Dr. Henry Kaufman, the famous "Dr. Doom" of the 1980's, chats with the NY Times about the dollar:
The Alpha Currency? It's Still the Dollar
By WILLIAM J. HOLSTEIN
FEARS that the dollar could go into a free fall because of big budget and trade deficits are overblown, says Henry Kaufman, known for his longtime work as an economist at Salomon Brothers, where he was often bearish about American economic prospects. Now 77, he is an independent consultant and is on the board of Lehman Brothers. Here are excerpts from a recent conversation:
Q. As someone who has been bearish in general, why are you positive about the dollar?
A. "Positive" is a little bit of an overstatement. I believe the dollar will remain the key reserve currency for the foreseeable future. The United States is the dominant world power, and with world power goes leadership of the currency. If you go back to the British Empire or the Dutch or the Spanish, you'll find that world power also means a dominant currency.
We have an economy that is performing far, far better than the other industrialized countries. Therefore, profits here are better than they are in most places around the world. Our interest rates are competitive.
Q. But the Bush administration, despite some statements to the contrary, seems intent on expanding government deficits. Isn't that sending a bad signal?
A. The immediate issue is, "Who is going to finance the American budget deficit?" Let me give you a couple of numbers. Japan will continue to buy about $200 billion of U.S. government debt a year. They have a large export surplus to the United States. China, which also has a large surplus, will also probably buy about $100 billion.
Thirdly, the Federal Reserve is a buyer for monetary reasons, and that will account for $50 billion to $75 billion. Lastly, other buyers have emerged over the past year, namely some of the oil-producing countries. The price of oil has increased very dramatically. That money cannot readily be spent by producers such as Saudi Arabia and Qatar. Therefore, you have to put them in for $50 billion to $75 billion of purchases of American securities. So there isn't very much left for the time being for domestic investors to finance.
...Q. What do you think of the quotation attributed to Vice President Dick Cheney that "Reagan proved deficits don't matter"?
A. That is an incorrect observation by the vice president. Deficits do matter over the long term. There are times in the business cycle in which the U.S. Treasury competes very heavily against the private sector. When that occurs, it escalates interest rates. It puts pressure on inflation. It's a dangerous approach.
...Q. A Chinese official was quoted as saying that his government was not happy with the dollar's weakness. Do you think the Chinese or Japanese could shift their holdings elsewhere?
A. I doubt that very much. Both China and Japan are big exporters to the United States. I believe that the Chinese and Japanese, down deep, realize that if they shifted from the American dollar to the euro, it would endanger their export drive to the United States.
Q. So what is your prognosis for the dollar?
A. I think there is going to be reasonable stability with occasionally a little bit of a give in the value of the dollar.
I can't generate a permalink, but try to read it all.
Famously, Henry Kaufman was disliked for his analytical conclusions, or the implication thereof. In this instance, he very simply describes the analysis--it unfortunately flies in the face of the "dollar naysayers." Many of today's naysayers seem, like today's military critics, to be fighting the last war, through a failure to incorporate the facts on the ground. Kaufman has addressed those facts rather succinctly.
Posted by: Forbes | February 28, 2005 at 05:07 PM