New York Times Editorial: No Bang for Our Cheap Buck

No Bang for Our Cheap Buck

Published: December 15, 2004
New York Times Editorial

The Bush administration's de facto weak-dollar policy - its preferred "cure" for the American trade deficit - is not working. Yesterday's trade deficit report shows that imports outpaced exports by a record $55.5 billion in October. The huge imbalance was worse than the gloomiest expectations.

So far, the administration has been hoping that the weaker dollar will raise the price of imports, leading American consumers to buy less from abroad, and will at the same time make our exports cheaper so foreigners will buy more American goods. That's supposed to shrink the trade deficit and, with it, America's need to attract nearly $2 billion each day from abroad to balance its books.

But the dollar has been declining since February 2002 - it's down by 55 percent against the euro and 22 percent against the yen - and the trade deficit has stubbornly refused to shrink along with it. The falling dollar has done nothing to diminish America's appetite for foreign goods - such imports continue to rise at a faster rate than exports. According to yesterday's report, imports were some 50 percent greater than exports in October. Much of October's import growth was caused by high oil prices, which have since subsided. But that's no reason to shrug off the disturbing evidence of the weak dollar's failure to fix the trade gap. The United States is now on track for a trade deficit of more than $60 billion next June.

As the American economy heads for higher global imbalances, the need to borrow from abroad grows. And the more we borrow, the weaker the dollar becomes. That's because the markets that set the value of freely traded currencies, like the dollar and the euro, punish indebted nations by pushing down their currencies. The United States, by any measure - trade, the federal budget, personal consumption - is by far the world's biggest debtor. The need to borrow in the face of an already weak dollar portends higher prices and higher interest rates.

How high and how fast? Who knows? But one thing is sure: that American tourists need to pay $5 for a demitasse in Paris will be the least of our worries if mortgage rates spike, the stock market falls, and businesses curb their already modest hiring.

A cheaper dollar would not be as threatening if it was part of a comprehensive strategy to close the trade deficit. For instance, the United States must demonstrate to our trading partners and the currency markets that it intends to reduce the federal budget deficit - thereby lessening its need to borrow from abroad and reducing downward pressure on the dollar. Unless and until it does so, the United States will lack the credibility and the authority to press for changes that need to occur in other countries to balance out global trade. There are alternatives to a single-minded pursuit of a weak dollar fix. What is lacking is the leadership to pursue them.