Monday, October 18, 2010

Is the U.S. Manipulating Dollar to Boost Exports?


"The slumping U.S. dollar is opening new sales opportunities abroad for American manufacturers...  Many U.S. companies—from coal miners to a producer of tugboat clutches—are seeing stronger demand in Europe and Asia as the weak dollar makes U.S. goods cheaper there. 

Economists say the dollar's swoon, which started in mid-September following a summer rally, will provide a modest boost for U.S. exports, but they caution that it means American consumers and businesses will pay more for imported goods and raw materials. 

According to Larry Kantor, global head of research for Barclays Capital in New York, the weak dollar "is a net plus for the U.S. economy." In the absence of free-trade agreements, a weaker dollar "is one of the few ways you can get exports going," says Mr. Kantor, who thinks many U.S. energy, industrial and agricultural companies will benefit."

Update: From Bob Wright in the comments:

"So to ask the obvious question: How can anyone in the U.S. Congress be upset with the value of the yuan when the value of the U.S. dollar has been dropping for the last 10 years?

The corollary being: why don't those U.S. congressmen who favor "fair trade" not also favor increasing the value of the U.S. dollar? Why do they only rail against the Yuan while remaining silent about the clearly unfair value of the U.S. dollar?

The chart above clearly shows the U.S. is not playing on a level playing field and yet no U.S. politician seems to be concerned about how unfair this is. Is FAIRNESS a one-way street? Is a level playing field simply a club with which to beat your opponent with?"

26 Comments:

At 10/18/2010 1:35 PM, Blogger Benjamin said...

We had a weak dollar in the 1990s, our best decade ever.

Japan has had a famously strong yen forever--and their economy has stagnated.

Better terminology: An "export-enhacing dollar."

Or, "a job-making exchange rate."

Bring on a dollar that boost demand for American goods and servbices.

The dollar should go even lower, I hope so.

 
At 10/18/2010 1:59 PM, Blogger morganovich said...

benji-

you are completely wrong about that.

the early 90's were a bad time for the US.

that back half of the 90's was the good half. it contained a MASSIVE dollar rally (about 50%).

http://3.bp.blogspot.com/_H2DePAZe2gA/SvEShKL_ApI/AAAAAAAAKPE/Te-dCS-ZdH4/s1600-h/DXVeryLongTerm.png

 
At 10/18/2010 2:23 PM, Blogger Buddy R Pacifico said...

This comment has been removed by the author.

 
At 10/18/2010 2:29 PM, Blogger Buddy R Pacifico said...

The dollar, as the world's reserve currency, has lost value as predicted by Triffin's Delenma. The U.S. has printed massive amounts of dollars to liquidity for the global trading system.

Here is an article from Jesse's Cafe Americain explaining Triffin's Dilemna. Jesse has also created a great chart showing the dollar's value since the 1985 Plaza Accord making the dollar the reserve currency.

 
At 10/18/2010 3:10 PM, Blogger Eric said...

I guess that means those people with record personal savings denominated in US dollars are screwed...or they can now export more of their equities (or get a new job) to get more declining dollars in return?

 
At 10/18/2010 3:41 PM, Blogger Benjamin said...

Eric-

The propblem is, if you let bondholders and savers call your macroeconomic shots, you will ever tread towards deflation. A wealthy retired US Treasury bondholder would love the economy to collapse and prices shoot to the basement.

See Japan for how countries do in deflation.

BTW, the NYT had a great story recently on Japan. It is the No.1 country on Earth not to emulate.

 
At 10/18/2010 3:48 PM, Blogger Bruce Hall said...

Payback for being "subsidized" by the Chinese.

 
At 10/18/2010 4:00 PM, Blogger LakeDweller said...

Can someone (who is a whiz at finding the right statistics) show which of these consequences has more "impact" on the overall economy of the US?

Rising consumer prices resulting in net reduction in consumer spending

OR

Rising exports resulting in job growth and/or increased wages.

I don't have a sense of what is more important to our economy, greater consumer spending or more exports. I thought there were way more people employed in retail than in exports, although the wages were lower.

And a side conversation: How does WalMart feel about rising costs...sorta goes against their idea of falling prices.

 
At 10/18/2010 4:28 PM, Blogger bob wright said...

So to ask the obvious question: How can anyone in the U.S. congress be upset with the value of the Yuan when the value of the U.S. dollar has been dropping for the last 10 years?

The corollary being: why don't those U.S. congressmen who favor "fair trade" not also favor increasing the value of the U.S. dollar? Why do they only rail against the Yuan while remaining silent about the clearly unfair value of the U.S. dollar?

This chart clearly shows the U.S. is not playing on a level playing field and yet no U.S. politician seems to be concerned about how unfair this is.

Is FAIRNESS a one-way street? Is a level playing field simply a club with which to beat your opponent with?

 
At 10/18/2010 5:28 PM, Blogger Benjamin said...

Bob Wright-

Screw China, and the commie, fascist, mercantile asses they rode in on.

I want the US economy to expand. What's wrong with looking out for No. 1?

Our foreign policy establishment always trades hort-term illusory strategic goals--ie, China cooparation on Iran--for real, long-term goals, ie, yuan appreciation.

Our foreign policy establishment thinks our economy is something that exists to finance and further their goals.

Morganovic-the source you cite uses outdated data. The dollar rallied late in the 1990s, so what? It was a great decade.

 
At 10/18/2010 6:48 PM, Blogger morganovich said...

benji-

you are 180 degrees wrong on your conclusions.

the early 90's were not a good time. the late 90's were. that was when the dollar was strong. the stronger the dollar got, the better things were. this is true of most of the best period in US history.

the dollar rally in the late 90's did not choke off exports or growth. both increased. exports doubled from 1990 to 2000 with nearly all the gains coming after 1994 during the strong dollar period.

you are simply factually wrong in your claim that a weak dollar made for a good 90's. it's very clear that the opposite was true (or that the good 90's drove a strong dollar)


you just want to devalue the dollar and attack those with savings for your own benefit. you are just another subsidy seeker wrapping up his desires in the cloak of "the common good" to justify what you want.

your plan is as selfish as it is factually wrong. you are just an "inflation farmer" looking for a crop subsidy.

and that data is not dated, it's a currency basket. it mirrors the DXY quite closely. all the side box you read (but did not understand) is that it has not been trade weighted in a bit. the difference has no impact on the conclusions.

the dollar rallied around 50% in the second half of the 90s while the economy and exports boomed.

there is no evidence that a weak dollar made the early 90's good and a great deal that the good part of the 90's saw a strong dollar.

your concept of a "job making exchange rate" doesn't work. we import more than we export, so we'll suffer more in higher prices than we gain in competitiveness. sure, we might shift some production here, but the higher prices still harm everyone who did not get one of those jobs which hurts everyone else they buy from leaving the country as a whole worse off in real terms.

 
At 10/18/2010 7:27 PM, Blogger Craig said...

I don't have a sense of what is more important to our economy, greater consumer spending or more exports.

Why are those your only two choices?

 
At 10/18/2010 7:36 PM, Blogger Benjamin said...

Morgan-

Why has Japan, with its famously strong yen, foundered for 20 years straight?

Has deflation and a strong yen worked out for them?

Never let the dead hand of debt determine a country's future.

 
At 10/18/2010 7:36 PM, Blogger Craig said...

the early 90's were not a good time. the late 90's were

Yes, but the late 90's good times were not caused by a rising dollar. A reduction in capital gains tax rates combined with Mr. Greenspan's generous helping of counterfeit dollars created a false boom which caused the dollar to rise (everyone wanted in on the action).


The overvalued dollar has been the bane of our existence since Nixon took us off the last vestige of the gold standard. It caused the rust-belt and has since hollowed out our consumer goods manufacturing industry.

None of that is to advocate that we jawbone the dollar down now. A cessation of inflationary policies by the Fed combined with a return to sane interest rates would accomplish it naturally. That, though, will never be allowed to happen.

 
At 10/18/2010 7:39 PM, Blogger morganovich said...

craig-

i think you missed the point of his question.

each of those two issues (real buying power vs increased exports) are the effects of different dollar policy. a strong dollar yields the former, a weak dollar the latter.

his question is "if you weaken the dollar, does the gain in trade balance exceed the drop in buying power"?

the historical experience has been no, it doesn't. strong economic performance usually occurs with a strong dollar, not a weak one.

given that we import more than export, it's clear where the deadweight loss comes from.

moving more production to the US (reducing imports, increasing exports) winds up costing us more in terms of high prices than we gain in profits. these higher prices reduce real income for everyone.

that is why this weak dollar idea doesn't work.

it might work in a highly open and export driven economy like one of the asian tigers, but it will not work here and especially not now.

currency issues are not the main issue with our exports. it's our wage levels, taxes, regulation, and living standards. manufacturing is a great way to get out of an agricultural economy, but with the exception of the idiosyncratic 40's-early 60's, manufacturing jobs have nearly always been low paying.
the guy who built you iphopne makes less per hour that the guy who served you at mcdonalds.

we can't adjust for that through currency devaluation.

 
At 10/18/2010 8:18 PM, Blogger PeakTrader said...

"According to Larry Kantor, global head of research for Barclays Capital in New York, the weak dollar "is a net plus for the U.S. economy.""

Some people also believe getting paid to dig holes and fill them up again is better than collecting an unemployment check, i.e. "a net plus."

 
At 10/19/2010 8:39 AM, Blogger juandos said...

"Some people also believe getting paid to dig holes and fill them up again is better than collecting an unemployment check, i.e. "a net plus.""...

Very good PT!

BTW there's a quasi interesting interview of Kantor by some folks from Bloomberg from May of this year...

 
At 10/19/2010 8:48 AM, Blogger morganovich said...

benji-

that's a total non sequitor.

japan's exports are fine. it's their unwillingness to write down debt coupled to a debt funded economy that mired them in low growth by suppressing domestic demand.

their economy is very different from ours. they are net exporters, not importers and do not have nearly the consumer culture nor the depth of equity markets.

the strong yen has not been the cause of their problems. if it were, they would have a trade deficit, not a surplus.

have you ever studied economics at all?

i really don't think you understand how monetary policy works.

 
At 10/19/2010 9:09 AM, Blogger morganovich said...

craig-

your arguments don't seem to make a great deal of sense.

first off, i'm not claiming that the strong dollar caused the boom (the predominant causality is likely the other way) but it did keep it going by increasing buying power and lessening equity cost of capital.

it certainly didn't hurt the boom. exports grew most rapidly during the years of rapid dollar appreciation.

unlike benji, i do not think the 90's were our best decade. it's clear that the 50's were better, but that was also a massive global tailwind we'll never see again.

all i'm arging is that a strong dollar has historically been consistent with strong US growth and as a country with a trade deficit, dollar depreciation to redress it will lead to lower overall real income.

then you make this odd claim about the "overvalued dollar" creating the rust belt. there is no correlation there. that was a problem of old technology, poor innovation, and overpaid labor.

more than anything, it had to do with the rest of the world recovering from the destruction of ww2 and the rust belt not adapting to the lower demand as reconstruction ended combined with the greater competition that the ROW provided. lots of US industry did fine, the issues with the rust belt were industry based, not currency driven.

then you seem to support letting the dollar find a "natural" level, which seems to be antithetical to being upset about coming off the gold standard which was clearly the source of dramatic dollar shortages in the post war period, hence the marshall plan and truman doctrine.

so i'm really not sure what you are arguing. there is a clear correlation between a strong dollar and periods of US prosperity. on the one hand you seem to want higher rates, on the other you fear the stronger dollar they would cause, so i must admit i'm a bit confused as to what you favor doing.

 
At 10/19/2010 2:40 PM, Blogger VangelV said...

We had a weak dollar in the 1990s, our best decade ever.

First, it was hardly your best decade ever. Your best decades are so far into the past that you do not know of them.

Second, the USD went up during the second half of the 1990s, which is when you had your best growth for a while and a huge increase in tax revenues.

The dollar should go even lower, I hope so.

Given the technicals the USD should bounce for a while until the fundamentals take over. That may last two or three days, two or three weeks or two or three months. But once the technicians have had their day fleecing the idiots who play the forex markets the USD will head lower and lower. Eventually it will lose most of its purchasing power as foreign creditors figure out that USTs are not a store of value and the USD is no more credible than the Peso Ley, Peso Argentino, or Austral used to be. At that time, I doubt that you will be happy that your money will no longer be able to buy you most of the things that you now take for granted.

 
At 10/19/2010 2:48 PM, Blogger VangelV said...

The problem is, if you let bondholders and savers call your macroeconomic shots, you will ever tread towards deflation.

That has never been the case before. All bondholders want is to make certain that they are not paid back with money that, after taxes and inflation, leaves them with less than they started with. If you try to destroy their savings you will destroy the capital markets and will trigger a run on the currency.

A wealthy retired US Treasury bondholder would love the economy to collapse and prices shoot to the basement.

No. She wants the government and Fed to stop robbing her of purchasing power.

See Japan for how countries do in deflation.

The Japanese government inflated the currency to prevent deflation. Most goods did not fall in price and other than for housing, equities, and electronics, most families did not experience falling prices.

BTW, the NYT had a great story recently on Japan. It is the No.1 country on Earth not to emulate.

The NYT was cheering the housing bubble all the way up. It is hardly a credible source of economic analysis.

 
At 10/19/2010 2:51 PM, Blogger VangelV said...

I want the US economy to expand. What's wrong with looking out for No. 1?

Absolutely nothing. We all need to look out for number one. The problem with you is that what you propose is just plain stupid. If you destroy the currency and the bond market you will turn the US into a nation that is weak and cannot attract sufficient investment to produce the exports that you are hoping to see. How does the destruction of the purchasing power of your savings help the nation? How does bailing out degenerate gamblers who lied and borrowed more than they should by taxing the productive and prudent who refused to play the game help America become more productive or wealthier?

 
At 10/19/2010 5:16 PM, Blogger morganovich said...

vangel-

you are presuming benji has savings.

i fear that what he wants to do is devalue our savings to help pay off his debts.

he never seems to grasp that he's asking for a massive subsidy from savers to borrowers or the moral hazard that such a policy creates.

 
At 10/19/2010 7:29 PM, Blogger VangelV said...

you are presuming benji has savings.

Actually, I wasn't. I am assuming that he is some student living in his parent's basement who has no real world experience. I was just giving him the benefit of doubt.

i fear that what he wants to do is devalue our savings to help pay off his debts.

That would be fine with me. I don't know about you but my savings are hedged against such a devaluation.

he never seems to grasp that he's asking for a massive subsidy from savers to borrowers or the moral hazard that such a policy creates.

I don't know about that. Many on the left have no trouble asking savers to pay for the sins of borrowers because they believe that the borrowers are entitled to subsidies. Inflicting some pain on those rich Chinese peasant is not a problem for them because poor Americans are seen as victims who do the heavy lifting by borrowing and consuming. After all, lefties are quite certain that consumption is more difficult and important than production. Just ask Paul Krugman.

 
At 10/20/2010 10:19 AM, Blogger morganovich said...

v-

aren't you kind of playing both sides here?

on the one hand, you proclaim deliberate inflation "stupid" and on the other, you say it's fine with you.

even if one hedges his savings, the hit to the overall economy will cause a lot of problems that are difficult to deal with. merely preserving value is not much of an investment goal. (though certainly there are situations when that may be the best you can hope for)

and don't get me wrong, i know that lots of these folks want inflation because it will benefit them and punish the savers like somehow saving is unamerican because it doesn't drive maximum consumer spending right now. my issue with benji is that he constantly rails against every other kind of subsidy, then denies that he is asking for his turn at the trough.

to be against subsidies for everyone else but for them for himself is a very ethically questionable position.

 
At 10/20/2010 3:11 PM, Blogger VangelV said...

on the one hand, you proclaim deliberate inflation "stupid" and on the other, you say it's fine with you.

I think that it is terrible that the Fed is robbing savers. But that does not mean that I won't protect myself and try to get rich from the stupidity of voters who sit around and cheer the actions.

even if one hedges his savings, the hit to the overall economy will cause a lot of problems that are difficult to deal with.

That is true. The economy will have a great deal of trouble because of the actions taken by the idiots in Treasury and the Fed.

merely preserving value is not much of an investment goal. (though certainly there are situations when that may be the best you can hope for)

Who is talking about preserving value? This is an opportunity of a lifetime. We won't see an opportunity to get rich as good as this one for another five or six generations.

and don't get me wrong, i know that lots of these folks want inflation because it will benefit them and punish the savers like somehow saving is unamerican because it doesn't drive maximum consumer spending right now. my issue with benji is that he constantly rails against every other kind of subsidy, then denies that he is asking for his turn at the trough.

Either Benji is not the brightest light on the porch or is just looking out for himself. Either way it should not matter to you or me.

to be against subsidies for everyone else but for them for himself is a very ethically questionable position.

Welcome to human nature and the real world.

 

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