- Now you have it. The dollar is in free fall, but it's
good for General Motors and it's good for the US - especially for the Bush
administration during election year.
-
- To borrow a phrase from the Nixon administration of the
early 1970s, US policy towards the dollar is one of benign neglect, benign
for the US economy but potentially very malign for the eurozone.
-
- First, however, let us set the record straight. Back
on January 15 1953, Charles Wilson, then-president of General Motors, appeared
before the Senate armed services committee to give testimony on his proposed
nomination for secretary of defence.
-
- His precise words were: "For years I thought what
was good for our country was good for General Motors and vice versa. The
difference did not exist. Our company is too big. It goes with the welfare
of the country."
-
- Wilson was president of General Motors from 1941 to 1953,
before becoming secretary of defence under President Dwight Eisenhower.
The 1950s was the decade when much was made of the "military industrial
complex" in the US, and how close the ties were between Washington,
military spending and big business. Plus Áa change.
-
- Let us now move forward 5l years from Charles Wilson
to the present chairman, Rick Wagoner. Last month, Mr Wagoner said the
drop in the dollar was "a big plus" for GM. Earlier this week,
he welcomed the further weakness in the US currency as a boost to sales,
via increased US competitiveness against Japanese and European rivals.
-
- Now, we all know the importance of the price mechanism
in the market economy, but some prices are more important than others.
The key "macro" prices are the rate of interest and the rate
of exchange.
-
- When the British pound was last at $1.80 - which it hit
this week - the exchange rate proved too high for the competitiveness of
many British businesses. Yet the Conservative government under John Major
briefly raised interest rates to 12% (with a threat to lift them further
to 15%) in order to keep sterling within the European exchange rate mechanism.
-
- The combination of an overvalued pound and extortionately
high interest rates was crippling and the policy collapsed. The British
economy then embarked on a long period of expansion, fuelled by a lower
exchange rate and much lower interest rates. The current accommodative
economic policy in the US makes what we experienced in Britain after sterling's
fall look like a vicar's tea party.
-
- Interest rates are negligible and the Federal Reserve
intends to keep them that way as long as possible. Lax fiscal policy -
tax cuts - and extreme monetary stimulus mean that, in the words of retired
IMF chief economist, Kenneth Rogoff, the US is enjoying "the best
economic recovery money can buy". On top of that, the dollar is doing
wonders for General Motors.
-
- Is it all too good to be true? Presumably the Democrats
hope so. One possible cloud on the horizon is that falling inflows of foreign,
mainly East Asian funds into the US may force a rise in interest rates
in the run-up to the election. Another is that the oil producing exporting
countries (Opec) may get fed up with the decline in the value of their
dollar earnings and push up the price of oil. That was the trigger point
for the first oil shock of the 1970s).
-
- But for the moment George Bush is riding high on an economic
revival that everyone knows means trouble via the twin budget and trade
deficits in the medium term. As for the fiscal stimulus, more and more
commentators are noticing that it is not just tax cuts that are boosting
the US economy but vast increases in military - or, in the case of lucrative
contracts in Iraq, militarily-induced - spending. That 1950s-style military
industrial complex is back.
-
- Yet it was Eisenhower himself who cautioned back in 1953:
"Every gun that is made, every rocket fired signifies, in the final
sense, a theft from those who hunger and are not fed, those who are cold
and not clothed." Happy new year.
-
- - William Keegan is the Observer's senior economics commentator
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- Guardian Unlimited © Guardian Newspapers Limited
2004
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- http://www.guardian.co.uk/economicdispatch/story/0,12498,1117180,00.html
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