“THE DOLLAR WILL FALL ENORMOUSLY’

The euro broke the 1.40 dollar mark for the first time. US economist Kenneth S. Rogoff warns that confidence of international investors in the American economy is shaken

[This interview published in: DIE ZEIT, September 2007 is translated from the German on the World Wide Web, http://images.zeit.de/text/2007/39/Interview-Rogoff. Professor Rogoff teaches economics at Harvard University and is a leading expert on the world economy. He worked for the IMF from 2001 to 2003.]


DIE ZEIT: Professor Rogoff, the euro is stronger than ever and the dollar falls. Will the most important currency of the world continue to weaken?

Kenneth S. Rogoff: Yes and more things will go wrong. The American finance markets will lose much of their radiance in the current crisis.

ZEIT: “Radiance” is not one of the categories that economists usually apply.

Rogoff: Then explain it to me. One advantage of American finance markets was always their depth, their extreme liquidity.

ZEIT: In other words, debt certificates and other securities can be bought and sold very simply in the US.

Rogoff: Yes. The greater the liquidity, the lower are the interests expected from a debtor. The gigantic US finance markets lend money at favorable rates to the whole world. That is true for loans of the US government and all possible securities including debt certificates of businesses with little creditworthiness.

ZEIT: Is this changing now?

Rogoff: Many things are changing. Confidence in American finance markets has suffered a few shocks. The American balance of payments deficit – which I always said cannot remain so mammoth – must be reduced. In any case, the dollar will fall enormously.

ZEIT: We have heard that for years but it hasn’t happened.

Rogoff: Yes. Why didn’t the dollar fall earlier and more quickly? One part of the explanation is that the American finance markets are very highly regarded. Oil-producing countries with their gigantic petro-dollar markets and Asian central bankers were always ready to pump more money in the American finance markets.

ZEIT: What else could they do with their funds? Why isn’t the US still an attractive place for their money?

Rogoff: The American economy will grow more slowly in the future. Adjustments will occur because the US grows slower and the rest of the world faster. The sub prime crisis is only one trigger.

ZEIT: Some say the dollar cannot fall faster because so many powerful players have no interest in such a fall. Central banks like the Chinese bank have accumulated enormous currency reserves that would only be lost in a dollar crash.

Rogoff: No one wants that. The Chinese would suffer a heavy blow since their dollar reserves would lose their value. Many smaller central banks that only hold a few billion dollars have fewer worries. They believe they could quickly sell their dollars in case of emergency. China will not start a run on the dollar but others could.

ZEIT: Won’t the Chinese support the US currency?

Rogoff: They can’t do this because they are too small. However their reactions cannot be separated from investment decisions elsewhere in the world. The next trigger is the American economy. I think the American real estate market will fall 10, 15 or possibly 20 percent. In some cities, “For Sale” signs appear in greater volume than we have ever seen. At the end, this development will sweep over the economy and then the dollar will fall.

ZEIT: Let us speak about the loss of confidence in the American finance markets. After the collapse of the energy giant Enron, strict legal conditions were imposed on businesses. Many managers and investors complained about this. The first American firms big farewell to the New York stock exchange. Did the legislation intensify problems?

Rogoff: Yes. Sarbanes-Oxley (the most important body of law at that time) was a massive overreaction as today’s efforts to regulate hedge funds are an overreaction. Many business managers now spend a great deal of time protecting themselves legally. The laws demand enormous detail knowledge from them. It would be better if they helped form the great vision instead!

ZEIT: You say: there will be too much monitoring. However the rating agencies are now under attack in the sub prime crisis. They obviously did not adequately adjust and warn of the risks.

Rogoff: Yes, this is a disaster. Today’s business model is dead. The Moody’s rating agency will be the Arthur Andersen of this decade.

ZEIT: Arthur Andersen is the auditing firm dragged into bankruptcy with the collapse of the energy firm Enron.

Rogoff: The rating agencies collaborated much too closely with the banks and received exorbitant compensation for their ratings.

ZEIT: Is the mortgage debacle a declaration of bankruptcy of the Wall Street model?

Rogoff: I would not go that far. The US has often demonstrated it can solve these kinds of problems – even with all the setbacks. I don’t see a better model in any other country.