All the Talk of Davos: the Weak Dollar and the U.S. Deficits

A Call To Action
The New York Times
January 26, 2005

By MARK LANDLER

DAVOS, Switzerland, Jan. 26 - As the world's most rarified talk-shop opened for business here today, two things were as clear as the Alpine air: the sinking dollar and soaring deficits in the United States are Topic A at this year's conference of the World Economic Forum.

And anyone hoping for an answer to when either will stabilize is likely to come away disappointed.

Economists, politicians and business executives voiced deep unease about the imbalances in the global financial system, which are reflected in the dollar's steep fall against the euro and other currencies.

But most expressed skepticism that the Bush administration would reduce the trade and budget deficits, which have fed those imbalances. Some said they doubted that China, which is financing much of the American debt, would bow to pressure to allow its currency to rise against the dollar this year.

"The U.S. current-account deficit is a problem for the whole world," said Jacob A. Frenkel, an economist and former governor of the Bank of Israel. "I don't see the budget deficit being taken seriously."

The Bush administration, which had dispatched Vice President Dick Cheney and then-Secretary of State Colin L. Powell to past Davos meetings to defend the Iraq war and other foreign-policy initiatives, has not sent a senior economic policy maker to this gathering. That absence has lent the proceedings themselves an imbalanced tone.

"In fairness, it's a transition period in Washington," said Representative Barney Frank, a Massachusetts Democrat, who supplied the American voice on a panel about American leadership. But he added, "The administration doesn't really have anyone they trust enough to send here."

Mr. Frank, the ranking Democrat on the House Financial Services Committee, said he worried that the United States was not paying enough attention to the risks of its growing indebtedness. The repercussions of a weak dollar, he said, had barely registered with the White House.

Other critics were blunter. "There's nobody home on economic policy in America right now," said Stephen S. Roach, the chief economist at Morgan Stanley and a reliable doomsayer at these gatherings.

The twin burdens of household and public debt in the United States, he said, are unsustainable. Describing American consumers as "an accident waiting to happen," he asked, "when does the music stop?"

With the dollar weak and the euro already trading above $1.30 - near its economically tenable limit for Europe - Mr. Roach said the United States could not rely on currency markets to right the trade imbalance between it and the Asian countries who finance American deficits by buying Treasury bills.

The answer, he said, lies with the Federal Reserve, which he said would have to raise interest rates aggressively to curb the spending binge. Whether the Fed could do that without setting off a recession is an open question, especially given the impending retirement of its chairman, Alan Greenspan.

Few here held out much hope for international coordination of the kind that stabilized the dollar in the 1980's, when the Reagan administration helped negotiate the Louvre and Plaza Accords.

"The Bush administration doesn't listen to people," said Laura D. Tyson, a former chairman of the council of economic advisors in the Clinton White House. "There's no hope of changing U.S. fiscal policy."

Professor Tyson, who is dean of the London Business School, said European leaders needed to stop worrying about the actions of other countries and set about streamlining their own economies. She pointed to recent wage negotiations in Germany, in which the unions agreed to longer hours and more flexible work rules, as a hopeful sign of change.

Certainly, Europe cannot rely on Asia to take the pressure off the euro. While people here said they were guardedly optimistic that China would eventually allow its currency, the yuan, to rise against the dollar, few were willing to hazard a guess as to when - or to what extent.

"That will need a political commitment and a political will, and I don't see that happening this year," said Takatoshi Ito, an expert in international economics at the University of Tokyo.

Some economists warned that the burgeoning trade deficit and weak dollar could cast a shadow over negotiations to liberalize world trade, which have been dragging for various reasons in the last year.

China's record trade surplus with the United States could fuel protectionist forces in the United States, said C. Fred Bergsten, the director of the Institute for International Economics in Washington. He said he could foresee moves to slap import barriers on Chinese wood and shrimp.

"This is a poisonous environment for trade policy and for domestic politics in the United States," Mr. Bergsten said.

In the last couple of years, with the White House's march to war in Iraq, Davos itself has been a rather poisonous environment for Americans. Those tensions have ebbed this year, although some non-Americans here were talking about the emergence of new alliances - like one between China and the European Union - that leave the United States on the sidelines.

"In recent years, our leaders have felt more comfortable talking to European leaders," said Yuan Ming, the director of the Institute for American Studies at Peking University. "The United States could be our biggest partner, but it could also be our biggest troublemaker."

Copyright 2005 The New York Times Company