主题：【文摘】中印：谁将从可持续增长中受惠 -- Chieftain

Debating the Dollar

December 10, 2004

Morgan Stanley Global Economics Team

A weakening dollar is now center stage in world financial markets. But dollar depreciation is not the endgame of global rebalancing. It is the means toward the end -- a long overdue realignment in the mix of global saving and consumption. Morgan Stanley's Global Economics team has been actively debating the currency issue and its implications for the world economy. Below are excerpts from a recent roundtable discussion we conducted on the dollar.

Stephen Roach: A $40 trillion world economy is woefully out of balance. This shows up in many forms, but the most glaring sign is an unprecedented disparity between the world's current account deficits (America) and surpluses (mainly Asia and, to a lesser extent, Europe). The key to a successful global rebalancing hinges critically on tempering the risks of the world's most serious excesses. For me, that speaks of a shift in the world's relative price structure -- namely, currencies -- in order to re- establish a more sustainable equilibrium. That's where the dollar comes into play. But currency adjustments can't do it alone. A weaker dollar could also be key in forcing the interest rate adjustments that address the asset-driven excesses of the American consumer -- quite possibly the biggest risk factor in today's US and global economy. If the depreciation of the dollar implies tough adjustments elsewhere in the world -- like forcing export-led Asian and European economies to stimulate domestic demand -- then that's not such a bad thing either. Global rebalancing is a shared responsibility.

Stephen Li Jen: I think everyone is too sanguine about this de facto competitive devaluation by the US. To me, this is very serious, and a very dangerous policy pursued by the US. I've never heard any central bank telling the world not to buy their assets. But this was essentially what Alan Greenspan said in his Frankfurt speech on November 19. We are now talking about a gradual sell-off in US Treasuries that would take yields on 10-year notes to 5.0%. But if the world really were convinced by Greenspan, why would bond yields stop at 5%? Why should US equities be spared?

Richard Berner: I certainly agree with Stephen Li Jen that it can be a dangerous and risky game for Fed officials even implicitly to talk down the dollar. Chairman Greenspan, himself, is often guilty of believing that he can wave his magic wand to manipulate markets to produce the desired result. History shows that even he is sometimes humbled by the collective wisdom of millions of investors.

I believe that Fed officials would like to promote -- if they can pull it off -- a shift in the mix of financial conditions that will facilitate rebalancing. That shift entails higher US rates, an associated compression of equity multiples, a tightening of domestic borrowing costs, and a weaker dollar. Officials must have decided that the risks of the current mix of financial conditions, with all of its potential consequences for growing imbalances and prospective abrupt asset price adjustments, were greater than those entailed in a strategy aimed at letting the air out of the dollar in a more orderly way.

By the way, while I agree that having a central banker talk down his/her own currency can be dangerous, I think we'd all agree that it is broadly appropriate -- nay, essential -- for central bankers to signal their policy intentions. So Greenspan's related comment that market participants should expect rising interest rates is certainly an integral part of today's Fedspeak.

Joachim Fels: On Dick's last point, I have the sneaking suspicion that the Fed's policy of talking the dollar down is part of their game plan to create higher inflation in the US. Core inflation (as measured by the personal consumption deflator) at 1.5% simply doesn't give you enough of a safety margin against deflation if and when the next recession hits. And, in highly indebted economies such as the US, a little more inflation helps to grease the wheels. That's why I think that stagflation will be the name of the game in America in the next few years.

Jen: The possibility of stagflation is a perfect example of what I mean by stressing the potential pain of a competitive dollar depreciation. Yet everyone is still insisting "it won't hurt." I think they are missing the point. The whole purpose of the competitive devaluation of the US dollar is that it would hurt the rest of the world. It is about taking jobs and output from the rest of the world, and leaving the rest of the world to find other ways to come up with alternative sources of demand.

The US is effectively exporting bubbles to the rest of the world by forcing other nations to run a low-interest rate, strong exchange rate policy. Look at Japan in the late 1980s: they were forced to cut their discount rate in half between the Plaza and Louvre accords that demarcated the dollar's descent in the latter half of the 1980s. What happened in Japan in the late-1980s? Japan was left to deal with the bubble and its aftershocks for the ensuing 14 years.

Roach: Stephen, your response is a classic example of what I call the global blame game -- the notion that it's unfair for America to foist its problems on to the rest of the world. While I have some sympathy for this argument, I would also stress that Asians and Europeans have been asking for trouble on this score for a long time. Unable or unwilling to stimulate sustained growth in their own internal demand, they have hooked their economies to the fortunes of the hyper-extended American consumer. The idea that such a "free-rider approach" is a good way to run the world - - Americans consume Asian goods and Asians gobble up American bonds -- was dangerous from the start. It has led to huge dollar overweights in official reserve positions of all major non-US central banks -- overweights that now look fiscally reckless to America's creditors in the event of a sustained further drop in the dollar.

I am not as worried as you that this will be a competitive devaluation that will take jobs and output from the rest of the world. America's manufacturing base has shrunk so much in the past 20 years that such a dramatic turnaround is problematic at best. What I am most worried about is that the dollar's weakness will trigger a real interest rate response that will finally bring the American consumer to his or her knees. With the rest of the world lacking in consumerism, this raises the distinct possibility that we are headed for a protracted period of subpar global growth. Rather than bemoan America's willingness to take a long overdue adjustment -- one that the wise men of Europe and Asia have long sensed was appropriate -- why can't the rest of the world respond with a growth agenda of its own?

Jen: My point is not so much about blaming the US for imposing pain on the rest of the world. It is a fact that there will be pain -- that's not a judgment call. That's how the US current account deficit can be compressed. That's how the US can generate (some) inflationary pressures that prompt Fed tightening. Up to this point, dollar depreciation is a zero-sum proposition! That is now about to change.

If it didn't "hurt" anyone, there wouldn't be any change in the US inflation or demand outlook, and the Fed would be no more justified in hiking rates than if the dollar did not weaken. In other words, a weaker dollar being the trigger for a more hawkish Fed must involve pain in the rest of the world, which is a point that the rest of the world does not understand. The talk in Euroland and Japan is, "how much more currency strength can we tolerate before we get hurt." That misses the point.

As you yourself have argued, Steve, it is the next step -- when the rest of the world and the US take proper action -- that determines if we can move on to a state that is more sustainable in the long run. Going from A to B will not be a smooth path, because equities and bonds are being talked down in the process: Greenspan cannot talk down the dollar without talking down other dollar-based assets as well. Bottom line: I don't disagree with you. I just think that the world doesn't understand that pain is a part of the game here.

Roach: Stephen, thanks for the clarification. Your point is an important one that I certainly do appreciate. I guess it boils down to how the world copes with pain -- constructively (i.e., structural reforms in Europe and Asia plus deficit reduction and increased private saving in the US) or destructively (trade frictions and protectionism). I worry that Asia hasn't gotten over the 1997-98 crisis syndrome -- that it holds a grudge that may complicate the rebalancing endgame.

Andy Xie recently wrote the following: "It is in the overwhelming interest of the region (Asia) to fight back. The global economy should not be there just to serve the US. Everyone's interest must be taken care of offer. The only sustainable equilibrium is a cooperative one."

My question to Andy: If all Asia does in defense is sell Treasuries, it may end up shooting itself in the foot -- i.e., incurring huge fiscal costs of currency losses for that portion of their dollar portfolios they do not sell. Asia needs a backstop of balance and resilience that will enable it to withstand the pain of a weaker dollar. If all there is to Asia is capex and exports, then Asia will get creamed when its US-centric external demand dries up. Talk about being beholden to the "kindness of strangers!" America is hooked on foreign capital inflows. Asia is hooked on the excesses of American consumerism. There is pain involved in breaking both of these habits. I agree with Stephen Li Jen that the world is in denial over that possibility.

Andy Xie: Steve, I am not saying that Asia is not to blame. After the Asian Crisis, the Fed cut interest rates and Asia employed an export strategy to come back without embarking on the fundamental changes needed to establish a new balance between investment and consumption. The US, however, did not ask anyone to change the strategy when it was cutting interest rate and taxes to stimulate demand after the tech bubble burst. That was because it needed Asian savings to stay out of recession. Asia became complacent in living in this precarious equilibrium. Now, suddenly, the US wants to shake it off. How is that possible when the necessary changes are huge? All dollar devaluation would do is increase deflationary pressure without changing Asia's export potential. The cooperative solution involves both (1) the US reducing demand and Asia increasing stimulus in the short term and (2) structural changes in Asia to decrease savings and in the US to boost savings. A unilateral approach by the US could lead us down the road to a bad equilibrium, a prisoner's dilemma.

Roach: Andy, America is like everyone else -- steadfast in its strong predisposition for embracing the painless way out. The theory behind finally facing the pain and getting on with the adjustment is simple -- the longer you wait, the rougher the endgame. I think the Fed has finally taken the leadership in this "resolution" because it has lost confidence in the US Treasury to manage the problem. I do believe that an unbalanced world needs a wake-up call. If that's what this dollar angst boils down to -- all the better. Complacency and benign neglect are no longer acceptable as policy options for a world that has become this seriously unbalanced. You are right, of course, that the only way out is a cooperative solution. But it takes someone to jar the world to its senses to get the major players of the global economy all on the same page. Three (belated) cheers for the Fed for bringing the problem out into the open.

Eric Chaney: That a very weak US dollar will inflict pain on America's trade partners is not debatable, in my view. As I understand it, both Steves -- Roach and Jen -- agree on that. The first Steve has long made the point that some form of external shock is required to force Europeans to unshackle domestic demand. I am not fully convinced of that. Apart from monetary and trade policies, structural policies are in the hands of a bunch of local governments, which have different agendas.

David Miles: I must confess that I am also a bit confused by the view that if there were more structural reform in Europe this would help reduce imbalances in the world. I thought "restructuring" was a sort of catch-all for liberalizing labor markets and product markets designed to make Euro area more competitive, productive and so on (i.e., a set of policies designed to tackle high unemployment by, for example, weakening restrictions on hiring and firing, making social security less employment unfriendly, cutting restrictions on maximum hours and so on). If all that works, doesn't the Euro area become more competitive? How does that help close the US trade gap? Isn't the Euro area actually doing its bit to help by keeping itself less competitive?

Of course, one could argue that the prospect of structural reform creating future higher wealth in Europe would boost consumption now by more than output, so net demand for the output of the rest of the world rises, helping shrink the US deficit a bit. But that depends on European households interpreting reforms in a positive light and being willing to borrow against (uncertain) future gains. All that strikes me as a bit unlikely. It is not that I am against the position that reform in labor and product markets in many European markets is needed. Rather I am not convinced that this has much to do with reducing structural global imbalances. In fact, it is even possible that it could make things worse.

Roach: Structural reform is a long and arduous process that often entails major risk for incumbent politicians. The temptation is always to put off the heavy lifting -- thereby ducking any potential backlash. The US saga of the 1980s is a key case in point. A stronger dollar crushed Smokestack America and unleashed a powerful wave of corporate restructuring. America -- aided, perhaps, by more tenuous social contracts than in Europe -- took the currency signal as an imperative to reinvent itself. Moreover, a strong yen in the mid-1990s triggered aggressive restructuring by Corporate Japan. Europe whines a lot but doesn't seem to get the old adage of "no gain without pain."

Riccardo Barbieri: I would argue that if the EU or the euro-zone started major labor-market reforms tomorrow morning, that would not necessarily raise aggregate demand (and thus, imports) next year. In the medium-term, however, a more competitive Europe would not only challenge US and Japanese companies, but also, probably, enjoy higher rates of economic growth. In turn, that would boost imports.

Roach: Precisely. A more competitive Europe will finally promote lasting job creation, income generation, and domestic private consumption. That would be the sustenance of incremental import growth that would eventually offer opportunities for increasingly competitive US exporters. "Eventually" is the key word here. But let me come back to something that bears on what I believe is Europe's overly-defensive response to recent currency adjustments: Are you guys serious in expressing the belief that America's central bank has made a conscious decision to punish Europe for its lagging progress on structural reform?

Barbieri: I interpret the apparent preference of the Fed for a further weakening of the dollar and higher interest rates as a reaction to the US election outcome. Mr. Greenspan evidently feels that the dollar will be better underpinned once it is widely viewed as "cheap" and US interest rates are rising.

Europe is criticized for its lack of structural reforms -- a criticism that most of us would share. However, the euro has so far borne the brunt of the dollar adjustment. The appreciation of the euro will drive up imports and will cost Europe further jobs. In sum, Europe could do more on the structural side, but is doing more than its share on the macro side. The same holds with Japan, with the notable exception of exchange-rate policy.

Roach: Riccardo, your Euro-centric view of pain misses one important issue -- the failure of Asia to bear any burden of the dollar's recent weakening. Isn't that what burden sharing ultimately must entail?

Barbieri: Countries that follow dollar pegs -- either explicitly (i.e., China) or implicitly (i.e., Japan) are a complete or partial exception.

Roach: But isn't Chinese currency policy the real missing link in the global rebalancing script?

Barbieri: Yes. China certainly does stick out as a critical factor going forward. I realize that until two years ago, in a strong dollar environment, the Chinese peg suited everyone else around the world. The fact is that now the US, unilaterally, wants a weak dollar is a very real irritant on the Chinese side. However, one thing is clear: Every percentage point of dollar depreciation is also one percentage point of RMB depreciation against third parties. This will put further pressure on countries that do not have the flexibility and the local market size of the US. To the extent that China refuses to change its currency regime, then Europe will have at some point to draw a line in the sand -- if it can -- in terms of the euro exchange rate. In my view, that line is at 1.40.

That said, if China does change its currency regime, the world financial system will no longer be the same. Indeed, a further move towards flexible currencies could in due course bring an end to the supremacy of the dollar. Or will it? Can the world financial system and international trade be organized around different currencies? What will be the numeraire for the commodities markets? In my view, the expectation that holds world markets together is that a period of higher US and world inflation will be followed, in the medium term, by fiscal consolidation in the US, which will then re-establish the credibility of the dollar. But, will this come to pass?

Ted Weiseman: I disagree with one part of Ricardo's earlier argument in assessing the current-account implications of the US policy mix. Contrary to what he stated, post-election news on the US fiscal front actually has been quite positive.

Barbieri: My reasoning goes as follows: The US will continue to have a current account deficit in coming years, but the deficit must decrease in order to prevent an excessive accumulation of net international liabilities, i.e., in order not to have the world awash with dollar assets. However, if a given policy approach promises, say, to reduce import dependency and to raise the saving ratio, that is helpful for the dollar, because it reduces the US current account deficit in the long run and should thus make the rest of the world more willing to hold US assets.

My bottom line: if you think that we will see significant tightening in fiscal policy in the next four years, then this is something we must take on board in assessing currency risks. If it also means a higher overall US saving ratio, then I guess this should make us more optimistic (or less pessimistic) on the dollar.

Weiseman: The argument we've been making is that the US fiscal situation is gradually improving -- that the current budget deficit is not out of line historically. So this is not really where the focus should be in the debate about the US savings imbalance. The relentless downtrend in the personal savings rate is the glaring issue. That has to start rising if the overall national savings rate is going to go up.

Roach: America's federal government budget deficit is a very serious problem for precisely the reason you state, Ted -- a dramatic shortfall in private saving. Declining personal saving is an outgrowth of the Asset Economy -- namely, aging and myopic homeowners banking on unrelenting house-price appreciation to do the saving for them. The fact that America is now in the midst of a housing bubble is especially worrisome in that regard. The problem with persistent structural budget deficits -- a long- term prognosis that is centered in the 2.5% to 3.5% steady-state range -- is that the US has no cushion of private saving to fund it. That's the intractable current account problem in a nutshell. Nor would I be quite as optimistic as Ted on the federal government deficit -- the peaking is cyclical, whereas the real problem is structural. America's saving problem is off the charts -- possibly the most serious imbalance in an unbalanced world. Sounds to me like a classic case for a consumption tax.

At least Europe and Asia have that cushion -- much higher private saving rates -- giving them every right, in my opinion, to be critical of the US for its profligate ways.

Barbieri: If the US economy continues to do well, shouldn't the Fed step up the tightening pace? It all looks like a huge bet on growth. If American companies invest their savings in the US (perhaps with some help from a weak dollar), then the pie grows, jobs grow, and consumers can pay off their debt.

Gray Newman: If Administration officials made important moves on the fiscal front, I wouldn't be surprised if we saw the dollar rally. In that case the negative economic impacts of fiscal tightening could well be offset by an easing of long rates. That could buy us time but it would undoubtedly perpetuate an outsize current account deficit -- setting us up for an even bigger problem in the future.

Roach: So here's what this aspect of this debate boils down to: Does the US have a structural budget problem, or not? Does the US have a private saving problem, or not?

If the answer to both of these questions is "no" then we should be pounding the table on the likelihood of a miraculous US current account adjustment and a related strong reversal of the dollar. If the answer to both of these questions is "yes" -- and that is where I am -- then the adjustment game is just beginning. The trick comes when the answers to either question get shaded one way or another. The dollar's recent decline reveals the collective preference of the consensus of global investors. Again, it's not that a weaker dollar will fix all that ails an unbalanced world. But, as I noted at the outset of this debate, it is very much the Trojan Horse of global rebalancing -- a spark to real interest rate adjustments and a concomitant trigger to a narrowing of global consumptions and saving disparities.

The hope is the world finds a way to manage the dollar's decent gradually over time. Unfortunately, given the sheer magnitude of today's global imbalances, that may be wishful thinking.