The world suddenly looks bleaker
The Bush administration is playing with fire by adopting a weak-dollar policy for political ends

FIRST, an apology. Buttonwood has received a slew of e-mails from readers either chastising him for defending Richard Grasso in last week’s column or congratulating him on standing up for the erstwhile head of the New York Stock Exchange. Suffice to say that no defence was intended: Buttonwood suggests a little light reading of Jonathan Swift, an eighteenth-century Irish satirist. Second, another, more important apology. Underlying some of this column’s cheer these few weeks past has been an assumption that President George Bush and his administration were not as stupid, short-sighted, parochial and economically illiterate as they sometimes appear. Buttonwood now realises that this was a mistake and retracts this view as hopelessly optimistic and naive. Over the past couple of weeks, the risks to the world economy and financial markets everywhere have risen as the full force of their economic myopia has visited itself on the world stage.

The reason for this column’s volte face was the outcome of the G7 meeting in Dubai. The communiqué issued by the group of industrialised rich countries on September 20th called for “more flexibility” in exchange rates, which sounds innocuous enough but most certainly wasn’t. Whatever other countries thought this meant—and the British and the Japanese denied it—the signal the Americans wanted to send was unambiguously clear: the Bush administration wants a lower dollar. John Snow, the treasury secretary, even called the statement “a milestone change”. Perhaps he was even hoping for a new version of the Plaza Accord, an agreement reached by the then G5 in 1985 to drive the dollar lower. Certainly, the currency markets thought something along those lines: since the meeting the dollar has fallen another 5% against the yen, to stand at three-year lows, and has dropped against other currencies as well.

None of the noises coming from Capitol Hill suggest that the markets are wrong in this view. This week, Medley Global Advisors, a consultancy run by Richard Medley, a former advisor to George Soros and a man with strong links to administrations past and present, issued a report saying that it was indeed the government’s intention to push the dollar lower. And a junior apparatchik in the Treasury claimed that, specifically, it wanted to lower the value of the dollar against the yen (since the Chinese are unlikely to play ball). Thus has the strong-dollar policy long espoused by Robert Rubin, Bill Clinton’s treasury secretary, metamorphosed into a weak-dollar policy. Mr Rubin, a former boss of Goldman Sachs, and as safe a pair of hands as could be wished for in troubled times, is said to be spitting blood at the stupidity of such a move.
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