REMEMBER WHEN GEORGE SOROS BET AGAINST THE BRITISH POUND and raked in more than one billion dollars for his efforts? I do. I was in London at that time, and the currency was going through the floor.
Although the pound is much higher against the U.S. dollar today than it was at that time (when holding dollars in my pocket felt good), I bet Soros is placing wagers not only against George Bush but that the dollar is going to sink to even lower levels.
I’m at the Starbucks on Victoria Street, not far from the Houses of Parliament. I don’t see any political celebrities here like I saw recently at the Starbucks near the White House. They seem to hang out at pub down the street. In fact, I think that the EU’s successor trade minister to Pascal Lamy, Britain’s Peter Mandelson may be down at the Red Lion Pub trying to convince members of the House of Commons that he won’t become too European in his new job.
Starbucks is just beginning to get T-Mobile wifi installed at its European locations — but service is spotty. The pub barristas (ok, bartenders), like at the Red Lion, get pretty addled if you ask for wireless while ordering a pint. I am having a very difficult time getting on line here, mostly because of a computer problem, so I may have to upload these posts when I return to Washington.
A cup of venti size coffee of the day at Starbucks at Connecticut and R Streets in Dupont Circle in Washington costs $1.87. Here in London, a venti coffee is 1.75 pounds, which is approximately $3.50. Shockingly, a gallon of gas is about $7.00 a gallon here, about 75% of which goes to the national treasury. And if one drives a car into central London — just driving through — the charge, or congestion tax as it is called, is 5 pounds a day, or roughly $10.00.
Tokyo used to seem expensive to me — but now seems like a dream destination compared to the prices in London. Last year, Tokyo’s central bank spent nearly $200 billion buying dollars and dumping yen to keep the dollar from drastically dropping in relative value and crippling the ability of Americans to buy Japanese exports. My guess from my experience thus far in London is that Britain’s central bankers meddle less in markets (other than gas consumption and car useage) and did not worry about the dollar’s fall.
During the 80s and 90s, America’s current account deficit as a percentage of GDP basically wavered between 2.5% and 3.25%, but recently, the current account deficit has surged to nearly 5% of GDP and is projected to rise to about 6% in the near term. Financial Times columnist Martin Wolf has written some superb commentary regarding America’s worsening macroeconomic conditions, and sensibly argued that “the high and rising U.S. current account deficit is one of the most remarkable features of the world economy.”
I have never worried that much about the absolute dollar value of the current account deficit — but when GDP ratios begin changing quickly over short time spans — I get concerned. Wolf agrees that deciding whether this current account deficit surge matters or not “is of some significance.”
An array of structural imbalances in the American economy is making America feel like a richer nation than it is. U.S. savings levels have reached all-time lows. America is exporting the least in memory in comparison to that which it imports. And as Martin Wolf writes, “foreigners are now funding close to three-quarters of net U.S. investment.” In commentary that Wolf offered a week ago (on August 18th), he writes “unless trends change, 10 years from now the U.S. will have fiscal debt and external liabilities that are both over 100 per cent of GDP. It will have lost control over its economic fate.”
Despite this worrisome data, Japan and China continue to finance America’s current account gluttony to keep U.S. consumers intoxicated on their exports. At some point, however, the only way out of America’s dysfunctional binge is that it consumes less or exports more; that it buys down debt and external liabilities by working harder without near term rewards because these rewards were enjoyed yesterday and paid for through a mortgage. At minimum, when accounts revert to historical trendlines, American living standards will certainly flounder but more likely fall.
I’m getting a glimpse of what this will feel like as I spend two dollars here on every British pound.
President Bush’s Chair of the Council of Economic Advisers, N. Gregory Mankiw, is duking out the real state of the economy with President Clinton’s former Chair of the same Council, Laura D’Andrea Tyson, who is here in London as Dean of the London Business School. In the International Herald Tribune (and perhaps the New York Times which I haven’t seen — just found it and link is here), Mankiw reports that Tyson has said that this is “the worst economic recovery period in terms off job creation that the nation has experienced since the Great Depression.”
Read the article if you would like to learn more about the job creation debate. Tyson, it seems to me, is talking about job levels as compared to the unusually low level of unemployment since the period of Clinton’s second term whereas Mankiw is arguing that today’s unemployment rate of 5.5% is the same as 1996 when Clinton was running for a second term, arguably an easier goal post for the Bush administration to compete with than the very best unemployment rates achieved during Clinton’s tenure.
But back to exchange rates and current account deficits. When one gets hit in the pocket book with the macro realities of a U.S. economy that will purchase less from abroad because the value of the dollar is sinking in real terms against most other economies, it’s clear that Americans will be compelled at some point to work harder (though they are arguably among the hardest working when compared to other OECD countries) but receive fewer returns for their labor so as to offset foreign liabilities.
Since the Chinese yuan has been fixed to the dollar, and the Japanese have been manipulating their currency’s market value with massive government intervention, we have not felt the high price of world purchases across our consumer sector. But if America hopes to have any manufacturing or services industry left (in the long run), the Chinese are going to have to float their currency. The Japanese are going to have to stop overdosing on dollar purchases.
And the price of nearly everything from abroad will rise for Americans, thus correcting some of the excesses manifested in our surging current account deficit.
Mankiw doesn’t address this fundamental reality. There is not only anxiety out there about job and retirement security — but there is some sense that people are beginning to notice that America is becoming a less rich nation. With oil now hitting $50 a barrel (well, $49.40 as of the time of this writing), how can Mankiw and his boss, President Bush, think that they can get away with the headline that ran here: “The U.S. Economy is Strong and Getting Stronger.”
What is their definition of a weaker economy? Would they know it if they saw it?
— Steve Clemons