Financial problems for the U.S.

Press, 4 January 1988, Page 12

Financial problems for the U.S.

Although most countries face tough financial problems in 1988, the United States faces more complex puzzles than any other country — and almost every other country will be affected by the way the United States resolves them. The main United States difficulty is the trade deficit, which between 1980 and 1986 increased sixfold. The President and the Congress are considering the problem but have not decided what to do about it. Because 1988 is the year of the United States Presidential election, the chances are high that the problem will not receive the priority that it demands.

In the absence of Presidential and Congressional action, the banks, other financial institutions, and investors are making their own judgments. The result is that the value of the United States dollar is being driven down spectacularly. This decline is in spite of the efforts of central banks around the world to hold it up. It cannot be calculated whether the value being placed on the dollar is simply the result of individual judgments, collective wisdom, or a concerted effort to drive the dollar as low as possible so that one day exports and imports come into balance.

The hope that the dollar can be driven down to enable a balance of exports and imports may be misplaced. For one thing, the last time that the United States had a balanced current account and Japan had a balanced merchandise trade account was in 1979. Between 1978 and 1985 there was 24 per cent more inflation and 27 per cent less growth in manufacturing productivity in the United States than in Japan. The value of the dollar would thus have to fall to about 115 yen to bring about the same balance. Other factors in world trade, including the difficulty in selling agricultural produce, which was once a very strong United States export, means that it would be sensible to set

the value of the dollar even lower; one estimate is at less than 100 yen. This week the value of the United States dollar was about 122 yen — and there was international alarm about the dollar falling as low as that. The world relies on the United States dollar for much of its trade, and a dramatic and continued fall in the value of the United States dollar would bring about financial havoc.

A further problem about reliance on the fall in the value of the dollar as the sole method of righting the United States trade deficit is that exporters to the United States, and American manufacturers, do not allow the changed value to alter trading patterns to the extent that they should. Theoretically, if the United States dollar becomes worth less, it should drive up the price of imports into the United States and make United Statesmanufactured goods cheaper. However, exporters to the United States have been determined to hang on to their market share, and have been prepared to cut their margins rather than see their prices go up. American manufacturers have not been slow to increase their own prices. Hence, the expected effect has been diminished. Because the United States is constantly spending more than it earns, it has been borrowing heavily from foreign lenders to balance its books. The interest on this accumulated debt is now making a heavy drain on the United States economy. The problem is compounded by the demands for investment and the financing of the Budget deficit, which need more than the United States can finance through savings. Once again the United States looks to foreign lenders. The willingness of other countries, particularly Japan, to continue to lend to the United States is not at the moment in question. But it may be an important, even crucial, question for the year that is just beginning.