The dollar's value makes the US economy vulnerable to international forces

Second, if you look at the interest rates, you would assume when the Fed cuts rates, the dollar would go down. That is one of the transmission devices for lower interest rates. It tends to lower the dollar and the European Central Bank really has not been as aggressive in lowering rates. Normal economics would tell you something is a little wrong here.

The difference is markets don’t just look at interest rates at the moment. They look at where those are leading. And the assumption of the market is that the aggressive Fed lowering was going to lead to growth in the United States in coming quarters, whereas the slowness of the ECB in lowering - in other words, keeping rates somewhat higher - will mean a slower economic outlook.

So the market looked through the initial decision by the Fed and by the ECB to what they thought was going to occur as the result of those decisions. They foresaw stronger growth in the US and weaker growth in Europe because of the central banks and the credibility of Alan Greenspan. So the American central bank surely has to be one major reason, one among many, that the dollar has performed this act of levitation that sort of surprised the BIS. So psychology plays a role in the market.

Third, long-term interest rates, and here is something that’s very important, I think. People say: well, the American stock market’s been very volatile. The US is having negative wealth effect after the positive wealth effect. The problem is foreigners do not buy a lot of American equities. They buy bonds, and if you look at the bond rates between, say, the United States and Germany, the real long-term bond yields are not very different. The United States also has a stronger, more liquid market in dollar assets, corporate assets, agency paper, which are the things foreigners buy. Therefore, that’s a very attractive way of holding money, particularly if you’re confident, as most people are, about the long-term inflation environment.

The last point about money flowing in is that a lot of money has come in via foreigners buying American assets through direct investment or acquisitions using money, not stock, but using money. That has been a very robust number. It’s declining a little bit, but it’s still quite strong.

So if you put all those together, and you look at some of the structural issues, which is the European Parliament a few days ago voting against this commission proposal for uniform rules on takeovers within Europe - they were supposed to liberalize the takeover market. It was voted down.

It’s useful to look at the current economic weakness today and that of 1990, when we actually had a recession. The role of the foreign sector in periods of economic weakness in this country has been largely positive in the sense that, in 1990 for instance, real domestic demand in Japan and Germany were growing at about 5 per cent in each of those countries. Today, Japan’s probably in a recession, its fourth in the past 10 years, and German growth, give or take 1 per cent, something like that. If they’re lucky, they’ll get to one percent, but certainly declining. So you haven’t really gotten strong robust growth.

The other is that, in the period 1990, the dollar had been depreciating in value for five years. Now, as people have pointed out quite correctly, the dollar has been appreciating in value for the last several years.

So on the whole, in 1990, foreign demand, exports in general, exports to the rest of the world, contributed 1.4 per cent, positive 1.4 per cent, to American growth. And that helped to cushion the recession of 1990.

Now, we’re seeing a very weak export environment for the United States - Japan, Western Europe, elsewhere - and many of these countries have been relying on the US to get out of their weakness. Well, the laws of economics say every country can’t export its way out of slow growth. And yet to hear the rhetoric, you would think that’s what they were trying to do.