BANKERS NEVER LOSE
Nossiter, Bernard D.
BANKERS NEVER LOSE Democrats as well as Republicans play their game BY BERNARD D. NOSSITER Almost since birth, the Republican party has stood fast for sound money and deflation—the preference of...
...But if Dukakis sincerely wants to win, he must risk being called uns< oundl...
...An opposition par ty does...
...An American microchip that cost 100 British pounds in Liverpool yesterday can be bought today with 90 pounds...
...The bankers, it seems, never lose...
...This is not a bad outcome...
...Such it s its potency that it was the occasion for the dramatic plunge in share prices last ( October...
...They put the money in Britain where interest rates are kept high by Prime Minister Margaret Thatcher, who is determined to tame unions with high unemployment...
...This is a game of second-order intelligence...
...So do his colleagues at Matsushita in Tokyo, ICI in London, and Philips in Amsterdam...
...Su ch is fashion that it has become the single r nost important statistic of our day...
...rate of the dollar...
...In any event, Wall Street's attention span is brief, so even though this spring's first trade figures were "good," the market dropped anyway...
...Government is likely to take stern measures to restrain significant inflation, so debtors must settle for low interest rates and the economic expansion they stimulate...
...When, for example, the rate between the dollar and the pound is about right, a pound will buy in London what the dollar multiplied by the exchange rate will buy in New York...
...both speak for their own self-interest and claim it is identified with the community's...
...It is not, as its business-school apologists claim, a competitive market where rational expectations prevail...
...Slowly, sluggishly, market forces will work and the dollar will strengthen...
...Like others in the West, many German voters acquiesce, persuaded that joblessness won't strike them...
...A citizen unc orrupted by prevailing wisdom m'lght re...
...The point usually suppressed is that trade no longer drives currency rates...
...In fact, imp orts account for only about 9 per cent of the i nation's total output—a small tail on a lar ge dog...
...Currency prices are fixed by a far heavier force: in the jargon of economists, short-term capital flows...
...But Democrats seem to have abandoned their pro-debtor policies in recent times, and as a result they have lost voters...
...it i measures the dollar value of exports, the goods and services Americans sell abro...
...However, changes in the trade deficit do seem to produce one important effect: They have strong impact on the overseas value of the dollar, and that matters...
...By blaming the dollar's decline on a failure to export, the bankers and their friends can demand the austere policy they prefer anyway...
...Which position you prefer usually depends on where you stand on the class and income ladder...
...In fact, the central bank had already raised rates quietly...
...This is the quintessence of Republicanism, historically considered...
...That is why the International Monetary Fund, an instrument of finance ministries in creditor nations, employs all its cunning and money to persuade Third World debtors not to pursue an inflationary course...
...Like Walter Mondale, he can enjoy the respect of business-page writers and their banking sources by offering a voters continued high unemployment...
...He must see through the small change of conventional debate and gain some insight into the economic forces that matter...
...As usual they want higher interest rates, and as usual the Federal Reserve appears ready to oblige...
...The Fed's willingness to take that course on the eve of an election reflects its confidence that neither George Bush, the son of a banker, nor Michael Dukakis will challenge bank wisdom...
...Wall Street's judgment on the trade deficit and the trade balance may be an interesting specimen of social psychology, but its economic interest is limited-provided you are not a stock speculator...
...In today's world, however, the banker rarely enjoys a fall in prices...
...The rise in the price of foreign currencies to an American is matched by a cheaper dollar in London, Tokyo, and Frankfurt...
...Like the misleading discussion of the Federal budget deficit, the wrongheaded analysis of trade deficits masks facts critical for economic policymakers and politicians...
...If the word got out, there might be a public demand to regulate these capital flows, to inhibit the great corporations...
...This suggested that the pound was overvalued by 50 per cent...
...It is a good reason to reduce taxes for business and the rich (spurring investment in machines to cut costs, stimulate exports...
...Too many political and economic stabilizers stand in the way...
...All these arguments dissolve once it is understood that the value of the dollar is determined by short-run decisions taken by huge multinationals...
...Moreover, it is not clear wh'y exp< arts are "good" and imports are "b ad...
...There is no inherent virtue in the positions of either creditors or debtors...
...The balance of trad e is no more than a simple box score...
...A falling dollar becomes an argument against spending for welfare (weakens productivity, drives up inflation...
...Capital flows, not trade, fix currency rates...
...There is little philosophy and a great deal of simple self-interest in this...
...Instead of p romoting the expansionary policies that k;ept them in the White House for most off the fifty-year span from 1933 through '1980, they have echoed Republicans, frettf id over inflation, and sounded respectable by making solemn sound-money pledges...
...once again, Wall Street had accurately predicted the past...
...The balance sheet will soon look "good...
...A pound in London bought only goods and services worth about $1.20 in New York...
...The dollar will regain its strength...
...Except when an August Belmont or a Bernard Baruch influenced the party's ecoBernard D. Nossiter writes a weekly newspaper column from London...
...Though inflation redistributes wealth capriciously and upsets all kinds of expectations, Roberto Campos, for years a key conservative adviser and minister in Brazil, urged inflation as the best route for Third World nations to liquidate their debt to the rich...
...Indeed, not long aj>o all economists derided Eight eenth Centi ary mercantilists for holding a view that is now commonplace: the belief that prosperity depends on a surplus of exports over imports...
...They will sell pounds and buy dollars...
...No matter how imperfect markets may be, a self-correcting mechanism exists...
...His latest book, "The Global Struggle for More," has just been issued in paperback by Harper & Row...
...Whether the dollar fetches 150 yen or 125 yen, 75 British pence or 55, directly affects prosperity...
...Striking examples were the Republican choice of deflation in the Great Depression following 1929 and in the deep recession of 1981-1982...
...And once Democrats conclude that there is no inconsistency between higher incomes, higher employment, and an appropriate exchange rate for dollars, they can return to their traditional and beneficial concern for America's majority of debtors...
...These investments by the giant multinational corporations and finance houses dwarf trade...
...A banker lends $200 that buys, at today's prices, a cheap suit, two shirts, and a chicken dinner...
...To be sure, stock ownership is concentrated among the wealthy, and Republicans (who own most shares) welcome a rise in stock prices...
...Even so, there may be enough time for the higher rates to ripple through the economy and stifle output and jobs before election day...
...BANKERS NEVER LOSE Democrats as well as Republicans play their game BY BERNARD D. NOSSITER Almost since birth, the Republican party has stood fast for sound money and deflation—the preference of creditors and bankers...
...Bankers, especially American bankers, are unimpressed...
...They place their spare cash where it earns the most, where interest rates are highest, and where the buying power of their loose change is best preserved from the ravages of inflation...
...Citizens and politicians will instinctively reject such a course, and their instinct is sound...
...It is not in the interest of the bankers or the multinationals to do so...
...It is these nervously flowing movements of capital, invested for a night, a week, or at most three months, that determine the supply and demand of dollars, marks, and yen...
...This box score is published each moi nth, and stock speculators and others w ait for it with a sharp intake of breath...
...One indication is the wide gap between the dollar's buying power at home and abroad...
...Herdlike, they buy and sell together...
...The Germans, still haunted by the catastrophic inflation they experienced in the 1920s, run a flagellant economy, curbing growth, keeping unemployment high, seeking negative inflation and cuts in prices...
...As John Maynard Keynes argued, they are merely guessing which value the market will assign shares at some future time...
...Debtors hope to repay the borrowed $200 when prices have risen and,that sum will buy only a sport coat, one shirt, and a hamburger...
...If the figures a .re "good," if exports are catching up with i mports, there is a great sigh of relief an d share prices almost always climb...
...Bush may end up with legitimate cause to complain of the Fed's lack of political solidarity...
...Their daily volume, unknown and uncounted, is estimated by bankers at ten to fifteen times the sums needed for exports and imports around the globe...
...against expanding demand to regain full employment (sucks in imports...
...They panicked ten years ago, when the Carter Administration faced an intractable and simultaneous rise in prices and fall in output...
...Typically, these are concealed in the open discussion because bankers and allied business groups have no interest in exposing them...
...The Un ited States must push up interest rates, choke output and jobs, and pursue a Draconian anti-inflation policy...
...id, and sums up the value of imports, th e goods and services Americans buy abro /ad...
...It is a simple story, but it doesn't work that way...
...Last spring, that meant that $1.80 should have bought a basket of the same goods and services as the pound...
...To be sure, trade generates some of the supply and demand for yen, marks, dollars, and francs, but it is only a small fraction of the whole...
...As the studies of last October's crash have shown, the stock market is a typical American market, concentrated, dominated by a handful of operators, banks, pension funds, and mutual funds...
...The conventional view holds that a "bad" balance-of-trade report, with imports widening the lead over exports, will lower the value of the dollar...
...This is well understood by bankers and others engaged in the business...
...The textbook and financial-page accounts are misleading...
...The lender has a stake in reducing output, expanding unemployment, and squeezing the cash demand for goods and services...
...He hopes to be repaid after prices have fallen, when the $200 will buy him a suit and a vest, three shirts, and a steak dinner, apart from the interest he has earned...
...but the answer does not lie in sr tutting oi it imports and reducing living s< tandards t nit in taxing a fraction of the cor isumer's si iving to maintain and retrain t he industi ial victims of trade...
...But faced with a choice between a flush Wall Street and inflation or a depressed Wall Street and deflation, the sound Republican chooses deflation, protecting his loans or bonds...
...It is almost never discussed in public...
...More of the cheaper American goods will be sold abroad, and Americans will buy fewer of the dearer foreign goods...
...The operators are not trying to determine some real, economically appropriate price for shares...
...More dollars must be spent for 1,000 yen or two pounds...
...In a world of textbook competition, however, this concern need not last long, for as imports become more expensive American exports become cheaper, and a new equilibrium is established...
...The Federal Reserve, another bankers' instrument, had no doubts and solved Carter's dilemma: It choked off price rises by policies th at deepened unemployment—and in doing so, it assured Ronald Reagan of his fir st Presidential victory...
...But this was far from the case...
...Eventually, treasurers for the multinationals will conclude that this gap is due to be narrowed...
...That is safest because if all are wrong, none are wrong, the ruling principle of bureaucracy...
...This only proves that there is no special wisdom in Wall Street...
...Millions may be jobless, incomes will be stunted, but the doJlar will stand tall and bankers will be repaid with a better class of money...
...That means Americans are likely to pay higher prices for Japanese transistors, London theater tickets, or German machine tools...
...The auto worker w ho is lai< d off has every reason to think otl lerwise...
...Michael Dukakis is perfectl y capable of leading Democrats to anothe.-r defeat by endorsing the sound-money, anti-growth policies that usually win edito rial plaudits...
...Carter's economic policymakers did not know whether to push or pull, to expand or depress...
...In the modern state, however, there are limits to what debtors may reasonably expect...
...So the modern banker settles for unchanged prices, a flat price level, and high interest charges...
...if th le i figures are "bad," if imports have widened their lead over exports, very nas ty t hings can happen...
...Each night, the treasurer of Exxon in New York has hundreds of millions of dollars in yen, marks, pounds, and dollars that he must lock up somewhere...
...ison he or she is better off buying a Japa nese car that is cheaper and sturdier tha in Detroit's...
...Any political candidate, even one leaning towards debtors, must be concerned about a diminishing dollar...
...Exchange rates govern the volume of exports and imports, and thus help fix the level of jobs, prices, and total output...
...Once it is understood that capital flows and not trade set exchange rates, that these rates are ultimately turned around by the same multinational actors who set them, the bankers and deflation need not prevail...
...nomic affairs, Democrats have tended to follow an opposite course, frequently favoring expansion and reflation—the preference of debtors...
...Multinationals also prefer marks and yen to dollars because inflation rates are lower in Germany and Japan...
...Even if the secret were to get out that exchange rates are fixed by money flows and not by trade, the same remedies would still be in order for a falling currency: It must be restored by attracting the loose change of Phi'iips, Matsushita, ICI, and Exxon...
...Dominant speculators had turned their attention from trade to interest rates, assuming that the Federal Reserve would now do what comes naturally to bankers—raise rates and depress stock prices...
...In addition, a lower dollar tends to boost American prices, to revive an unbalancing inflation, to deprive Americans of inexpensive foreign goods...
...The many debtors in the Democratic following have precisely the reverse interest of Republican creditors...
...wages (makes exports more competitive) and weaken unions...
...Few issues are as n iisunders.tood—or as important for p' rosperity--as those that center arournd the balance of trade and the exchange...
...That is how they become cheaper...
...Though the trade deficit is much less worrisome than conventional wisdom suggests, the stock market can be moved a long way by a small change in the trade balance...
...Eventually, when multinational treasurers conclude that the dollar is near bottom, it will attract the short-term capital flowing elsewhere...
...Creditors want deflation—or lower prices—because it makes them richer...
...Since then, the Democrats have not regained their nerve...
...They will shift deposits from London to New York despite the lower interest offered...
...A falling dollar is a good reason to hold down The value of the dollar is determined by short-run decisions taken by huge multinationals, not by trade deficits or surpluses...
...From their standpoint and that of their bankers, it is far more useful to pretend that trade accounts for the dollar's low estate...
Vol. 52 • August 1988 • No. 8
