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.25Perhaps the most important long-run consequences of high real interestrates resulted from their effects on the trade-weighted international valueof the dollar.The trade-weighted index reached a decade low of 84.65(March 1973 = 100) in July 1980, when the Federal Reserve arguably hadoverreacted to the effects of the activation of the Credit Control Act of1969.As real U.S.interest rates rose relative to those in other countries,the December values of the index rose to 91.99 in 1980, 105.21 in 1981,119.22 in 1982, 132.84 in 1983, and 149.24 in 1984, before reaching adecade maximum of 158.43 in February 1985.26 U.S.manufacturing firmsencountered enormous pressures from foreign competitors that led to awave of plant closings.The (unreported) soaring merchandise trade deficitonly hinted at the changes.Partly because of renewed oil price increasesand recessions in 1980 and 1982, the U.S.entered the decade with tradedeficits of $25 and $28 billion in 1980 and 1981.The trade deficit was $36billion in 1982 when spending on imports was low because of the reces-sion, but then soared to $67 billion in 1983 and $113 billion in 1984.Basic industries such as steel and automobiles suffered from cheap im-ports and experienced large losses.Those that survived invested heavily inthe latest technologies and closed obsolete facilities.Somewhat surpris-ingly, given the high real interest rates, real gross nonresidential fixed in-vestment in 1987 dollars only slipped slightly from $438 in 1980 to $421billion in 1983 and then rose to $522 billion in 1985.27 The U.S.was re-tooling in response to severe foreign competition; plant and equipmentwere being replaced with the latest high technology versions that wouldserve well in the coming decade.However, there were severe regional im-pacts, because new investment was occurring in different areas of thecountry than those where facilities were being closed.In 1987 dollars, between 1980 and 1985 all merchandise durable goodsimports rose from $134 billion to $237 billion, merchandise nondurablegoods imports rose from $102 billion to $129 billion, and services importsrose from $54 billion to $88 billion.Constant (1987) dollar U.S.exports ofdurable goods fell from $161 billion to $139 billion over these years, ex-ports of nondurable goods fell from $87 billion to $86 billion, and exportsof services rose from $72 billion to $84 billion.While nothing is forever,25See Greider (1987, pp.517 521, 545 551) and Volcker and Gyohten (1992,Chap.7).26Source: Board of Governors of the Federal Reserve System (1991, p.467).27Data in this and the following paragraph are from Council of Economic Advi-sors (1994). Paul A.Volcker: 1979 1987 71these changes in the composition of imports and exports have proven to bevery long lasting.Thus, again in 1987 dollars, in 1992 the U.S.was still anet importer of durable goods (imports - exports = $45 billion) and a netimporter of nondurable goods (imports - exports = $45 billion).The U.S.did resume its role as a net exporter of services (exports - imports = $55billion).As can be seen in Table 8 and the three subsequent even-numbered tables, these continuing trade deficits led to a large and growingdeficit in the balance of payments on current account.Finally, the brief recession following the activation of the Credit ControlAct of 1969 led to a doubling of the federal deficit in late 1980, which wasreversed by the recovery in early 1981, again reflecting the operation ofautomatic stabilizers.The subsequent large Reagan administration tax cutscoincided with very large and persistent federal deficits that lasted throughthe end of the Volcker term.The events in these years would also finallyand clearly demonstrate the profound change in the power of monetarypolicy in the U.S.economy that resulted from going to a floating exchangerate system, which occurred shortly after President Nixon s August 15,1971 speech that effectively terminated the Bretton Woods System.In the national income accounts, government deficits and trade deficitsare connected by an identity; the trade deficit plus net private savingequals the government deficit.28 The balance on current account includesthe trade deficit, but it has other relatively small components that break thestrict accounting identity.Until the large tax cuts in the 1981 1983 period,there had been no close relation between the federal surplus and the bal-ance on current account in the foregoing even-numbered tables.Therewould be an increasingly close relation in the future that would emerge inseveral steps.First, until the collapse of the Bretton Woods quasi-fixed exchange ratesystem in the early 1970s, real interest rates were constrained not to moveexcessively relative to real rates in other countries and exchange ratestheoretically could not change.The scope for monetary policy by countriesin a pure fixed exchange rate system is very limited, because exchangerates are partly determined by differences in real interest rates across coun-tries.In fact, the Bretton Woods system was not a pure fixed exchange rate28Specifically the identity is that the sum of the trade deficit (imports exports)and net private saving (saving investment) is equal to the government deficit(expenditures + net transfers taxes).Because state and local governments tend tohave close to balanced budgets, the government deficit can reasonably be inter-preted as the federal government deficit.If net private saving were constant, thenchanges in the trade deficit in the national income accounts would equal changesin the federal government s deficit. 72 Paul A.Volcker: 1979 1987system, in part because of the artificial fixed relation between the dollarand gold, which eventually led to its abandonment.But as a first approxi-mation it was, so until its demise inflexible real interest rates preventedany close linkage between the government and trade deficits.Instead, ahigher government deficit was roughly matched by a rise in net privatesaving.Second, as the system began to collapse in 1968, with the suspension ofU.S.gold sales to foreign individuals and firms, there was a considerableincrease in the volatility of interest rates that can be seen by comparingTables 5, 7, and 9.As argued in the foregoing paragraphs, this volatilitywas largely a consequence of the Federal Reserve s seemingly futile strug-gle against inflation.So long as interest rate volatility was concentrated innominal rather than real interest rates, exchange rates were not likely to bedrastically affected.Between February 1973 and June 1978, only in a fewwidely separated months did the trade-weighted value of the U.S [ Pobierz całość w formacie PDF ]
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.25Perhaps the most important long-run consequences of high real interestrates resulted from their effects on the trade-weighted international valueof the dollar.The trade-weighted index reached a decade low of 84.65(March 1973 = 100) in July 1980, when the Federal Reserve arguably hadoverreacted to the effects of the activation of the Credit Control Act of1969.As real U.S.interest rates rose relative to those in other countries,the December values of the index rose to 91.99 in 1980, 105.21 in 1981,119.22 in 1982, 132.84 in 1983, and 149.24 in 1984, before reaching adecade maximum of 158.43 in February 1985.26 U.S.manufacturing firmsencountered enormous pressures from foreign competitors that led to awave of plant closings.The (unreported) soaring merchandise trade deficitonly hinted at the changes.Partly because of renewed oil price increasesand recessions in 1980 and 1982, the U.S.entered the decade with tradedeficits of $25 and $28 billion in 1980 and 1981.The trade deficit was $36billion in 1982 when spending on imports was low because of the reces-sion, but then soared to $67 billion in 1983 and $113 billion in 1984.Basic industries such as steel and automobiles suffered from cheap im-ports and experienced large losses.Those that survived invested heavily inthe latest technologies and closed obsolete facilities.Somewhat surpris-ingly, given the high real interest rates, real gross nonresidential fixed in-vestment in 1987 dollars only slipped slightly from $438 in 1980 to $421billion in 1983 and then rose to $522 billion in 1985.27 The U.S.was re-tooling in response to severe foreign competition; plant and equipmentwere being replaced with the latest high technology versions that wouldserve well in the coming decade.However, there were severe regional im-pacts, because new investment was occurring in different areas of thecountry than those where facilities were being closed.In 1987 dollars, between 1980 and 1985 all merchandise durable goodsimports rose from $134 billion to $237 billion, merchandise nondurablegoods imports rose from $102 billion to $129 billion, and services importsrose from $54 billion to $88 billion.Constant (1987) dollar U.S.exports ofdurable goods fell from $161 billion to $139 billion over these years, ex-ports of nondurable goods fell from $87 billion to $86 billion, and exportsof services rose from $72 billion to $84 billion.While nothing is forever,25See Greider (1987, pp.517 521, 545 551) and Volcker and Gyohten (1992,Chap.7).26Source: Board of Governors of the Federal Reserve System (1991, p.467).27Data in this and the following paragraph are from Council of Economic Advi-sors (1994). Paul A.Volcker: 1979 1987 71these changes in the composition of imports and exports have proven to bevery long lasting.Thus, again in 1987 dollars, in 1992 the U.S.was still anet importer of durable goods (imports - exports = $45 billion) and a netimporter of nondurable goods (imports - exports = $45 billion).The U.S.did resume its role as a net exporter of services (exports - imports = $55billion).As can be seen in Table 8 and the three subsequent even-numbered tables, these continuing trade deficits led to a large and growingdeficit in the balance of payments on current account.Finally, the brief recession following the activation of the Credit ControlAct of 1969 led to a doubling of the federal deficit in late 1980, which wasreversed by the recovery in early 1981, again reflecting the operation ofautomatic stabilizers.The subsequent large Reagan administration tax cutscoincided with very large and persistent federal deficits that lasted throughthe end of the Volcker term.The events in these years would also finallyand clearly demonstrate the profound change in the power of monetarypolicy in the U.S.economy that resulted from going to a floating exchangerate system, which occurred shortly after President Nixon s August 15,1971 speech that effectively terminated the Bretton Woods System.In the national income accounts, government deficits and trade deficitsare connected by an identity; the trade deficit plus net private savingequals the government deficit.28 The balance on current account includesthe trade deficit, but it has other relatively small components that break thestrict accounting identity.Until the large tax cuts in the 1981 1983 period,there had been no close relation between the federal surplus and the bal-ance on current account in the foregoing even-numbered tables.Therewould be an increasingly close relation in the future that would emerge inseveral steps.First, until the collapse of the Bretton Woods quasi-fixed exchange ratesystem in the early 1970s, real interest rates were constrained not to moveexcessively relative to real rates in other countries and exchange ratestheoretically could not change.The scope for monetary policy by countriesin a pure fixed exchange rate system is very limited, because exchangerates are partly determined by differences in real interest rates across coun-tries.In fact, the Bretton Woods system was not a pure fixed exchange rate28Specifically the identity is that the sum of the trade deficit (imports exports)and net private saving (saving investment) is equal to the government deficit(expenditures + net transfers taxes).Because state and local governments tend tohave close to balanced budgets, the government deficit can reasonably be inter-preted as the federal government deficit.If net private saving were constant, thenchanges in the trade deficit in the national income accounts would equal changesin the federal government s deficit. 72 Paul A.Volcker: 1979 1987system, in part because of the artificial fixed relation between the dollarand gold, which eventually led to its abandonment.But as a first approxi-mation it was, so until its demise inflexible real interest rates preventedany close linkage between the government and trade deficits.Instead, ahigher government deficit was roughly matched by a rise in net privatesaving.Second, as the system began to collapse in 1968, with the suspension ofU.S.gold sales to foreign individuals and firms, there was a considerableincrease in the volatility of interest rates that can be seen by comparingTables 5, 7, and 9.As argued in the foregoing paragraphs, this volatilitywas largely a consequence of the Federal Reserve s seemingly futile strug-gle against inflation.So long as interest rate volatility was concentrated innominal rather than real interest rates, exchange rates were not likely to bedrastically affected.Between February 1973 and June 1978, only in a fewwidely separated months did the trade-weighted value of the U.S [ Pobierz całość w formacie PDF ]