN TRADE, The Washington Post