Former U.S. budget director David Stockman says Black Monday was small change compared to the "serious danger" of a dollar crash that would play havoc in capital markets if unchecked.
"I think there's a risk of accidents, not necessarily the next one being a stock-market crash; perhaps it's a dollar crash," Stockman said in an interview with The Daily Yomiuri in Tokyo Saturday.The underlying problem is not just the U.S. trade deficit, but the huge current-account imbalance, he said.
"Once the market becomes fully aware of that, I believe there is a serious danger of another round of extreme pressure on the dollar and the current exchange rate that will require new G-7 actions and severe tightening, possibly, of U.S. monetary policy right before the election," said Stockman, who quit the Reagan administration over its fiscal policies.
U.S. trade and current accounts can barely improve at the current exchange rate, meaning that the market will seek a 10 percent to 20 percent reduction in the dollar value in the next two to five years, he said. "A much lower level would cause a dramatic loss of confidence in dollar-based assets, which could create almost panic-level turbulence in capital markets," Stockman said.
Whether central banks are up to the task of propping up the dollar in such circumstances is "a wide open question," Stockman said.
"I think it also implies that we're going to get more protectionist trade policy in the United States than people are expecting, because there will be a tendency over time for Congress to try to take matters into its own hands," he said. "So there is no easy way out of this bind, and simply wrecking the U.S. dollar is not going to be the solution."
Stockman said the hope that the United States might export its way out of economic crisis was "nonsense" due to the lack of additional production capacity in relevant sectors. He scoffed at Friday's hoopla over the first U.S.-made Hondas to be imported to Japan, saying the cars were "pebbles in the Pacific Ocean" when compared to the magnitude of the U.S. trade deficit.
Increased U.S. protectionism will begin with the current trade bill, which will be signed in compromise form as members of Congress have too much vested in the process to care about substance, Stockman predicted.
The law will prove "highly protectionist" because time-consuming case-by-case administrative relief will be easier to gain, he said.