Droopy Dollar Mighty Mark

August 29, 1992

It is high noon in the world's financial markets. The biggest guns are brandished by the German Bundesbank, determined to fight inflation with double-digit interest rates, and the U.S. Federal Reserve Board, equally adamant in holding interest rates low to fight an election-year recession.

As the Germans and Americans stare each other down, there are plenty of other participants: Britain, which may be forced to devalue the pound; France, where polls indicate the Maastricht Treaty for European Monetary Union could be rejected, and other countries plagued by the most serious worldwide economic turndown in half a century.

The most spectacular evidence of this dysfunction is the weak dollar, now worth only half the deutschemarks it could buy in 1985. This is due to a mammoth 6.75 percent differential in high German and low U.S. short-term interest rates.

Why are these supposed allies working at such cross-purposes? The German government, still spooked by the hyper-inflation that brought on Hitler, want to combat the inflationary pressures of bringing the Communist-wrecked eastern German economy up to western standards. Though high-interest policies are causing consternation, especially in Europe, reunified Germany shows no hesitation in throwing its weight around, as it did in forcing the pace on the dismemberment of Yugoslavia. As for the Bush administration, it is not about to raise interest rates with an election in 66 days.

The drooping dollar officially worries official Washington not a bit. While it might make European vacations expensive, it makes U.S. exports far cheaper and therefore more competitive on the world market. In contrast to the Germans, American economists are fairly confident U.S. inflation rates will remain low.

Yet a falling currency is hardly a sign of strength for any country. Like trade deficits, it may provide an aura of uplift. But just as trade debts come due with time, so cheap exports and pricey imports can represent an outflow of real wealth.

With stock markets down and economic malaise spreading, the impression grows that Germany's policy is not only damaging on a global scale but contrary to its own interests. High interest rates are a major factor in undercutting German competitiveness. Joblessness is increasing as German blue-chip companies institute layoffs and put their investment money into factories abroad rather than in eastern Germany where they are desperately needed. So logic would suggest that this high-noon confrontation should be eased through lower German interest rates. Alas, don't count on it.

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