After trading blame for the problem at their meeting in Washington, D.C., this week, finance ministers of the world's richest industrial nations agreed the U.S. dollar has lost too much buying power and solemnly concurred that something must be done about it.
But when it came to specifying a cure, the central bank governors from the United States, Canada, Germany, Japan, Italy, Canada and France in effect simply shrugged and looked the other way.It would be easy to criticize this performance of the G-7 nations, as they are called, as an exercise in spineless temporizing.
Actually, however, the decision to sit on their hands was about the only sensible thing the finance ministers could do - at least for the time being. In the long run, however, some painful sacrifices are in order - particularly on the part of the United States and Japan. But, based on past experience, don't count on either Washington or Tokyo to do the right thing.
Meanwhile, consider the extent to which the leading nations' hands are tied when it comes to quick and effective action in response to the slide of the dollar, which has lost 10 per cent of its value against the German mark and 20 per cent against the Japanese yen since the first of the year.
The most direct response would have been to hike interest rates as a way to get foreign investors to dump other currencies in favor of the dollar. But the Federal Reserve already has done exactly that seven times since February 1994. Further hikes would risk sending the United States into a recession just when the economy is doing so well, with inflation low and consumer confidence on the rise.
Likewise, the Fed could try to prop up U.S. currency by buying a couple more billion dollars worth. But such an intervention would amount to small potatoes in a global currency market where roughly $1 trillion worth of money is traded every day, most of it in dollars.
Instead, the solutions to the dollar's problems are to be found in long-range actions.
The United States simply cannot have a strong dollar while running a permanent trade deficit and a permanent budget deficit, both financed in part by selling debt to foreigners.
Of the two, the budget deficit is by far more important since it gives foreign investors the not unfounded impression that Washington lacks the judgment and character it takes for the United States to live within its means. That impression - which makes foreign investors want to dump their dollars in order to cut their losses - is strengthened by Congress' current efforts to put tax cuts ahead of spending cuts.
At the same time, the United States keeps importing more than it exports even though Americans have few savings compared to other countries. As a result, the world is flooded with surplus dollars while Americans are forced to borrow from other countries. With too many dollars floating around the world, the value of the dollar understandably diminishes.
The U.S. trade deficit with Japan is particularly big and stubborn. This deficit results not just from high tariffs but from Japan's maze of bureaucratic regulations that grossly favor domestic producers over foreign competitors. Those regulations don't ease even when the lower-valued dollar makes U.S. goods dirt cheap.
Decades of futile negotiations show there are sharp limits to what Washington can do to get Tokyo to behave more sensibly and responsibly. But there's no excuse for Washington's failure to put its own house in order. The way to do so, of course, is with a federal budget in balance and even in surplus.