[Congressional Record Volume 141, Number 91 (Tuesday, June 6, 1995)]
[Senate]
[Pages S7750-S7752]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                  THE DOLLAR, THE YEN, AND THE DEFICIT

  Mr. SIMON. Mr. President, this is the third in a series of 
commentaries I am making on our Nation's condition, a series suggested 
to me by President Clinton after I announced my future retirement from 
the Senate.
  One of the major economic events of this year is the recent decline 
of the dollar against the Japanese yen and the German mark. Though this 
slippage was arrested temporarily a few days ago, the long-term trend 
is clear. We know that the drop in the value of the dollar will affect 
our future, but we are not sure how. We know that we should do 
something about it, but we are not sure what.
  At a White House press conference on Tuesday evening, April 18, a 
reporter asked President Clinton about the sinking dollar, and the 
President responded: ``In the present climate, the ability of 
governments to affect the strength of their currency . . . in the short 
run may be limited.'' If that is an excuse for inaction, it is wrong. 
But the President was right in saying:

       So what you have to do is work over the long run. The 
     United States does want a strong dollar. We believe in the 
     importance of fundamentals in our economy. We believe in 
     getting the deficit down, getting jobs up and pursuing a 
     responsible course.

  The Washington Post had an editorial that observed:

       Anger and frustration in their voices, Japanese and German 
     officials have been calling on the United States publicly to 
     do something about the [falling] dollar * * * The United 
     States is likely to offer sympathy but little more. There's 
     nothing useful that the United States can do.

  The Post is wrong.
  A few blamed our $20 billion loan guarantee to Mexico, and while it 
could have altered behavior slightly in an uneasy market, a $20 billion 
multiyear loan guarantee is not something major for a nation that has a 
$6 trillion national income, if it has its economic house in order.
  There are two basic questions: What does the fall of the dollar mean? 
What can we or should we do about it? I shall address both.
  What does the fall of the dollar mean?
  It is significant, both for our Nation and the world. Since two-
thirds of the world's trade is carried on in dollars, the erosion of 
the dollar can destabilize economies far from us. But the British 
publication, the Economist, is correct:

       In the long run, the biggest loser from the neglect of the 
     dollar will be America itself.--April 15, 1995.

  A Journal of Commerce columnist accurately noted on April 17: ``The 
weak dollar will decrease U.S. political influence abroad.'' Peter 
Passell wrote in the New York Times, on May 7: ``No indicator of the 
American economic decline stands out like the fallen dollar.'' Paul 
Volcker, former chairman of the Federal
 Reserve Board, is quoted in the New York Times on May 2: ``If you 
think American leadership is important, then erosion [of the dollar] is 
a negative.'' Time magazine, in its March 20 issue, quoted financial 
analyst Felix Rohatyn: ``We are gradually losing control of our own 
destiny. The dollar's decline undercuts American economic leadership 
and prestige. It is perhaps the single most dangerous economic threat 
we will face in the long term because it puts us at the mercy of other 
countries.'' Van Ooms, economist for the Committee for Economic 
Development and former chief of staff of the House Budget Committee, 
said on the pages of the Chicago Tribune on April 13 that Europeans 
will take this country less seriously on foreign policy ``when it can't 
run a credible economic policy.'' As if to underscore all of this, the 
April 12th Wall Street Journal had a heading about the fastest growing 
economic part of the world: ``Asia's Central Banks Unloading Dollars in 
Shift Toward Yen as Trade Currency.''

  Short-term, Americans will see little change. Yes, if we are 
traveling in other nations, we will be hurt a little by the foreign 
exchange rates. Our balance of trade with other nations may be helped a 
little, because U.S. products can be secured for less money, though 
foreign businesses--like their American counterparts--rarely 
immediately drop their prices, both because they want to make some 
additional profit and because there is a reluctance to adjust prices 
until the currency market stabilizes. Our balance of trade is helped 
because U.S. businesses that buy component parts from overseas 
producers will suddenly find them more expensive and will shift to a 
U.S. manufacturer of the same product, if one is available. But that is 
not always the case. The VCR, for example--invented, developed and, at 
one time, entirely manufactured here--now has no U.S. manufacturing 
source.
  Little-noticed economic consequences will gradually affect us. For 
example, securing a patent in Japan will now be more expensive for a 
United States firm or individual. Factors like that have a limited, 
short-term impact but a much greater long-range impact.
  Long-term, the dollar decline has more serious consequences.
  First, the increased cost of foreign goods will have a gradual 
inflationary impact on our economy. That will not only cause the 
consumer dollar to shrink and discourage savings, it eventually will 
put pressure on the Federal Reserve Board to raise interest rates to 
discourage inflationary pressures--and that will hurt our economy.
  The financial markets will also push interest rates up. We know that 
approximately 16 percent of our deficit--or about $700 billion--is 
publicly known to be held outside the United States. But many nations 
outlaw holding bonds from another nation--the United States once did--
and there is additional ownership that is not publicly disclosed, 
hidden usually through a third party holding the
 bonds. If the dollar continues its decline, U.S. bonds denominated in 
dollars will become less and less attractive. We will have to raise 
interest rates to sell this huge chunk of our deficit.

  Less widely known is that 14 percent of our corporate bonds are held 
by people who live beyond our borders. That money has financed a huge 
chunk of our industrial expansion and modernization. If the dollar 
continues to decline, we will either lose this source of capital, or 
interest rate payments will have to be raised to make these bonds 
attractive enough to sell.
  In addition, there are sizable foreign deposits in savings and 
checking accounts in our banks, and foreign-held certificates of 
deposit. Indirectly, these help to finance both our government sector--
because the banks buy Treasury bonds--and the private sector, because 
the banks are able to make loans to U.S. businesses with these 
resources. If all of this shrinks because of a fall in the dollar, the 
only way to salvage the situation is with higher interest rates.
  In the long term, higher interest rates discourage industrial 
investment and reduce productivity. Our economy is hurt, and the 
phenomenon of a lower dollar is not healthy for our Nation. From time 
to time, minor adjustments will occur and frequently are healthy. But 
the fairly consistent pattern of the drop in our dollar against the yen 
and the mark has major long-term consequences for our citizens that are 
not good.
  I read an exchange that took place between two economists some years 
ago when the dollar brought 262 yen. In 1968, incidentally, 1 dollar 
equaled 360 yen. Here we can see in this graph what has happened to the 
dollar versus the yen. The one discussant predicted that if our 
policies were not altered, the dollar would eventually slide to 180 
yen. The other economist predicted, confidently, that this would never 
happen. A few days ago, the dollar fell to 82 yen and today the dollar 
is worth 84 yen. Recently the Washington Post published a column noting 
the opinion of [[Page S7751]] an economist and an economic observer who 
suggest we may have to think about issuing U.S. Treasury notes in yen 
rather than dollars to attract buyers and save on interest. The 
reasoning is simple: The financial markets want a stable currency for 
their investments, particularly long-term investments. The
 yen has shown itself much more stable than the dollar. To continue to 
sell in dollars will require higher interest rates. Therefore, they 
argue, we should issue our bonds in yen and pay less for interest. It 
would be politically unsettling to many Americans to see our bonds 
being sold in yen, but that is where we are headed.

  There are better alternatives.
  What can we do about the fall of the dollar?
  It is not difficult to diagnose much of the problem. But once the 
illness is diagnosed, the patient has to take the medicine, and that is 
much more difficult with a patient that is not accustomed to taking 
distasteful medicine.
  The basic problem is that the confidence in the dollar has 
diminished. Neither cheerleading by United States officials nor 
salvaging efforts by the central banks of Japan, Germany, and other 
countries will do more than temporarily heal the wound. Confidence-
building measures have to be substantial. Those who now hold U.S. 
dollar-denominated financial certificates, who are uneasy, are not 
going to be assured by cosmetic actions.
  Four steps can strengthen our economy and solidify the dollar.
  First, get rid of our Government deficit. This is, by far, the most 
important of the four actions, and it will help the next three. It is 
no accident that the most recent slide of the dollar began the day 
after the Senate rejected the balanced budget amendment by one vote.
  The Federal Government has been in a deficit situation for 26 years, 
and for 25 years, the dollar has been in a slide against the yen and 
mark. It does not take an Einstein to understand there is a 
relationship. But it is not a straight line, and other factors are also 
present. Sometimes when the deficit was high, interest rates were high, 
increasing the value of the dollar. It is an over-simplification to 
attribute all of the dollar decline to the deficit. But it is a major 
cause.
  ``The Germans and the Japanese say the basic problem is America's 
budget deficit,'' the New York Times reported on April 25. A month 
earlier, the Los Angeles Times reported Federal Reserve Board Chairman 
Alan Greenspan telling the House Budget Committee that ``last week's 
Senate defeat of the balanced budget amendment [can be blamed] for the 
sudden plunge in the value of the dollar and pointedly warned Congress 
that the currency will remain under long-term pressure until Washington 
tackles the deficit.'' The newspaper called his comments 
``extraordinary because he so rarely gets involved in political 
disputes over tax and budget policies.''--March 9, 1995.
  Business Week, in its March 2 issue, commented on the dollar slide: 
``What the [international] market wants is simple: less debt or higher 
interest rates.'' The same article noted ``that sense of unease [caused 
by] the narrow defeat in the Senate of the balanced budget amendment. 
Now, investors are worrying that talk of tax cuts will continue despite 
the amendment's failure. `The optimism that something would be done on 
the long-standing U.S. budget deficit problem has disappeared,' argues 
Jonathan H. Francis, head of global strategy at Boston's Putnam 
Investments.'' The story concludes: ``Unless the U.S. * * * catches on, 
even more trouble lies ahead.'' Paul McCracken, economist at the 
University of Michigan and former chairman of the Council of Economic 
Advisors under President Nixon, had a guest column in the Wall Street 
Journal of April 13, titled: ``Falling Dollar? Blame the Deficit.'' In 
the article, he says that the deficits have caused a decline in 
productive capital investment and that this ``is not trivial. If gains 
in real income had continued at a pace more in line with our long 
history, average family income today in real terms
 would be almost 25 percent higher than our economy is now 
delivering.'' The bipartisan Concord Coalition recently issued a study 
suggesting that family income would be $15,000 higher today if we had 
not had years of deficit. On April 17, Trudy Rubin wrote prophetically 
in the Journal of Commerce: ``If there were signs that Washington were 
cutting the deficit, the dollar would probably stabilize.'' Lawrence 
Thimerene, chief economist for the Economic Strategy Institute, wrote 
in the New York Times on March 23 that, to stabilize the dollar, 
Congress and the President must ``demonstrate real seriousness on 
deficit reduction.'' To the credit of President Clinton, he did that 
with his budget of 1993. It cost him politically, but it benefited the 
Nation. To the credit of our colleague, Senator Pete Domenici, chair of 
the Budget Committee, he has proposed that we balance the budget by the 
year 2002. While I differ strongly with his way of getting there, I 
applaud his courage in proposing this. The Senate and the House now 
have passed different budget blueprints. During the Senate debate, 
several of us on the Democratic side of the aisle proposed a different 
budget plan which would balance the budget but with significantly 
different priorities. We need bipartisan efforts in the that direction.

  But our task is made more difficult by the one vote we failed to get 
in the Senate for a balanced budget amendment. I hope that 1 of the 34 
Senators who voted against it--Dale Bumpers, David Pryor, Barbara 
Boxer, Diane Feinstein, Chris Dodd, Joe Lieberman, Dan Akaka, Daniel 
Inouye, Wendell Ford, Bennett Johnston, Barbara Mikulski, Paul 
Sarbanes, Edward Kennedy, John Kerry, Carl Levin, Paul Wellstone, Bob 
Kerrey, Harry Reid, Bill Bradley, Frank Lautenberg, Jeff Bingaman, Pat 
Moynihan, Kent Conrad, Byron Dorgan, John Glenn, Mark Hatfield, 
Claiborne Pell, Fritz Hollings, Tom Daschle, Pat Leahy, Patty Murray, 
Robert Byrd, Jay Rockefeller, and Russ Feingold--will reexamine the 
issue in light of what has happened to the dollar and in light of the 
action taken by Senator Domenici and the Budget Committee.
  Even Budget Committee action alone toward fiscal balance has had an 
impact. The heading on the New York Times story of Friday, May 12, was: 
``The Dollar Surges On New Plan To Cut Deficit.'' The story, written by 
Peter Truell, begins:

       The dollar staged its biggest one-day rally in nearly four 
     years, rebounding against the German mark and the Japanese 
     yen on speculation that Washington might do more than in the 
     past to cut the federal budget deficit.

  The difficulty with the Budget Committee acting alone, much as its 
goal is to be applauded, is that the financial markets will remain 
somewhat skeptical, as I am, about whether Congress will follow through 
in the remaining 6 years. Financial savings from interest that could be 
applied to things like social programs and Medicare, and should be 
applied there rather than for a tax cut, will not be fully achieved. On 
the basis of estimates made by Data Resources and other forecasters, my 
guess is that with the same goal of balancing the budget and the firm 
wall of a constitutional amendment, there would be an additional 
interest savings of at least 1 percent. That would mean an extra $170 
billion over 7 years for needed programs like education and a 
stimulated U.S. economy in areas that are interest-sensitive, such as 
home construction, car purchases, and industrial investment.
  Washington Post columnist James K. Glassman recently had a column 
under the heading, ``Year of the Balanced Budget.'' While whoever wrote 
the headline for the column may not have intended it, there is fear on 
the part of many that the use of the singular, ``year,'' is what will 
happen. We need ``Years--plural--of the Balanced Budget.'' Our 
experience with legislative
 solutions, such as Gramm-Rudman-Hollings, an earlier balanced budget 
try, is that they have an impact for a year or two, but when the public 
squeeze is felt, it is much easier politically to create additional 
deficits than to make the tough decisions.

  That's where the constitutional amendment would help.
  But unless we confront our fiscal problems, the day will come when we 
will look back with longing to the day when the yen was 84 to a dollar.
  Second, our trade imbalances must be addressed. A report from the 
Congressional Research Service says that studies show 37 to 55 percent 
of our trade deficits are caused by the budget deficit. [[Page S7752]] 
  But there are other causes, varying from our neglect to aggressively 
market, to our weakness over the decades in trade negotiations. The 
latter deficiency is caused in part by not having a cadre of 
professionals handling our negotiations, particularly when compared to 
Japan. Too often it has been long-term professionals against changing 
teams of U.S. negotiators, and I don't mean that disrespectfully to 
fine, competent people of both political parties who have been thrust 
into these positions of responsibility.
  The firm stance of President Clinton and Trade Ambassador Mickey 
Kantor in negotiating with Japan on automobiles and car parts is sound. 
I am optimistic that the problems can be satisfactorily resolved, but 
we should not be too eager. It is also worth noting that our firmer 
stance with Japan on trade matters has come since Japan has been a 
declining factor in purchase of our treasury notes. It is difficult to 
get tough with your banker.
  The United States also must build products that can accommodate the 
cultures of other nations; we must learn to sell in their languages, 
not ours; and tens of thousands of U.S. corporations that do not 
consider marketing in other nations must change course.
  We are gradually getting better, but it we can hasten the process, we 
will reduce the trade deficit that troubles the international currency 
markets.
  But any serious look at trade policy must return to fiscal policy. 
Last month, Judith H. Bello, former general counsel to the U.S. Trade 
Representative, wrote in the Washington Post:

       The United States will continue to run trade deficits, no 
     matter what happens in trade negotiations, so long as we run 
     federal budget deficits. If Japan and every other trading 
     partner opened their markets completely, we would still run a 
     trade deficit if our savings rate remained inadequate.
       There is little that trade negotiators can do about a trade 
     deficit. The power to reduce the U.S. deficit lies with 
     Congress and those within the administration responsible for 
     the federal budget. No matter how many markets any trade 
     representative opens, the effect on the U.S. trade deficit in 
     isolation is peripheral.
       U.S. trade negotiators have relatively little power to 
     affect the weakness or strength of the U.S. dollar through 
     their market-opening negotiations. As long as the United 
     States remains heavily dependent on foreign capital to fuel 
     our economic growth, and fails to save more and spend less, 
     the dollar is likely to be relatively weak despite our 
     fundamental competitiveness.

  Third, our savings rate must be increased. Again, the biggest 
impediment to our savings rate is the deficit. But it is more than 
that.
  The United States culture is not dramatically different from that of 
Canada and other Western industrialized nations, but our savings rate 
is significantly lower. We save only 4.8 percent of our gross national 
product, Canada saves 9.1 percent, Germany 10.7 percent, and 19.7 
percent in Japan. Because of the low savings rate, the United
 States is much more dependent on others buying our debt paper.

  By making some changes in our Tax Code, we can reward savings rather 
than debt. Our Tax Code, for example, rewards businesses that create 
debt to finance growth, rather than financing growth through savings or 
equity financing. A corporation that buys another corporation by 
borrowing money can write off the interest payments even through the 
debt may create hazards for the purchasing company. But if that same 
corporation more prudently issues stock, the dividends are not 
deductible. If we changed the tax laws to permit 80 percent of interest 
to be deductible and 50 percent of dividends to be deductible, the net 
result would be a wash in Federal revenue, but many corporations would 
have a more solid base, and our corporate debt base would decline. 
Similarly, we should create tax incentives for individual Americans to 
save that would not add to our Nation's debt but would add to our 
productivity by making investment capital more available. Our people do 
not have the incentives to save that citizens of many nations have.
  Shifts in our culture will not be brought about quickly, but we must 
work to bring about change.
  Fourth, we must do more long-term thinking and face our deficiencies 
frankly. The fiscal deficiency is an example I have already discussed. 
We have ducked telling people the truth because it is politically more 
convenient to duck.
  But there are many more examples.
  Can we expect to build the kind of a nation we should have if we 
continue to have 23 percent of our children living in poverty? Can we 
expect to build a nation that can lead and compete in the future if we 
continue to neglect the need for quality education in all of the 
nation?
  Financial markets look at our deficits and worry about long-term 
inflationary pressures. When our fiscal policy does not address the 
deficits, the Federal Reserve Board is forced to look at the long-term 
implications of inflation. That is why the quality of appointments to 
the Federal Reserve Board are so significant. If we in Congress and the 
Clinton administration addressed our long-term fiscal problems more 
directly, the pressure would be removed for Federal Reserve Board 
action.
  Germany and Japan are far ahead of the United States on nondefense 
research--and probably even further ahead of us in applying their 
research to productive purposes.
  Governmental America tends to live from election to election and, 
even worse, from poll to poll. Corporate America too often lives from 
quarterly report to quarterly report. Unless we do more long-term 
planning and acting in both the public and private sectors, our future 
performance as a nation will be less than outstanding.
  Others understand this about us. We must understand this about 
ourselves.
  If we were to address these four areas with courage, not only would 
the dollar continue to rebound, our hopes and spirit would rebound 
also. The cynicism and negative attitudes that concern many of us are 
not caused only by the haters and those who see only the worst in our 
Government and public officials. The depth of public concern that 
results in hostility rather than activity is also caused by good, 
decent public officials of both political parties who do not have the 
courage to face our fundamental problems or who see an opportunity for 
partisan advantage rather than an opportunity to lift the Nation.
  Yes, we can save the dollar.
  We can also save the Nation.
  Mr. President, if no one else seeks the floor, I question the 
presence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. DOLE. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. DOLE. Mr. President, I understand morning business has ended?

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