Stampede to Safe Havens

March 08, 1995

The world's globalized economy, with currency in the trillions moving across borders on a daily basis, is once again teaching governments a harsh lesson. Central banks may intervene massively to try to stop the free fall of the dollar or the dizzying descent of the peso and the peseta; they may raise interest rates or attempt to impose stability. All to no avail. Once the speculators get the bit in their teeth, once they start a stampede to safe havens -- currently the German mark and the Japanese yen -- there is no stopping them.

So what are governments to do? Perhaps in times of turmoil, the best policy is to do nothing. Nothing other than to try to protect their home or regional economies as best they can while the worldwide speculative binge runs its course. And run its course it will. The law of supply and demand still prevails. The theory that for every winner there is a loser, and vice versa, still holds.

U.S. officials, those reluctant custodians of the world's reserve currency, are now standing by helplessly as the dollar drops to postwar lows against the mark and the yen. Only a couple of months ago, eyes rolled as the greenback for the first time bought less than 100 yen. Today, the rate is down to 89 yen to the dollar. The dollar has lost 6 percent against the mark in only a week.

Is this, then, a moment for panic? Maybe in Mexico, where a crumbling regime finds itself in a political crisis exacerbated by economic breakdown. But not in this country.

You can forget Treasury Secretary Robert Rubin's rhetoric last week that a strong dollar is important to U.S. security. You can learn more from President Clinton, who is uncharacteristically keeping his mouth shut.

And why not? American exporters are delighted at the prospect of improving their position against German and Japanese competitors. U.S. economists who worry for good reason about huge trade deficits can see them narrowing if the present currency ratios hold for a reasonable time. Even a governor of the Federal Reserve, Susan Phillips, has uttered the home truth that the health of the U.S. economy outweighs any concerns she may have about the falling dollar.

The internal U.S. market is so huge that world currency upheaval causes only marginal impact here. Domestic concerns about inflation, bringing the current boom in for a soft landing and fighting chronic federal deficits remain paramount.

These are matters that cannot be settled in a twinkling. But over time, given more courageous policies than now obtain, prudent management of the domestic economy will do more to strengthen the dollar than a dozen ill-conceived central bank interventions or interest rate adjustments. So the Clinton administration would be well-advised to hold aloof, let the world financial markets find their equilibrium, take good care of our Mexican and Canadian neighbors and keep focused not on day-to-day speculation but on economic fundamentals.

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