Time - Man of the Year/Time_Man_of_the_Year_Compact_Publishing_3YX-Disc-1_Compact_Publishing_1993.iso/moy/090792/09079924.000

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                                                                                ECONOMY, Page 36

Down and Down the Dollar Goes


Where it will stop, certainly nobody in Bonn or Washington knows

By JOHN GREENWALD -- With reporting by Daniel Benjamin/Berlin,
S.C. Gwynne/Washington and Adam Zagorin/Brussels


    European tourists flocked to tony U.S. stores last week,
snapping up bargains. Shoppers like Pirrera Enza, a bank worker
from Sicily, stocked up on perfumes and cosmetics at
Bloomingdale's in New York City for less than half their price
at home. Enza flew back a few days later with a planeload of
beaming compatriots toting bags and luggage bulging with
American-bought goods.

    What made the bonanza possible was the U.S. dollar's
plunge to its lowest level since World War II. But that same
decline meant that while the Europeans frolicked, Americans
abroad turned into window shoppers because the cost of
everything had become so expensive. "A room in a decent hotel
costs $450, and breakfast $35," fumed Robert McFadden, an
Atlanta lawyer in London. "It would have been bad enough without
the dollar's fall. Now it's just outrageous." Said Stephanie
Bressler, a recent college graduate from Rhode Island who was
touring Paris with friends: "Like we saw the Louvre, the outside
of the Louvre, but we couldn't go inside." Neither Bressler nor
her companions could afford the $7 admission charge.

    Welcome once again to the wild and wacky world of foreign
exchange crises. After several years when major Western
currencies generally moved in unison on international exchanges
like pennants gently fluttering in the breeze, the dollar in
recent days has looked as though it was about to be blown off
its flagpole. The American currency dropped a dizzying 4%
against the German mark in a four-day slump that leveled off in
the middle of last week. In the 1960s, when the dollar was king
of currencies, it was worth 4 marks; by a year ago, it was still
worth more than 1.7 marks. But last week the value of the dollar
was down to just 1.4 marks.

    The dollar slump and the ripple effect felt by other
currencies staggered stock and bond markets around the world.
Business and consumer confidence, already shaky, suffered
another setback. Investors watched helplessly as early in the
week stock prices sank and long-term interest rates turned
upward, depressing investments and driving up mortgages and
other borrowing costs. "Rising rates and a falling dollar --
that's the definition of a currency crisis," says C. Fred
Bergsten, director of the Institute for International Economics
in Washington. "What it says is that foreigners are pulling out
of both U.S. currency and financial markets."

    The cheap dollar, or any cheap currency, offers both
advantages and disadvantages. It all depends on where you stand.
American manufacturers generally like a lower dollar because it
slashes the cost of their products overseas and thus helps
exports. For example, Ford expects the low exchange rate to
boost sales of its new right-hand-drive compact, the Probe,
which it plans to ship to Japan. A cheap dollar, however,
increases inflation because U.S. consumers have to pay more for
such foreign goods as Louis Vuitton luggage or Hermes scarves.
A declining currency is also seen as a vote of no-confidence by
foreign investors in a country's economy -- and in the people
managing it.

    A cheap currency is likewise a mixed blessing for foreign
countries. For Japanese and European manufacturers, a weak
dollar hurts sales of goods like cameras and cars because it
raises their prices in the U.S. But foreign tourists in the U.S.
can suddenly buy a lot more with their marks, yen or francs.

    While business people last week were trying to get used to
new exchange rates, the currency crisis jolted political
capitals from Bonn to Tokyo. The dollar's fall was a clear
embarrassment to President George Bush and his re-election
campaign. The sharpest plunge came in the two days after Bush's
much touted acceptance speech to the Republican National
Convention. The money markets seemed to be sending the message
that they saw little in his proposals for jump-starting the U.S.
economy. A wobbly dollar will make it harder for Bush to brag
during the campaign about the strong U.S. presence around the
world.

    The international currency instability left many European
countries in similar binds. While Britain, France and Italy
would like to cut interest rates to stimulate growth, the
European Monetary System obliges them to keep their currencies
from falling too far behind the mark. "It is the economics of
the madhouse, but we have agreed to play by the rules," says
Peter Morgan, director general of the London-based Institute of
Directors, an international organization of corporate board
members. "The danger is that if we stick by the rules, the
recession continues even longer."

    The currency chaos compounds the uncertainty over the
outcome of the September 20 referendum in France on the
Maastricht treaty, which is supposed to lay the basis for a
European Union. French voters could decide they do not like the
high interest rates dictated by Germany and vote non on the
treaty. That would doom it and change the shape of post-cold war
Europe.

    The cause of the flight from the dollar is a fundamental
disagreement between the German central bank and the Bush
Administration and the Federal Reserve. The Germans have been
pushing interest rates up in an attempt to fight domestic
inflation brought on by the absorption of the former East
Germany. The costly unification has raised the annual inflation
rate to about 4%, a low level for most countries but an
uncomfortable one by German standards. German central bankers
are willing to accept less growth in return for less inflation.

    The Bush Administration and the Federal Reserve, on the
other hand, are fighting a totally different war. The Federal
Reserve, under not-so-subtle pressure from the White House, has
been pushing interest rates down for more than a year in hopes
of stimulating the U.S. economy out of its long bout of
sluggish growth in order to help the President's re-election
campaign.

    With German rates high and American ones low, a yawning
interest-rate gap exists between the two countries. Investors
put their money in countries that pay the most interest, and
right now German banks are paying about 6.5% more than U.S.
ones. Result: the international savvy money has been flowing out
of dollars and into marks. "What is happening now is absolutely
logical," says economist Barry Bosworth of the Brookings
Institution in Washington. "The only puzzle in my mind is why
it took so long for it to happen."

    As companies, consumers and tourists scramble to cope with
volatile money rates, the dollar's slide could continue to
resonate in the U.S. election-year fray. Supporters of
presidential nominee Bill Clinton recognize political fodder.
"This is not a campaign issue in the sense that it has a major
impact on the voter directly," says Gene Sperling, economic
policy director for the Clinton campaign. "But it provides
background music that gives legitimacy to the instinctive
feeling that people have given up on the current policies of
this Administration."

    Bush aides blame the falling dollar on the Bundesbank's
relentless policy of raising rates and forgetting about the rest
of the world. Administration officials point out that Washington
has been urging the German central bank to bring down rates for
more than a year. Such jawboning, however, has failed to budge
the staunchly independent Bundesbank.

    The Bush Administration has the sympathy of the government
of Chancellor Helmut Kohl. Tired of being portrayed as the bad
guys on the international monetary scene, German officials
would also like to see their interest rates fall. "Bonn is
definitely not happy about the policy the Bundesbank pursues,"
says Jurgen Pfister, head of economic research at the
Commerzbank. "But the government would harm itself if it
criticized the Bundesbank too overtly. The majority of the
public still thinks stability is the main goal."

    The real problem is that there is little to stop the
dollar from sliding or the mark from climbing as long as
government and financial leaders pursue conflicting goals. "What
you have in Europe is policy gridlock," says James O'Neill, head
of financial-markets research for Swiss Bank Corp. in London.
"The Bundesbank is performing a domestically mandated task that
has provoked increasing irritation around the Continent. No one
has a ready solution, and until one is found, financial markets
will remain in turmoil."

    In a world where almost all the major countries are
suffering through either slow growth or no growth, the last
thing international business needs is a period of new
instability and currency crises, which would only inhibit new
growth. Yet the combination of economic stagnation and low
interest rates in the U.S. and high interest rates in Germany
remains a prescription for monetary disarray and instability.
Until the Americans and Germans can stop pushing and pulling
their economic policies in opposite directions and narrow the
interest-rate gap through policies that are good for both of
them -- and for the rest of the world -- businesses, consumers
and even those happy tourists buying bargains will continue to
watch currencies gyrate.