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Pain-Free? We'll Pay Later

THE BALTIMORE SUN

Tokyo -- The dollar is once again hitting record lows, and once again the initial impact for most people in the United States will be similar to a snort of cocaine -- pleasant and numbing in the short run, but ultimately addictive and harmful.

The currency markets do what weak governments around the world cannot: They provide an objective evaluation of a country's economic condition and force necessary and often painful changes.

Beyond day-to-day fluctuations, the continued decline in the dollar over the past quarter-century against currencies like Japan's and Germany's reflects a real problem for the United States: It spends more than it earns, and, relatively speaking, it is in economic decline.

That isn't a moral issue for the currency markets; it is a practical one. More dollars flow out than corresponding currencies flow in. To reconcile the discrepancy, each dollar becomes worth less -- a lot less -- unless conditions change. As a result, the currency market acts as a type of asset appraisal mechanism, not all that different from the person who comes around to value a home at the time of a sale. In essence, this appraiser has just examined every piece of property, every piece of equipment and every person in the United States, and has concluded that nothing there is worth as much as it used to be, compared with other nations having sounder economies.

And as is always the case for those who are becoming poorer, a result will be less money for consumption and investment.

Because the decline is so broad, it is hard for any single person to see it. But that doesn't mean it hasn't occurred. Among other problems this will cause, the United States, like every business in trouble, will have to pay more to finance its debts. Lenders will demand a higher return to make up for the likelihood that the currency used to repay a loan won't be worth as much as the currency provided at the time it was made.

That will affect everyone in the United States directly because the cost of maintaining individual debts -- mortgages, school loans and the like -- will rise, and indirectly because more taxes will have to go to merely paying interest on government debt, and more company revenue will have to be devoted to capital costs, rather than investment or salaries.

If all that weren't bad enough, there is worse news. Because the issues involved in currencies aren't as immediately thrilling as, say, the latest development in the O. J. Simpson trial, and because the immediate repercussions may even seem pleasant, the United States is likely to be deluded, or lulled, into believing the decline in the dollar doesn't signify a problem. As a result, it will get worse.

A seemingly benign scenario could go as follows: The initial fear is that the decline in the dollar will cause inflation. That is possible, particularly for many commodities like newsprint and oil for which there is strong international demand and constrained supplies, but the probability is diminished by other factors. Companies serious about the United States, like many here in Japan, take extraordinary pains to avoid price increases that could result in loss of market share. Meanwhile, U.S. companies have become ruthless in offsetting higher expenses for raw materials by pruning people. The cost of capital will rise and stay high for as long as the underlying problems remain, but the initial implications will be small.

That could hold costs down within the United States while U.S. manufacturers, without any overt effort, will be able to raise the prices in dollars of the products they export, or sell them for a bit less. The collective result is that dollar revenues from abroad will increase, and prices within the United States will stay roughly the same.

Going abroad will be more expensive, but that will boost travel within the United States and foreigners will visit. Disneyland may be a bit more crowded, Tokyo and Bonn a bit emptier, but who goes to those places for fun anyway? Expect a number of pleasant stories to emerge on the further resurgence of local companies, and the popularity of local tourism. With just a touch of what could appear to be luck, but really is just delusion, America will be able to read about how much stronger and more attractive America has become.

Conversely, the articles or broadcasts from abroad on the dollar's plunge will be filled with howls of pain. The dollar's decline is front-page news across Japan.

"Close to a crisis," was how Japan's minister of trade and industry, Ryutaro Hashimoto, described it. Each time the value of the dollar declines by a single yen, the country's vaunted auto makers lose about $340 million, the electric appliance makers lose about $240 million.

With numbers like that, it isn't hard to imagine that a protracted decline in the dollar could do what legions of U.S. trade negotiators and company executives could not: take a sledgehammer to the nearly incomprehensible barriers inhibiting U.S. exports, most notably to Japan, but also to other countries that aggressively market their goods in this country. And if these aggressive trading partners are suffering, many Americans may wrongly conclude that their nation must be doing all right.

Putting all those elements together -- restrained prices, increased dollars from exports, more visitors, and market-opening pressure on trading partners -- makes currency depreciations seem like a panacea. Yet that is only the most myopic view. Even though a weaker currency can provide a short-term boost, it is almost impossible to find an example of a country experiencing continued depreciations becoming economically healthier. Instead, a declining currency is the long-term signature of economies that have fallen into chronic decline, like Britain's, Argentina's and those of troubled African republics. The countries experiencing consistent currency appreciations, such as Germany, Japan and Singapore, almost inevitably have expanding economies.

Why? Because beyond any problems caused by the depreciation itself, in the final analysis, currency shifts tend to point to a cause rather than an effect.

Countries that produce efficiently and export successfully tend to become wealthy, and tend to have appreciating currencies. The reverse is equally true.

Japan's minister of trade and industry may be correct when he says the implication of a strengthening yen is immediate losses of hundreds of millions of dollars for key industries.

But since the yen began floating 25 years ago, it has almost quadrupled in value while those industries expanded. Meanwhile, other world-class competitors such as Britain and the United States have gained numerous temporary breathers from depreciations.

There is little that Toyota or Sony can do today to mitigate the pain caused by a weak dollar and a strong yen. But Japan continues on a course punctuated by incremental changes aimed at producing future economic success.

In Japan, labor unions have all but abandoned demands for higher wages and top executives have forgone bonuses.

Frills common during the 1980s have been stripped away. Japanese companies and all their constituents, down to the smallest subcontractor, are determined to transform operations that only a year ago were structured to operate profitably at 110 yen to the dollar to remain viable at 90 yen to the dollar, or 80 yen to the dollar, or wherever the yen might go.

These shifts are hardly as theatrical as, for example, efforts by the U.S. Congress to address its chronic inability to restrain spending by amending the Constitution. In fact, they are the opposite: deadly serious and quietly painful. But ultimately, they may be more meaningful for the economic viability of countries attempting to prosper in a tough world. It is a response the United States would do well to heed.

The decline in the dollar is a signal that the United States has little choice but to bring its own production and consumption into balance. Once the initial benefits of the depreciation pass and sobriety re-emerges, the underlying problems will be all the more evident, making future depreciations, and impoverishment, all the more likely.

MA Thomas Easton is the Tokyo bureau chief of The Baltimore Sun.

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