Are the chickens coming home to roost? For a few years prior to February 1985, the world witnessed and marveled over the strengthening of the U.S. dollar in the foreign exchange market. Inflation had been playing havoc with our economy until Paul Volcker was appointed chairman of the Federal Reserve Bank in 1979. He embarked upon a tight monetary policy that raised interest rates to record levels and led to a severe recession in 1981-82.
In 1981, to combat the recession and to change the direction of economic and financial policy, Congress passed the administration's supply-side economics program, which provided for huge tax cuts, increased spending on defense and minimal cuts in other spending programs.
The result of all these extraordinary financial and economic forces occurring within a short time of one another was to prove a mixed blessing. For one thing, inflation, which reached a high of 13.5 percent as measured by the consumer price index in 1980, was badly crushed by 1986. Our economic recovery from 1982 on was miraculous, with some 11 million jobs being created. Concurrently, the dollar became the strongest currency in the world.
These events were the good side of the coin, but there also is a bad side. The new supply-side program has created continuous and enormous federal budget deficits. The strong dollar made our exports expensive against the currencies of our trading partners, which has led to massive merchandise trade deficits and devastated the manufacturing sector of the economy.
Because of the low savings rate in the United States, our gigantic budget deficits required foreign savings to help finance our red ink. Consequently, interest rates remained high in an effort to attract the foreign funds necessary to cover our deficits. This demand for dollars helped to keep the dollar strong. But in time, as the economy became lethargic, the situation began to unwind itself.
Interest rates have plunged during the greatest bond-market rally of all time. The dollar has been weakening for over a year, and the yen is now the world's strongest currency. Inflation remains low, but the plunge in oil prices is damaging our banking system and the petroleum sector of the economy. Consequently, the continued weakness in our economy, the mounting foreign indebtedness of the United States -- which recently became the world's largest debtor -- and the continued poor merchandise trade balance, as well as the widening current account deficit, are all responsible for the continued deterioration of the dollar.
These ominous signs have led Sam Nakagama, a sociopolitical economist, to fear that long-term interest rates may have seen their lows. Nakagama will have a chance to see if he is correct when the Treasury markets $27 billion of securities in its quarterly refunding package this week. On Tuesday, it will auction a three-year note in minimum denominations of $5,000. The Treasury then will auction a 10-year note on Wednesday and a 30-year bond on Thursday. Both will be in minimums of $1,000. All three issues will be available at no charge at the Bureau of Public Debt in Washington, or the Federal Reserve Banks of their branches nationwide. The three-year issue should return 7.05 percent; the 10-year, 7.45 percent; and the 30-year, 7.50 percent.