Sunday, March 21, 2010

America's Weak Dollar Policy Amounts to the Biggest Currency Manipulation in Human History

The US Dollar depreciated by 37% between 2002 and 2008 (data here), see graph above.

Tough talk from abroad, an editorial in the
London Telegraph:

"Obama has called on China to adopt a more "market-oriented exchange rate." The US Treasury Department, meanwhile, has set a mid-April deadline to decide whether China truly is a "currency manipulator," warning that America could impose new levies on Chinese products if that's judged to be the case.

The president is playing with fire. For one thing, his country is being kept afloat by China's willingness to keep buying U.S. government debt. Obama really should tread carefully. At the same time, the US is now at risk of sparking what could be an all-out trade war.

The reality is that America's "weak dollar" policy – its long-standing practice of allowing its currency to depreciate in order to lower the value of its foreign debts – amounts to the biggest currency manipulation in human history. At the same time, the U.S. has, for years, shamefully stalled on various rulings passed by the World Trade Organisation that show America to be breaching global trade rules.

Chinese inflation is now at 2.7% – close to the official 3% target. Beijing will eventually allow the yuan to rise, but in its own time and in order to tackle inflation and not because of US pressure. America needs to act smarter and get its own economic house in order. Obama has decided instead to lash out at China in a desperate attempt to placate a U.S. electorate increasingly mindful of their president's failings."

MP: The U.S. has also stalled the free trade agreements with Panama, Colombia and South Korea, which were passed in 2007 and are now languishing into a fourth year.


32 Comments:

At 3/21/2010 4:13 PM, Anonymous Lyle said...

But currency devaluation was proven in the 1930s to be the way out of a slump. Britian moved first off the gold standard and their economy stopped dropping and recovered a bit. FDR devalued the dollar against gold and stopped the free fall. If you are facing deflation, devaluing the currency is a good way to stop it. The looser in the 1930s was France who was the last one standing with an overvalued currency.
(See Lords of Finance for details on the 1930s issues)

 
At 3/21/2010 4:44 PM, Anonymous Anonymous said...

FDR devalued the dollar against gold ...

FDR confiscated the gold of American citizens at a fixed rated, 35% below the market rate of gold at the time. It was one of the biggest acts of theft in human history. FDR was a blithering socialist idiot, who prolonged the Great Depression. (See "The Forgotten Man", Amity Shlaes)

 
At 3/21/2010 5:08 PM, Anonymous Anonymous said...

I don't understand you. On one hand you present yourself as a free market proponent. On the other hand, you blame America for not intervening in the currency markets to support the dollar. The forex market is a trillion dollar market. How do you propose to intervene in this market? Sell gild reserves to strengthen the dollar? In about 3 months there will be no gold left in the vaults.

IMO the argument is based on a profound lack of understanding of how markets operate. Economists are known to lack market understanding. It is an argument solely manufactured by a certain lobby. The fact is that the market discovers the price for the dollar, not America or its politicians. Intervention can only affect rates for a short period of time.

I get the idea you are mixing economics and politics here to support a certain hidden agenda.

 
At 3/21/2010 5:44 PM, Blogger PeakTrader said...

Anon said: "Economists are known to lack market understanding."

I find that amazing, because economists not only proved how markets work, but often proved conventional wisdom wrong.

 
At 3/21/2010 6:05 PM, Blogger PeakTrader said...

Export-led economies are the manipulators, because they don't exchange their goods for enough U.S. goods, e.g. to maintain employment levels.

U.S. actual output has generally been below potential output since the late-'90s. There've been attempts to blame the Greenspan Fed for the housing bubble. However, it should be noted, in the mid-'90s, the Fed believed the economy could expand faster without fueling inflation and it was correct. In the early-'00s, the monetary easing was appropriate to spur domestic output. It worked and it wasn't the root cause of the housing bubble.

 
At 3/21/2010 6:13 PM, Anonymous gettingrational said...

Weak dollar, strong dollar or something in between there is still a world market for the USD.

Is the U.S. gov't pegging through manipulation to the Yen? the Euro? Mexican Peso? Chinese Yuan?
No, no, no, no and no to any other currency.

Control of currency, as one of the tools to control trade flows, is against IMF agreements

Do you want to trade currency in China? Sorry, no way. "Private foreign exchange transactions are illegal behaviors disturbing financial orders and are prohibited by China¡¯s laws. According to Article 45 of the Regulations on the Foreign Exchange System of the People's Republic of China, those engaging in foreign exchange transaction without permission shall be given a warning by foreign exchange management authority, and imposed the conversion of foreign exchange, and their illegal incomes shall be confiscated, and they shall be fined an amount more than 30% but less than 3 times of the illegal foreign exchange amount."

 
At 3/21/2010 6:28 PM, Anonymous Benny The Man said...

I love the weak dollar. Bring jobs back to the USA.

You know, when a person, a family, a city, a society or a country stops carrying its own weight, it becomes decadent.

Right now, we get others to produce our goods, and we import Mexicans to do all the hard work in the fields, or cleaning office buildings etc.

This leads to a decadent, weakling society. You wonder why your kid plays video games all day long, and will never be able to raise a family.

Think about it. American women are weaklings, who get tired after a visit to the psychiatrist and the salon.

 
At 3/21/2010 6:28 PM, Blogger Ron H. said...

1. "FDR devalued the dollar against gold..."

2. "It was one of the biggest acts of theft in human history. FDR was a blithering socialist idiot,who prolonged the Great Depression."

Anon @ 4:44 says it much better.

 
At 3/21/2010 6:51 PM, Blogger Ron H. said...

Benny, I think you just about covered everybody with your comment. Is there anyone you didn't insult? lol

You're right, of course, more of us should spend time working hard in the fields and cleaning office buildings to toughen up. As an added benefit, we will have to produce our own goods, as we won't be able to afford to get others to do it for us.

And, women certainly won't be able to afford psychiatrists or salons.

 
At 3/21/2010 7:42 PM, Blogger Ron H. said...

Peak Trader, If you don't think loose money policy by the Feds caused the stock market bubble of the late 90s and then the housing bubble of the 00s, what do you think did cause these bubbles?

You said:
"in the mid-'90s, the Fed believed the economy could expand faster without fueling inflation and it was correct."

Yes, but they overdid it. Inflation remained moderate, but the extra money created poured into the stock market. When the Feds finally put the brakes on, the higher interest rates caused the dotcom bubble to burst.

"In the early-'00s, the monetary easing was appropriate to spur domestic output. It worked and it wasn't the root cause of the housing bubble."

Once again, they overdid it. In their eagerness to provide a soft landing after the stock market bubble burst, they again poured too much money into the system, and this time it flowed into the housing market, assisted by government pressure on banks to loan to pretty much anybody who could walk in the door, and the secondary market for mortgages taking away the risk of making shaky loans.

As before, the eventual Fed tightening and the higher interest rates caused the bubble to burst.

 
At 3/21/2010 8:36 PM, Blogger PeakTrader said...

Ron, first off, the U.S. has never had a 10-year expansion without a recession, except from 1991-01, and then had one of the mildest recessions in 2001. So, to say the Greenspan Fed had a failure or overdid it is ridiculous.

Sustainable growth is optimal growth, because there's neither strain nor slack utilizing resources. In the 2000s, actual output was either below or roughly at potential output. So, there wasn't an aggregate production strain utilizing resources. The monetary easing was needed to take the slack out of the economy, and again the Fed didn't overdo it.

I believe, the root cause of the housing bubble was export-led economies sold their goods too cheaply and then lent their dollars too cheaply, causing a virtuous U.S. cycle of consumption and investment. The cycle turned into a boom, which was unsustainable. The U.S. current account deficit reached over $800 billion a year or over 6% of U.S. GDP. Without the housing bubble, and related goods, U.S. actual output would've remained below potential output throughout the 2000s.

The Fed uses crude tools to direct the economy rather than micromanage or fine-tune it, and it was increasingly successful smoothing-out business cycles, until Lehman failed in Sep '08. Also, I may add, the U.S. had a quick and massive creative-destruction process in a mild recession (mostly from 2000-02).

 
At 3/21/2010 9:17 PM, Anonymous Pumping Iron said...

"Right now, we get others to produce our goods, and we import Mexicans to do all the hard work in the fields, or cleaning office buildings etc.

This leads to a decadent, weakling society. You wonder why your kid plays video games all day long, and will never be able to raise a family.

Think about it. American women are weaklings, who get tired after a visit to the psychiatrist and the salon."


**************************

You forgot to mention how fat the Americans have become because they are too lazy to woork.

 
At 3/21/2010 10:23 PM, Blogger bobble said...

". . America's "weak dollar" policy – its long-standing practice of allowing its currency to depreciate in order to lower the value of its foreign debts – amounts to the biggest currency manipulation in human history."

this is incredibly flimsy for at least two reasons:

1) long standing dollar depreciation? no, over the decades the price of a dollar has appreciated sharply at times and fallen. but it is now essentially the same as it was in 1978. see chart

2) what does "practice of allowing its currency to depreciate" mean?

i'm pretty sure the united states does not intervene in the currency markets to affect the price of the dollar. so where is the manipulation?

 
At 3/21/2010 11:04 PM, Anonymous Benny The Man said...

Ron H and Pumping Iron:

Yes, I was being a bit funny in my comments, but there is also a large grain of truth.

Selling our assets off, and becoming indebted to China, and calling that a positive--well, my head spins.

 
At 3/21/2010 11:40 PM, Blogger Ron H. said...

Peak, you said:

"I believe, the root cause of the housing bubble was export-led economies sold their goods too cheaply..."

If I understand correctly, you are saying that we as consumers had too much money to spend because we were able to buy cheap stuff from China, and we poured that extra money into real estate. Do you feel we should have spent more than we did for imported goods?

"...and then lent their dollars too cheaply..."

I don't understand that part.

Don't you think that holding Fed funds rates at 1% for a year caused any overheating? Could that have caused the boom you mentioned?

What do you think would happen if the Fed didn't exist, and the market set interest rates without interference?

 
At 3/21/2010 11:50 PM, Blogger Ron H. said...

Bennie, The real solution to being indebted is to drastically reduce government spending. Period. Other solutions include massive increases in taxes, which might be counter productive, and keeping those presses busy printing money.

I think that last one is the "weak dollar policy" the Telegraph editorial is complaining about.

 
At 3/22/2010 12:58 AM, Anonymous Anonymous said...

I hope China stops investing in the US. I hope interest rates go up and stop the insanity.

 
At 3/22/2010 2:28 AM, Blogger PeakTrader said...

Ron, prices fell to maintain U.S. demand, because of diminishing marginal utility. Export-led economies had to make up in volume what they lost in value.

At some point when the dollar depreciated enough, when U.S. inflation was higher, and when interest rates were lower, export-led economies would exchange their goods for U.S. goods rather than for U.S. Treasury bonds. However, they took larger real losses instead, e.g. to maintain their employment levels.

Dollars were drained out of the private sector through export-led economies when U.S. consumers bought foreign goods and foreigners bought U.S. Treasury bonds. Americans borrowed to buy real estate.

The U.S. economy didn't overheat in the 2000s, because actual output didn't rise much above potential output, in part, because imports subtract from GDP. I think, without the Fed, the U.S. would have suboptimal growth, because of boom-bust cycles, and shocks to the system wouldn't be compensated. Also, fiscal policy should raise taxes in an expansion and cut taxes in a recession to help the Fed smooth-out business cycles.

 
At 3/22/2010 3:37 AM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 3/22/2010 4:39 AM, Blogger Ron H. said...

Peak, are you making this stuff up? Do I need to read up on Post-Keynesian economics to understand what you're talking about?

"prices fell to maintain U.S. demand, because of diminishing marginal utility."

What does marginal utility have to do with it? You don't make much sense.

 
At 3/22/2010 3:50 PM, Blogger PeakTrader said...

Ron, I suggest you look up the meaning of diminishing marginal utility.

Also, I may add, most U.S. goods have rising prices, while most Chinese goods have declining prices. So, the U.S. exports inflation and imports deflation. The U.S. makes up in value what it loses in volume, while China makes up in volume, what it loses in value.

I suspect, when U.S. output picks up, inflation will accelerate, in part, because there will be fewer imports than before.

 
At 3/22/2010 6:22 PM, Blogger Craig said...

Export-led economies are the manipulators, because they don't exchange their goods for enough U.S. goods, e.g. to maintain employment levels.

But economies don't trade -- people do. Germany, for example, is now being criticized in Europe for exactly the reason you state: they don't buy "enough" goods from the rest of the EU.

Should German citizens be required somehow to buy more goods from abroad? I suspect they're content with things the way they are and to call them "manipulators" seems harsh to me.

 
At 3/22/2010 6:45 PM, Blogger Craig said...

I think, without the Fed, the U.S. would have suboptimal growth, because of boom-bust cycles, and shocks to the system wouldn't be compensated.

Well, that's where you're wrong. Without the Fed, growth would be optimal in the sense that it would be based on a more stable currency and interest rates that properly match available savings to loan demand. The Fed's manipulation of interest rates -- with its attendant money supply fluctuations -- causes businesses to make decisions based on false and temporary conditions.

Also, fiscal policy should raise taxes in an expansion and cut taxes in a recession to help the Fed smooth-out business cycles.

How about we let tax rates remain constant so business (and consumers for that matter) can make decisions about the future that don't shift under their feet the minute some bureaucrat decides it's time to "optimize" the economy.

I find your obsession with governmental economic controls to be sub-optimum, economy-wise that is.

 
At 3/22/2010 8:48 PM, Blogger PeakTrader said...

Craig, if you don't want to use the term export-led economy, we can instead say people in a country who sell more goods than they buy, or perhaps call them export people.

Obviously, there's manipulation when people cannot exchange their goods for other people's goods, year after year.

When the U.S. was on the gold standard, there were many economic booms and busts. Of course, the U.S. economy was smaller back then. So, it expanded at a faster rate. Yet, it was suboptimal growth, because resources weren't utilized efficiently in both the boom and bust phases. Fiscal policy should also help smooth-out business cycles. Afterall, when times are good, it's wise to save for a rainy day.

Anyway, you really haven't explained why you believe economic booms and busts are optimal.

 
At 3/23/2010 1:54 AM, Blogger Ron H. said...

Peak,

I understand diminishing marginal utility just fine. Its the context you use it in that doesn't make sense. Are you saying simply that the laws of supply and demand are at work here? If so, why don't you just say it?

You seem convinced that booms and busts are inevitable without a benevolent Fed to ease the cycle, but you are ignoring the fact that historically most such booms have been CAUSED by misguided central bank policies that kept interest rates too low for too long, causing excess credit, and subsequent bubbles, which must eventually burst.

If Fed policies since 2000 created "optimal growth", where did the excess capital come from that flowed into the real estate market
to cause a bubble? Well, you answered that question already:

"Americans borrowed money to buy real estate."

Exactly. Artificially low interest rates caused excess credit which caused capital to flow into overpriced real estate, rather than into business growth. Optimal use of resources? Hardly.

As you said yourself,

"The Fed used crude tools to direct the economy."

I couldn't agree more. Maybe NO direction would be better. Without interference, interest rates would always be correct, and reflect the true demand for credit.

You are concerned with suboptimal growth, when resources aren't used most efficiently, but a less restricted market automatically directs resources to their most efficient use. Any business that doesn't use resources efficiently will lose out to competitors who do, and will soon go out of business.

That's what should have happened during this current recession, but it hasn't been allowed.

AIG? - taxpayer bailout.
GM? - taxpayer bailout
Chrysler? - taxpayer bailout.
Fannie May? - taxpayer bailout
Freddie Mac? - taxpayer bailout.

The list goes on.

Too big to fail? That's BS.

"Fiscal policy should also help smooth-out business cycles. Afterall, when times are good, it's wise to save for a rainy day."

That's just wrong. The government should never have more of my money than it needs for immediate expenditures. Why do you think government can somehow know better how to spend my money than I do?

 
At 3/23/2010 2:58 AM, Blogger PeakTrader said...

Ron, to induce demand, prices had to decline, because of diminishing marginal utility (also, falling interest rates induce demand). Consequently, the U.S. current account deficit reached over 6% of GDP.

The Fed has smoothed-out both short-term and long-wave business cycles. From 1982-07, there were two mild recessions in a period of disinflationary growth. Also, there were deep depressions in the 1870s and 1930s. However, the Fed prevented another deep depression in the 1970s.

Fiscal policy can also help smooth-out business cycles by raising or cutting taxes, which may be better than decreasing or increasing expenditures.

 
At 3/23/2010 10:07 AM, Blogger OBloodyHell said...

> "America's Weak Dollar Policy Amounts to the Biggest Currency Manipulation in Human History"

Yeah, and it's making millions for DNC supporter George Soros.

Good luck getting anything done on that.

> I find that amazing, because economists not only proved how markets work, but often proved conventional wisdom wrong.

There are idiots in any collection of experts. What percentage of economists are neoKeynesians?

Krugman won the Economics prize, and he's a blatantly blithering idiot -- so what does that say about both the prize and the value of expertise?

> Right now, we get others to produce our goods, and we import Mexicans to do all the hard work in the fields, or cleaning office buildings etc.

Benny, on this, you are a blithering idiot.

On manufacturing in particular, there's a reason it's going elsewhere, and that's because there's NO MONEY in it. Manufacturing is OLD economy, and you might as well claim we can improve our trade balance by hiring more farm workers from the American populace.

That doesn't work because we aren't an AG economy any more. Clue One: We aren't an INDUSTRIAL economy either.

We are an IP And Services Economy (the primary one in the world, almost the only one), and, while you MIGHT argue that you did mention "services", it's not that kind of service where new "Real Money" will come from, but ones which deal with real expertise, real specialist talent, and real ingenuity.


Look carefully at all the world's new "billionaires" (anyone who has become a billionaire in the last 30 years) .

Where did almost all, if not all, their billions come from?

With a few exceptions, it's in IP and Services.

Q.E.D. Figure it out.

 
At 3/23/2010 10:22 AM, Blogger OBloodyHell said...

> If you don't think loose money policy by the Feds caused the stock market bubble of the late 90s and then the housing bubble of the 00s, what do you think did cause these bubbles?

It enabled it more than caused it.

The housing bubble in particular was caused by Fed policy in general that said everyone should own a home, then distorted the market forces that at least made sure that people bought within their means.

The stock market bubble was driven by a subtle, partial grasp that we are, and have been for several decades, in the process of turning (as I note above) into an IP & Services Economy. There are very real differences between IP and so-called "Real" Property. People KNOW this, though few can really detail it (I recommend John Perry Barlow's The Economy of Ideas for an introduction. Though it's over 15 years old, it's still the best introduction to the differences I'm aware of). They spoke of a "New Economy" where the rules were different. They were partly right, they had the correct idea. They just didn't Get It that some of the rules still applied, or applied differently than they thought. The bubble bursting the so-called "New Economy" idea didn't prove it was wrong, so much as clarified that it was a First Draft. I think we've entered the next stage, because, while it's clear the economy is screwed up, it's also fairly clear that it ought to be a lot more screwed up than it is. It should not be possible for it to be as screwed up as it is, and still be as functional as it is, if all the traditional concepts were valid.

I argue that we are now, where things were in 1930, with the USA (and the developed world at that time) in transition from an Ag economy to an Industrial one. Now we're in transition again from an Industrial one to an IP&SE -- the world's first.

This is further complicated by the fact that people don't really understand it in general, some individuals don't understand it at all in many cases (Benny and anyone who argues for re-developing the industrial base are prime examples), and there are other economies around the world which seriously impinge on that transition which are right in the middle of the first transition, from Ag to Industry (i.e., namely, China, but also, to a lesser extent, India).

 
At 3/23/2010 4:11 PM, Blogger Ron H. said...

>"I argue that we are now, where things were in 1930...

Absolutely right! The scary thing is that from all indications, our idiot national leaders are trying all the same wrong things that clueless FDR did, in attempting to "correct" things, thereby prolonging the depression until WWII.

FDR's Treasury Secretary, Henry Morgenthau, angry at the Keynesian spenders, confided to his diary in May 1939:

>"We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot."

Of course, wrong headed Keynseian policies are like a drug to politicians, calling for MORE government control, MORE government spending, MORE interventions in the markets.

What's not to like?

 
At 3/25/2010 1:10 PM, Blogger Michael said...

This is when we could really use an economist commenting rather than inflammatory headlines.

If we have kept inflation at "expected" levels, than what have we manipulated? The foreigners who chose t-bills over spending their cash on our imports have precisely the same buying power in the US that they expected to have when they made their decision. Maybe this accounts for their continued willingness to buy more t-bills.

And how is China loaning us money any different from the fed loaning us money? If China stops loaning us money, and the Fed wants to keep interest rates low, it will exactly match the loaning that China is foregoing.

 
At 3/26/2010 12:49 PM, Blogger Ron H. said...

Michael

>"This is when we could really use an economist commenting rather than inflammatory headlines.

Liam Halligan, writer of the editorial in the London Telegraph, is a British economist and award-winning print and broadcast journalist

http://en.wikipedia.org/wiki/Liam_Halligan

Follow the link in the original post to see the editorial in the London Telegraph.

>"Maybe this accounts for their continued willingness to buy more t-bills."

This willingness may to be coming to an end.

http://online.wsj.com/article/SB123780272456212885.html

>"And how is China loaning us money any different from the fed loaning us money?"

Michael, Michael, The Fed doesn't actually LOAN us money, it CREATES money out of thin air.

http://www.federalreserveeducation.org/fed101_html/policy/money_print.htm

Increasing the money supply is the root cause of inflation. Rising prices , and most of the depreciation of the dollar are a result of this increase.

Our buying power is eroded as the price of almost everything goes up. Why do you suppose so many things cost more than they did years ago? It is inflation, pure & simple.

We should expect prices over time to go DOWN due to improved production methods and improved efficiencies under the pressure of competition.

 
At 3/27/2010 5:06 AM, Anonymous Money said...

The dollar free fall doesn't look like it's going to slow down any time soon.

 

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