A little perspective on the impact that a weaker USD will have on overall economic activity
The Japanese yen, the Eurozone euro, and the British pound have appreciated 16%, 14%, and 9%, against the USD, respectively, since their 2010 lows. Some say that the “US wins” since the Fed’s quantitative easing (QE2) will drive export growth via a weaker dollar. (Note that the Fed has not actually announced QE2, this is all just speculation.)
I’m not suggesting that the stated Fed policy will be to drive down the dollar. What I do know, however, is that the United States production model is not structurally positioned to enjoy the economic panacea that is a persistent debasement of the dollar, neither in the near- nor medium- term.
The bottom chart illustrates the export share in overall economic GDP, as forecasted by the European Commission (you can download this data at the Eurostat website). Notice that the US share of exports, expected to be just 12.3% in 2010, is minuscule compared to the export markets in Europe. So what I gather from a chart like this is that the weak dollar will hurt Europe much more than it will “help” the United States.
We need domestic policy to support full employment and the expansion of our export sector that will eventually arise. See Marshall Auerback’s post this week at Credit Writedowns for a discussion on austerity, currency wars, and exchange rates.
Rebecca Wilder
The only way a weak dollar will help the average Jane and Joe in this age of economic industrial policy that focuses on money from money is if they have more dollars put in their hands either physically or through government programs that reduce the risk of living.
In the mean time, I have to figure out how to play the currency arbitrage game with $100/wk savings.
If you can’t beat them, join them?
Nouriel Roubini:
The next stage of these wars is more quantitative easing, or QE2. The BoJ has already announced it, the Bank of England (BoE) is likely to do so soon, and the Fed will certainly announce it at its November meeting. In principle, there is little difference between monetary easing – lower policy rates or more QE – that leads to currency weakening and direct intervention in currency markets to achieve the same goal. In fact, quantitative easing is a more effective tool to weaken a currency, as foreign exchange intervention is usually sterilized.
Expectations of aggressive QE by the Fed have already weakened the dollar and raised serious concerns in Europe, emerging markets, and Japan. Indeed, though the US pretends not to intervene to weaken the dollar, it is actively doing precisely that via more QE.
http://www.project-syndicate.org/commentary/roubini30/English
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The following is from Chatham House in London:
‘Currency Wars’: the US should take the lead to stop the race to the bottom
Thursday 21 Oct 2010 by Dr Paola Subacchi, Research Director, International Economics
As rhetoric on ‘currency wars’ heats up, escalating tensions between the US and China are casting a shadow over the world economy. Yet we must be clear on one point. No matter whether or not China is free riding on the exchange rate, the threat of a full-scale currency war will be defused only if the US takes the lead in promoting international exchange rate coordination and acts responsibly to prevent any rise of protectionism. Since the dollar is the key reserve currency, the US sets the pace on currency issues. South Korea, the host of this year’s G20, is unlikely to put exchange rate coordination on the Seoul summit agenda in November unless the US is willing. The US should seize the opportunity to set a positive role model and defuse the undoubted protectionist threats overhanging the world economy.
This agenda clearly extends to the issue of quantitative easing, where it seems almost a foregone conclusion that the Federal Reserve will resort to a new round of Treasury securities purchases in early November. European as well as Asian governments and central banks will be watching closely for signs that America is moving over-aggressively in a deliberate ploy to force the dollar down further – a policy that the US of course denies it is following.
World economic uncertainty is irrefutably increasing as a result of countries’ measures to use the exchange rate to rebalance their domestic economies. Domestic interests seem to be increasingly at odds with the goal of reducing global financial imbalances.
http://www.chathamhouse.org.uk/media/comment/currency_wars1010/-/1165/
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Tim Geithner may be the only person who still argues that the US is not deliberately manipulating the dollar downward. I’ve heard that even Krugman has finally ‘come clean’ on the actual purpose of QE. Geithner’s resolve is commendable though considering that he participated in the creation of the closing communique at the recent G-20 that included a promise by the US to limit currency manipulations via QE etc. The reference to the US was implicit but considering how many times Geithner went on record with statements to the contrary this had to be embarrassing to the extreme. I wonder if there is some sort of training regimen that government officials follow to improve their credibility? They could just play poker I suppose. Geithner and Krugman could be poker buddies.
Rebecca – “Notice that the US share of exports, expected to be just 12.3% in 2010, is minuscule compared to the export markets in Europe. So what I gather from a chart like this is that the weak dollar will hurt Europe much more than it will “help” the United States.”
Why didn’t you also show dollar value comparisons of the nations’ exports? That changes part of the discussion.
I see no basis for which you can make the assumption that a weak U.S. Dollar will not boost the level of exports on the global marketplace, and perhaps capture an larger share of the market in various global regions.
What your chart doesn’t show is the difference between intra exports by European nations to other nations in Europe operating with the Euro currency and exports to other parts of the world for the nations of Germany, UK, Italy, and Spain. For that matter, the same can be said for imports by the same countries.
Rebecca – “What I do know, however, is that the United States production model is not structurally positioned to enjoy the economic panacea that is a persistent debasement of the dollar, neither in the near- nor medium- term.”
A further explanation is warranted. How do you know that the supposed U.S. production model is not structurally positioned properly to capture larger global market share with a declining U.S. Dollar? I don’t think you can prove that, for starters, and I further raise the question of how many different corporations’ plants you have ever visited in the USA.
I think you’re talking well over your head with your statement. I don’t believe that you have that level of hands on or eyes on experience to make that statement.
I’m going to ask a dumb question. (I have a habit of doing so.) Could it be argued that QE is the modern day equivalent of exporting our way out of deep recession? During the great Depression the US was the largest exporter in the world. We tried exporting our way out then, and guess what? It failed. What makes QE any different? Trade wars and currency devaluations, as was said upthread, is a race to the bottom. Then what?
Good questions. I’ve been reading about QE2 for a few months, but I am baffled. If many nations undertake QE2, then what changes? Do we end up with a QE2 driven crisis on the global front?
The only conclusion that I have reached is that the Fed might have to step up and buy some more mortgages.
But, trust me, I am dumb as a rock on this one.
It will be more bubble blowing of assets, on a global basis. Whatever doesn’t get used for bubble blowing will sit as idle excess reserves at the Fed. We still have a “liquidity trap” in the real economy, and adding liquidity does nothing in this situation. Many financial experts have this opinion.
So far the Fed is talking about buying treasuries for QE2. They could buy more mortgages, but the problem here is not interest rates, it could be chain of title problems. The Fed can’t print away legal problems.
And the obvious risk is that OPEC may not sit still while the world devalues most fiat currency. Studies have shown that oil above $100 is recessionary in the US, so QE2 could easily lead to GR2.
“I’m not suggesting that the stated Fed policy will be to drive down the dollar. What I do know, however, is that the United States production model is not structurally positioned to enjoy the economic panacea that is a persistent debasement of the dollar, neither in the near- nor medium- term.”
How do you known that? Note that weaker dollar means not only more exports but a better competitive position against both imports and outsourcing.
“I’m not suggesting that the stated Fed policy will be to drive down the dollar. What I do know, however, is that the United States production model is not structurally positioned to enjoy the economic panacea that is a persistent debasement of the dollar, neither in the near- nor medium- term.”
How do you known that? Note that weaker dollar means not only more exports but a better competitive position against both imports and outsourcing.
“I’m not suggesting that the stated Fed policy will be to drive down the dollar. What I do know, however, is that the United States production model is not structurally positioned to enjoy the economic panacea that is a persistent debasement of the dollar, neither in the near- nor medium- term.”
How do you known that? Note that weaker dollar means not only more exports but a better competitive position against both imports and outsourcing.
ray I love: thanks for the insight. Do you honestly think China is going to sit back and watch its dollar denominated assets decline by currency manipulation? Perhaps this may be an underlying reason why China has been reluctant to let the RMB free float?
I thought I read something earlier today (I can’t find the link), where the Fed is considering easing banking reserve levels. Apparently they didn’t get the Hudson memo.
I think the burden of proof of efficacy lies with the one intending to print up a trillion dollars.
Imports can be handled with tariffs, and the USG does need the tax money.
If we find out that all a weaker dollar does is increase Wintel profitability, that is not a big win for a reckless trillion dollar bet on behalf of all US residents.
I think the burden of proof is on the person who states “What I do know,”.
Whoah, MG. Can’t we play nice here?
“How do you know that the supposed U.S. production model is not structurally positioned properly to capture larger global market share with a declining U.S. Dollar?”
All I’m saying, is that based on the structure of production – i.e., a smaller share of exports – the marginal impact of the weak dollar policy is going to be smaller than the marginal impact of a stronger currency in the European eocnomies, all else equal. It’s a fact, likewise, that no matter how low the dollar goes, we’re not increasing domestic production of textiles, for example, enough to compensate the potential demand. Thus, we’ll still import.
It takes time for companies to repatriate profits by increasing production domestically.
And to your point on external exports from the eurozone, Germany and Italy are on the lower end of countries that export within the EU27. Germany, for example, exports roughly 30% to non-EU 28 countries. Italy, 40%.
Rebecca
Also note that the interest paid by the Treasury on debt purchased by the Fed will return to the Treasury, increasing the percentage of budget spending that goes to purchase of goods and service and reducing the percentage that goes into transfer payments to people with excess capital.
There are long lags between currency depreciation and a rising trade balance – but that’s not my point above. Sometimes, the trade balance turns in the opposite favor, as foreign exporters shift the terms of trade in order to keep market share (the J-curve).
It takes two to tango. The Fed can try to pump up the global economy with an inflow of USD, but that’s not sustainable. It must be accompanied by a shift in sentiment amongst global policymakers regarding their trade policies.
Short term, I don’t see how exporters are going to provide the impetus to domestic jobs growth. Currently, that must come from the service sector (generally non-exporters).
Rebecca
nanute,
I read a credible theory by some blogger out of the UK who pointed out the obvious fact that the US was content with the arrangement with China until the Chinese started using dollars for commodities and other investments instead of T-bills. I suspect that China has already rid its coffers of as many dollar-related assets as possible. It is wise to consider though that China stands to prosper either way. If they get burned on a dollar depreciation, which is almost a certainty, the ROW will be given yet another salient example of how little the US can be trusted. This will strengthen all of those trade ties that they have been working on so diligently. The T-bills are after-all just paper sitting mostly idle in some vault. What they want is a world without a reserve currency and they have not been shy about saying so, but we don’t much about that.
What is also worth noting here is that the Chinese lending us money all of these years is what allowed for the Bush tax cuts. That in turn accelerated capital formation which provided a low cost advantage in the quest to secure the maximum amount of global market-share. This has been an advantage that was only possible for the reserve currency nation but offset by military costs.
As for China’s soft-peg motives, they have formally stated that they are the victims of the Triffin Dilemma. So yes, if they let their currency float they get the same treatment that Brazil just got. This leaves emerging nations with few choices and it applied to China more-so due to its rampant growth combined with its large export percentage. India for instance exports less than it imports so currency appreciations are less troublesome, India is still however considering capital controls because foreign inflows can of course cause instability. ‘Keyboard capital’ also suggests that there is an element of exploitation where foreign inflows are concerned but nations that mention that are soon ostracized, so that subject doesn’t come up much. It will though if the power of the G-5 is diminished, which is happening now. Interesting times.
My guess is the banking system will export dollars, then spend their bonuses at selected US malls, restaurants and plastic surgeons. But that’s just totally unfounded speculation on my part.
Rebecca,
I think the point you so deftly made here: “Short term, I don’t see how exporters are going to provide the impetus to domestic jobs growth. Currently, that must come from the service sector (generally non-exporters)“, goes a long way toward providing a key clue. The US economy being service-based makes the assertion that exports might be the answer to the jobs problem more than just a little suspect. Dollar depreciation is obviously not about ‘exports’. And our leaders are not stupid, so the ‘export’ story is for the tourists.
Wait until China actually shifts toward more domestic demand growth – guess what’s going to happen to the global price of energy then?
Probably makes 2008 look like child’s play.
Rebecca
Also, ray, will you please provide a link to the Michael Hudson article that you referenced on the IMF meetings?
Cedric: That is very good! Maybe, they’ll take the money and go on a foreign vacation. Maybe, China?
I’ve been thinking the really, really good outcome will be that Disneyland and Seaworld can get cheap loans and expand into Africa. Then, if our world leading biotech industry achieves a breakthrough in rejuvenating dinosaur DNA, imagine the possibility of dinosaur amusement parks on the Dark Continent!
Rebecca, the following link is to MH’s website. The IMF post, and, the newer article on Capital Controls, which is what I quoted from today, are each there in plain site:
http://michael-hudson.com/
And, if you ever want to know who actually deserves far and away the most credit for warning the country of the housing collapse etc, have a look at this:
http://www.insurgentamerican.net/download/MichaelHudson/Hudson_RoadToSerfdom.pdf
It is worth saying too that Hudson’s piece was published as a cover story in ‘HARPER’S’ magazine more than 3 months before the forecast that Dean Baker goes on about, almost daily.
If you don’t have time to read it just check out the extent of presentation.
And we shouldn’t overlook that the Dynosaur Export Model could be applied to south and central America as well.
Cedric,
Economics without extreme imbalances and the resulting hardships would be boring. So, it is difficult to choose between boredom and being entertained at the expense of those who have not learned to appreciate the tragedy of it all, or, those poor souls who are too busy being victimized to have time for such. I just thought I should explain this so that if any non-econ-buffs read your comments that they will be able to understand your deranged comments. I of course appreciate the humor, and, naturally, I am good for a doozy now and then myself.
Any trips to China will be “expensed” as a business trip, but here’s a good news report on what the non-banking sector has been up to. Ever since the credit crunch, set off by the wholesale run on banks by banks, the non-bank business world decided they need to protect themselves from banks.
They did it first with layoffs and cutting expenses, but then found they had a great market for selling corporate debt at cheap rates. This resulted in a trillion in short term liquidity on corporate balance sheets.
The authors speculate that all this cash will ultimately be used for stock buybacks. The irony being no real help for investment and the economy, and then they will be more dependant on banks for short term financing again, and the new bondholders who bought at low rates will see their credit risk increase as a result.
But the Fed continues to “push on a string”.
http://finance.yahoo.com/news/Cash-Hoard-Shows-Borrowers-bloomberg-901282465.html?x=0&sec=topStories&pos=1&asset=&ccode=
My goal is only to make economics less dismal, boring, and more intellectually accessible for the understandably deranged non-economist.
ray I love,
I really appreciate your contributions. I am not a well learned sort, but I am inquisitive. And I think Cedric has given us some fine examples of keeping it on the lighter side. Thanks to you both,