[Marxism] As high dollar brings in billions, Washington exports worst of crisis

["Fred Feldman" <ffeldman@xxxxxxxxxxxxxxxx>]

New York Times
March 9, 2009
A Rising Dollar Lifts the U.S. but Adds to the Crisis Abroad 
By PETER S. GOODMAN
As the world is seized with anxiety in the face of a spreading financial
crisis, the one place having a considerably easier time attracting money is,
perversely enough, the same place that started much of the trouble: the
United States.

American investors are ditching foreign ventures and bringing their dollars
home, entrusting them to the supposed bedrock safety of United States
government bonds. And China continues to buy staggering quantities of
American debt. 

These actions are lifting the value of the dollar and providing the Obama
administration with a crucial infusion of financing as it directs trillions
of dollars toward rescuing banks and stimulating the economy, enabling the
government to pay for these efforts without lifting interest rates.

And yet in a global economy crippled by a lack of confidence and capital,
with lending and investment mechanisms dysfunctional from Milan to Manila,
the tilt of money toward the United States appears to be exacerbating the
crisis elsewhere.

The pursuit of capital suddenly seems like a zero sum game. A dollar
invested by foreign central banks and investors in American government bonds
is a dollar that is not available to Eastern European countries desperately
seeking to refinance debt. It is a dollar that cannot reach Africa, where
many countries are struggling with the loss of aid and foreign investment. 

"Virtually all of the low-income countries are in very serious trouble,"
said Eswar Prasad, a former official at the International Monetary Fund and
a senior fellow at the Brookings Institution, the liberal-leaning research
organization in Washington. 

He went on: "This is the third wave of the financial crisis. Low-income
countries are getting hit very hard. The flow of private capital to the
emerging market has dried up."

Private money invested in so-called emerging countries plunged from $928
billion in 2007 to $466 billion last year and is likely to fall to $165
billion this year, according to the Institute of International Finance.

Not that the United States is enjoying a great influx of money. Globally,
investors are holding tight to cash and extracting it as quickly as they can
from risky ventures. 

In the United States, investments by foreigners have slowed markedly. But as
Americans eschew foreign deals and keep their dollars at home, and as
foreign central banks - especially China - buy Treasury bills, the United
States is absorbing money that used to be scattered around the globe. And
that is making money tighter elsewhere in the world.

The most immediate crisis appears to be in Eastern Europe, where investors
borrowed exuberantly in foreign currencies - notably the euro and the Swiss
franc - using those funds to build office towers and factories. Their debts
are growing as their currencies decline in value, leading to bank losses and
requiring government bailouts along with aid from the I.M.F..

Economists liken this episode to the financial crisis that assaulted much of
Asia in the late 1990s. Then, as now, investors borrowed in foreign
currencies. When investment left the region, local currencies plummeted,
particularly in Thailand and Indonesia, setting off defaults and sowing job
losses and poverty.

"Eastern Europe looks incredibly similar to Asia in the 1990s," said Brad
Setser, an economist at the Council on Foreign Relations in New York.

In one key regard, this crisis is more problematic: In the 1990s, the rest
of the global economy was growing vigorously. Once danger abated, Asian
countries were able to resume growth by selling goods to the United States,
Europe, Japan and China. 

Indeed, the very plunge in currencies that precipitated the crisis also
provided a fix, making Thai, Malaysian, Indonesian and Korean goods that
much cheaper on world markets.

This time, as many low-income countries again see their currencies fall,
they are confronting a world beset by recession, in which demand for their
products is weak and falling.

In a report released Sunday, the World Bank predicted that the global
economy would shrink in 2009 for the first time in more than half a century
and forecast that global trade would decline for the first time since the
early 1980s. 

"Depreciation isn't enough now to offset the global contraction," said Mr.
Setser, noting that export powers like Japan, Korea, Taiwan and Brazil have
had rapid declines in sales in recent months. "Everybody's looking
vulnerable. All commodity exporters are potentially subject to currency
crises."

Fears are growing that a much broader group of countries will plunge into
trouble. Mr. Prasad's list of potential danger zones includes Vietnam, the
Philippines, Malaysia and Indonesia, as well as Pakistan and Ecuador. 

In the Asian financial crisis, countries at the center of the storm were
particularly vulnerable because the values of their currencies were mostly
pegged to the dollar. Once central banks ran out of dollars to exchange for
their own currencies, they lost their ability to influence the exchange
rate. As a result, their currencies fell, turning already large debts into
impossible debts. 

Many more countries now allow their currencies to float with the whims of
the market, removing this grim chain of events. Still, as economic activity
slows and banks are stuck with larger losses, the damage could swell beyond
the ability of governments to finance bailouts, said Kenneth S. Rogoff, a
former chief economist at the I.M.F. and now a professor at Harvard. 

"Debt collapses are going to wreak havoc with exchange rates," Mr. Rogoff
predicted. "A lot of countries in Europe are already on the brink of
default."

Only two years ago, many analysts were suggesting that the I.M.F. - created
more than 60 years ago to rescue countries in financial distress - no longer
had a clear reason to exist. Now, the fund is scrambling for contributiNs
from developed nations to bolster its $350 billion war chest. Mr. Setser
suggested it needed $1 trillion for all that might yet unfold.

Because worries are deeper nearly everywhere else, the United States and the
dollar have essentially benefited from the worldwide panic. In the last
year, the dollar has risen 13 percent against major foreign currencies after
adjusting for inflation, according to Federal Reserve data. Foreign holdings
of Treasury bills rose by $456 billion in 2008.

"It's a huge safe haven effect," said William R. Cline, a senior fellow at
the Peterson Institute for International Economics in Washington. "The basic
assumption that people are making is that the U.S. government will never
default on its debt."

As the dominant flavor of money used in business worldwide, the dollar has
once again been affirmed as the global reserve currency. 

Only last year, some analysts said that as the American economy sagged,
foreign central banks would be reluctant to sink national savings into the
dollar. That has been soundly debunked.

In ordinary times, the rise of the dollar would provoke American worries
that it would crimp exports by making goods more expensive on world markets.
But for American policy makers, what matters now is attracting enough buyers
of American debt to finance the rescue plans, and if the dollar must rise
along the way, that is a cost worth paying. 

"The fact that we can still borrow at lower interest rates is saving us from
much more severe adjustments," Mr. Rogoff said. "We're really still staring
down an abyss."

Julia Werdigier contributed reporting



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