From the Straits Times (Singapore), "Washington's risky dollar brinkmanship":
The United States trade deficit is at record heights. It also has a yawning fiscal deficit, which puts further pressure on the dollar - foreigners finance the fiscal deficit, selling their own currencies to buy US Treasuries, causing the dollar's value to rise. Businesses and unions pressure Washington to do something about the twin deficits, and legislators introduce a flurry of protectionist measures. To deflect these pressures, the administration persuades its most powerful trading partners to intervene in the currency markets, to knock down the dollar. A crisis is averted.Sounds familiar? It should. The above sequence describes not only the present but also what happened 18 years ago. On Sept 22, 1985, when US external deficits were as unsustainable as they are now, finance ministers of the world's five most powerful economies - the US, Japan, Germany, Britain and France - gathered at New York City's elegant Plaza Hotel. The resultant 'Plaza Agreement' committed the five to a managed devaluation of the dollar. In addition, the US agreed to control its fiscal deficit and Europe and Japan agreed to stimulate their domestic economies. It was recognised that a mere devaluation of the dollar would be insufficient in reversing America's external imbalance.
Plaza was a success insofar as it averted an immediate international financial crisis. Within three years, the yen soared from 240 to the dollar to around 135, and Japan's imports rose by almost 50 per cent. Although the US balance of trade never did become balanced as a result, and its fiscal deficit continued to grow, Plaza did moderate the rate of deterioration of the twin deficits, and it did deflect protectionist sentiments in the US. That was the chief reason then President Ronald Reagan abandoned his free market sentiments to intervene forcefully in the currency markets.
Can anyone imagine President Bush even entering into serious negotiations with other G-7 nations, let alone agreeing to control the deficit at their behest?
Can anyone imagine Candidate Bush abandoning his "free market sentiments" before the election?
