August 6, 2003
 

To the editor:

I wanted to call ITNI readers’ attention to ongoing trends that I and some of the other contributors to the weekly have been pointing out: that a lack of direction in foreign policy is having negative consequences for the American economy.

Fears about the future of the U.S. economy continue to exert a toll on America's economic health.  The belief that the United States is now committed to open-ended ventures in Iraq and Afghanistan, as well as increased costs for improving homeland security, are spurring worries that a growing U.S. budget deficit can only be financed by higher interest rates.  The sharp fall in the Dow Jones yesterday--by more than 150 points--took place in part because of the news of a terrorist attack in Jakarta--highlighting fears about the continued vulnerability of the global infrastructure to terrorist attack and in part because of fears that rising interest rates will divert capital away from investment toward financing the debt.

The slight recovery that occurred in July appears now to be in reverse.  On July 1, 2003, the European Central Bank quoted a dollar-euro rate of 1.1543, but, by August 1, the dollar had appreciated against the euro, lowering the rate to 1.1169.  However, the euro has once again begun to appreciate against the dollar, and a good deal of those gains have been lost; the rate closed on August 5 at 1.1333.

This trend is not associated with any greater economic productivity in Europe.  Annual real GDP growth in the eurozone is estimated to have been only 0.8 percent for 2002, compared with 1.4 percent in 2001.  Germany is projected to have zero growth for 2003 (although a modest rate of growth for 2004).

International investors are also using their stocks of dollars to buy gold, driving up the dollar-denominated gold price.  The price has fluctuated but not significantly fallen, indicating that international investors remain very worried about the fate of the dollar and wish to diversify their holdings.  An important benchmark will be whether gold is trading at over $400 an ounce by September.  Certainly, any crisis over North Korea will further exacerbate these trends and could affect the ability of the United States to finance its operations.

Arthur Eliason

(Arthur Eliason is an independent consultant and a contributor on economic issues to In the National Interest).