Trade Expert: Dollar Devaluation Necessary

Monday, 07 Mar 2011 12:33 PM

By Greg Brown
MONEY NEWS

Author and trade expert Clyde Prestowitz warns that it would take up to a 50 percent devaluation of the dollar against the Chinese yuan and an end to the greenback as the global reserve currency to truly right the global trade economy.

Prestowitz is founder and president of the Economic Strategy Institute and formerly a counselor to the Secretary of Commerce during the Reagan Administration.

In a post at the website of Foreign Policy magazine, Prestowitz details a list of scheduled global banking and trade discussions. Then he dismisses them all, saying that the real problems facing the U.S. economy relate to a fundamental imbalance that cannot be negotiated or smoothed over by simply talking.

“At present, virtually all the world's economies are attempting to grow and create jobs by exporting primarily to the United States, which, despite the recent economic crisis, high unemployment, and a fragile recovery, is still acting as the world's buyer of last resort,” Prestowitz writes.

“But with its budget deficits, and global indebtedness rising and true unemployment hovering around 17 percent, the ability of the United States to continue this role while also acting as the global security provider is questionable,” he explains.

China and “other high-growth emerging economies” cannot grow, either, using cheap currencies, financing domestic construction booms, and maintaining low internal consumption. “Few believe this situation to be indefinitely sustainable,” he says.

The “fix” means the following things are due to occur, Prestowitz says:

• The United States must solve its budget deficits while “doubling present household savings rates.”

• “Massive investment” in U.S. infrastructure and a renewed manufacturing base.

• A 40 percent to 50 percent devaluation of the greenback against the yuan and “some other Asian currencies,” along with “a lesser devaluation” against the euro or “a new German deutschmark” if the euro ceases to exist.

• And finally, possibly the end of the dollar as the global reserve currency.

• An increase in consumption and a reduction in saving, production, and exports by Germany, China, Japan, and the east Asian “tigers” as they revalue their own currencies.

U.S. Treasury Secretary Timothy Geithner, speaking to the Senate Thursday, said there was "no material risk" to the dollar’s role as the global reserve currency.

The real risk, he said, would be if the United States lost global confidence in its “financial leadership" position in the world. "That is the only risk to the role of the dollar," Geithner said.

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