On the Money

By JOHN ROTHCHILD

The past week was a sad one for America. The once almighty dollar sank to its lowest level since World War II in relation to the Japanese yen. Twenty-five years ago, a $1 bill was worth 360 yen. Today it's worth only 100 yen, and at one point last Tuesday it dropped below 100. The most common affliction of U.S. travelers to Tokyo is not jet lag. It's sticker shock. For people who pay in dollars, the top hotels are so expensive, they ought to offer mortgages.

It's more or less the same story in Germany, where the dollar has fallen in relation to the mark. And it's not only travelers who are affected. The falling dollar can also have a big impact at home. It can make things more expensive in our own neighborhoods, raising the price of everything from Nikons to Nintendos. The stock market is already telling us it doesn't like this slump in the greenback. The Dow Jones industrial average dropped 139 points last week, including a 62-point drop on Friday.

If the dollar's decline were a temporary thing, it wouldn't be worth worrying about. Countries can make their currencies go up and down by buying and selling in the world's foreign-exchange markets. The U.S. and its major trading partners were in the market last week for the third time this year, ! buying every dollar in sight in an effort to halt the latest slide. It didn't help much, and that could force the Federal Reserve to raise interest rates some more and risk slowing the economic recovery. Yet for all anyone knows, the price of the dollar could rise in the next few months.

The trouble is that over the past 20 years, the general direction of the dollar has been down. Remember the phrase "sound as a dollar"? It used to be popular, back when telephones were black and had rotary dials.

A chronically weak currency like ours is a sign that the country is living beyond its means. It's a sign that we are deep in hock, and for all the wrong reasons. It's O.K. to go into debt if you put the money to some useful purpose, such as building a new factory or a better computer or a faster airplane. But we've borrowed heavily to buy cars, TV sets and more gadgets to put in the house. Maybe you haven't, but a lot of the neighbors have. Uncle Sam is the biggest offender of all: he borrows just to pay the monthly bills.

Worse yet, while we've been bringing home the made-in-Japan stuff, the Japanese have neglected to buy our made-in-America stuff. On the whole, they are savers and not spenders, and the recent hard times from which they are now recovering have made them spend even less. We've been paying them in dollars, and they've been investing our dollars in new plants and machinery to make their country more productive so they can sell us more goods and make even more dollars. At this point, Japan and much of the rest of the world have a glut of dollars, more than they know what to do with. And whenever there's an oversupply of something, its price goes down. Hence the falling dollar.

Now we come to the part where the weak dollar can really hurt. Not only does the falling currency raise the price we pay for Japanese, German and other imported goods; our own companies can now afford to raise their prices without fear of losing business to foreign competition, and pretty soon we've got widespread inflation.

A falling dollar can also mean higher interest rates, and this is where the federal deficit comes into play. The U.S. government is already $4.5 trillion in the red, and every year it has to borrow another $200 billion or so by selling bonds. A hefty chunk of this sum comes from foreigners, and they were not born yesterday. Seeing the dollar in decline, they sense that our plan is to pay them back with devalued money. So they stop buying our bonds, and the only way we can lure them back is with higher interest rates that affect everyone. Thus, thanks to the falling dollar and continuing huge budget deficits, Americans are paying more for home loans, car loans and consumer loans than they otherwise would.

A falling dollar is good for one thing: it makes our products cheaper for foreigners to buy. But this hasn't narrowed our trade deficit with Japan, which stands at about $60 billion a year; nor has it done much to shrink our $10 billion deficit with Germany. And while some currency watchers say our government wants the dollar to fall so low that even the Japanese won't be able to resist buying U.S. goods, this game of chicken has shown few signs of success. Each time the dollar has fallen sharply in the past 25 years, the Japanese have responded by improving the quality of their products to help maintain their competitive edge.

Countries that borrow and consume too much are destined to lose out, and a cheap currency cannot save them in the end. Eighty years ago, the world's most powerful currency was the British pound sterling, which enjoyed the same almighty reputation as the dollar once did. But the country's post-World War II collapse sent the pound reeling, and while further declines in the currency have occasionally boosted British exports, Britain is no longer the prosperous place it once was. Any visitor can see that.

We applaud other countries with weak currencies and large deficits when they adopt austerity measures, sack bureaucrats and reduce the size of their government deficits. In places like Chile and Argentina, these harsh moves have begun to pay off in rising standards of living. But America continues to spend too much and to save too little, and the falling dollar is the world's way of canceling our credit card.

CHART: NOT AVAILABLE

CREDIT: Datastream

TIME Graphic by Jason Lee

CAPTION: Number of Yen per Dollar