A grim forecast that the U.S. dollar is headed for a collapse in international markets, triggering a worldwide recession, was issued yesterday by economist Stephen Marris of the Institute for International Economics.
In a report predicting that the recent decline of the dollar will gather momentum and lead to "a hard landing," Marris said foreigners will lose $300 billion to $450 billion in the value of their dollar investments, now worth about $920 billion.
This would happen because the United States is in the unique position of borrowing in its own currency, meaning that the exchange risk is taken wholly by foreigners, Marris said.
Marris is a former director of research for the Organization for Economic Cooperation and Development in Paris.
He said that the calamity he foresees "need not happen" if correct economic policies were taken here, in Japan, and in Europe, "but I don't think meaningful changes will take place in time."
He acknowledged that there have been "some signs of movement in the right direction," notably the Sept. 22 Group of Five meeting, which approved coordinated intervention to deflate the dollar. He also cited, with approval, the latest congressional effort to cut the budget deficit. But Marris said, "it still seems quite likely that the action taken will be too little and too late."
The prospect of a major dollar crisis might actually be useful in forcing an emergency heads-of-state summit to devise new mechanisms to guide the international economy, he said. He also called for a "managed float" of international currencies, with the dollar, Japanese yen and German mark tied together by the three major central banks, the Federal Reserve, the Bank of Japan and the German Bundesbank.
In Marris' "hard-landing" scenario -- which he said is "more or less inevitable" -- the dollar would plunge 42 percent from the levels prevailing before Sept. 22, and 33 percent from early December. The fast drop would double the rate of inflation and generate higher interest rates and a severe recession, Marris told reporters. At the bottom of the dollar decline, the yen would have reached 130 yen to the dollar, and the German mark would be 1.33 to the dollar.
The economist said that in 1985, "the United States is spending 45 percent more for goods and services than it is earning. No other major nation has ever moved into debt as massively as that."
Although foreigners have invested heavily in the United States, lured by high interest rates and a recovery here stronger than in the rest of the industrial world, Marris argued that "a time is bound to come, as the dollar's decline gathers momentum, when foreigners' willingness to invest their savings in the United States dries up faster than the U.S. economy's need for them."
When this happens, he said, there will not be enough capital to finance the U.S. budget deficit, "a crunch will develop in U.S. financial markets, and the economy will be headed for trouble." One result, as foreigners pull their money out of investments here, and recession cuts America's ability to buy imported goods, would be a halt in the accumulation of foreign debt by 1988.
Thus under his "hard landing" scenario, the United States, which has become a big debtor nation, would regain its creditor status by 1993. Beginning in 1990, the U.S. current account would once again show a surplus, by an estimated 1.5 percent of GNP.
Some other analysts have suggested that the dollar could continue to enjoy a gentle decline, or "soft landing," in which the crunch foreseen by Marris is avoided because the decline in foreign investment would come slowly and would be offset by reductions in the budget deficit.
"This scenario looks totally implausible," Marris said in his report, titled "Deficits and the Dollar: The World Economy at Risk." Among other reasons, the soft landing outlook calls for a sizeable decline in the dollar, with foreign investment remaining high despite accelerating inflation and increasing debt.
On the basis of exchange rates at the end of November, and assuming no further change in policies, the soft landing would imply a U.S. international debt position in 1990 of $1 trillion, or 10 times the $100 billion forecast for the end of this year. The current account deficit would be $230 billion, compared with an estimate of $125 billion for 1985.
If the dollar stayed at the average exchange rates that prevailed in the first half of 1985, the external debt would be $1.31 trillion and the current account deficit $320 billion in 1990, he said.
"I was pretty shaken by those results," Marris said. "It comes out like that because the starting position of the U.S. is unbelievably bad."
The "right answer," Marris said, is to correct the basic cause of the worldwide financial troubles -- the excessive budget deficit here and the refusal of the Japanese and Europeans to expand their economies. He called for reducing both the U.S. budget deficit and the current account to zero by 1990, and "a substantial but temporary fiscal stimulus" in the other countries.