Wed, Dec 15, 2004 - Page 8 News List

Taiwan must beware dollar's slide

By Honigmann Hong洪財隆

Despite the US Treasury Depart-ment's reiteration of a "strong dollar" policy, most people believe this is just a confidence-building measure. The US's current account deficit of US$600 billion -- approximately 6 percent of its GDP -- cannot be allowed to grow indefinitely, and many countries around the world, especially those in East Asia, have already accumulated close to US$2 trillion in foreign currency reserves. As such, US Federal Reserve Chairman Alan Greenspan, when commenting on why the Chinese yuan cannot remain pegged to the US dollar and not appreciate, said that there must be a limit.

Discussion now centers not on the issue of whether the US dollar should depreciate, but rather the degree of its decline to ensure a smooth depreciation as a means to achieve the goal of reducing the US's current account deficit. Or, should another agreement be made similar to the Plaza Accord of 1985 in which the then five major industrial countries (the US, Japan, Germany, the UK and France) jointly moved to cause the US dollar to depreciate? What is the difference between the situation back in 1985 and today?

Also, what would be the economic consequences of a large-scale depreciation of the US dollar, and what kinds of effects would occur as a result of increasingly prominent East Asia regionalism? Several consecutive years of growth in US expenditures (especially in consumption rather than investment) have exceeded an increase in output. On the whole, the situation in other countries has been the reverse.

Seen from the perspective of international finance, the US is purchasing too many products and services for consumption while other countries are buy too many of all sorts of not-so-profitable financial assets issued by the US in preparation for foreign currency exchange.

In other words, there is a trade-off among countries: the US primarily provides the end-point consumer markets, export opportunities and prosperity, while other regions contribute cheap commodities, labor and low-profit or close to no-profit money in return.

The secret of the so-called East Asian economic miracle is in fact based on this kind of mutual international understanding. Apart from the US dollar's unique position as a form of foreign currency reserve, it is this kind of mutual understanding -- or the economic policies that these understandings conceal -- that suppresses the economic reasoning ability of each country's central bank governors. As such, they fail to grasp that buying more and more of a currency that must inevitably depreciate will only delay the moment when that currency will depreciate.

To resolve the US' trade imbalance it is not possible to depend solely on the US (to increase the savings rate). Two external conditions must also apply.

First, economic growth in other regions must be faster than in the US, and the exchange rates of each of the major currencies must be more flexible. Here, of course, I imply a one-way traffic, meaning that different East Asian currencies, as well as the euro (in relation to the fluctuation of the US dollar) and Chinese yuan, must appreciate. Since the euro has appreciated to a new high of US$1.3, and China's trade surplus with the US has soared to billions of dollars every year, there will be even more pressure on the yuan to appreciate.

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