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Don’t worry about the weak dollar

October 13, 2009

By John M. Berry

There’s no way to shut off the incessant warnings about a weak dollar from foreign officials and some economists, but it’s perfectly safe to ignore them.

You can also yawn the next time Treasury Secretary Timothy Geithner repeats the mantra, “It is very important to the United States that we continue to have a strong dollar.”

Everybody is blowing smoke.

Those complaining in Europe, Japan, Canada and elsewhere are worried that a cheaper dollar will further damage their already declining exports, making their ailing economies worse.

The reality is that the dollar’s more or less continuous decline against other major currencies since the beginning of 2002 has helped cut in half the huge U.S. deficit in trade and financial transactions with the rest of the world. That deficit peaked in 2006 at just over $800 billion, almost 6 percent of GDP.

Even though millions of Americans have lost their jobs during the severe recession triggered by the financial crisis, without the weaker dollar, many more would have disappeared. The cheaper dollar has helped reduce demand for foreign-made goods and services at home while making U.S. exports more competitive abroad.

The recession itself has played in trimming the deficit by reducing both overall consumption and investment.

The foreign finance ministers and central bankers, such as European Central Bank President Jean-Claude Trichet, who are unhappy about the dollar also regularly call for actions to reduce global financial imbalances, including the U.S. trade deficit. They can’t have it both ways, which they know perfectly well. So keep in mind that their dollar comments are often intended for a domestic audience whose jobs may have been lost as their exports have declined. That’s why they love to talk about a “strong dollar”.

Last week, Trichet said, “When the secretary of the Treasury and our friend Ben Bernanke say that a strong dollar is in the interest of the U.S. economy and that they are pursuing a strong dollar policy, this is a judgment that is obviously very important for us and for the global economy.”

The ECB president, however, fully understands that neither the Treasury nor the Federal Reserve is about to take any steps specifically to support the dollar.

The Fed isn’t going to raise interest rates and the Treasury isn’t going to intervene in currency markets by having the Fed buy dollars to prop up its value. Only if markets began to behave in a truly disorderly fashion might there be temporary interventions.

The dollar has dropped by a third — and never in a disorderly way — over the past seven years. Since the dollar’s peak early in 2002, the Fed first cut its target for the overnight lending rate to a low of 1 percent, kept it there for a year and then increased it steadily to 5.25 percent. After the financial crisis hit, it has lowered the rate almost to zero.

None of those decisions were directly to do with the value of the dollar. And while Chairman Bernanke and his colleagues are now discussing when it may be time to begin to raise — or to rein in any of the other steps the Fed has taken to support financial markets — you can be sure the value of the dollar will have little to do with their decision.

In the 10 years of its existence, the ECB has essentially had the same approach, focusing on controlling inflation rather than the value of the euro.

The same thing is true for the Bank of Japan, whose interest rate target is also close to zero while the yen keeps strengthening against the dollar. (The Japanese finance minister, however, has threatened to intervene in currency markets to weaken the yen and protect Japanese exports.)

China is a whole other ballgame, however. To protect its enormous trade surplus, the world’s largest, it again froze the value of the yuan compared with the dollar in the middle of last year. For several years before that, it had let the yuan gradually appreciate.

But keeping the yuan-dollar rate frozen while the dollar declined against most other currencies meant that the yuan also declined against most other currencies. None of the affected nations has a way to force the Chinese to change their policy. This is one instance in which just about everyone wishes the dollar would weaken much further.

At some point, a weaker dollar could add to inflationary pressure in the U.S. by contributing to higher prices for imports — but that’s a problem for the future.

Right now, a weak dollar is not a bad thing at all.

Comments

Rubbish …. when did you see the last time a country debase its currency and then wind up more prosperous again? Argentina would be the richest country in the world per capita that were the case. Debasing any currency will only make the “poor” poorer and add to their ranks in the long run and will also reduce the overall wealth of a nation. The U.S. will be no exception. When will people learn that there is NO FREE LUNCH ……

 

Weak currency never made a nation richer. It is also a myth that weak USD will reduce the trade deficit and promote exports. I know, instead of a weak dollar, why dont we simply make every american worker take a 20% pay cut, gee that would reduce imports and make the US more competitive too..LOL

US is a net importer of commodities. A weak USD will cause commodity prices to increase offseting any benefits to manufacturing. Additionally, so many manufacturers import components that will now become more expensive. As for rising profits due to a weak USD, that is called MONEY ILLUSION. Nominal profits have increased, but real profits havent.

There have been 5 economic expansions since 1970:

1971-73
1975-79
1982-90
1992-01
2002-07

The three shorter ones had falling USD, rising commodity prices, falling real incomes and flat or even falling productivity and ended with an ugly recession.

The two longer ones had stable or rising dollar, stable or falling commodity prices, rising real incomes and rising productivity. These two expansions ended with a mild recession.

Posted by Emo | Report as abusive
 

Currency exchange rates have virtually nothing to do with our trade deficit. As evidence, consider the dollar/yen exchange rate. In 1971, the dollar bought 308 yen. Today it has weakened to 89. Yet, in spite of that precipitous decline, we went from a trade surplus with Japan to a huge trade deficit – four times worse than our deficit with China when expressed in per capita terms.

Global trade imbalances are driven by huge disparities in population density. Nations with extreme population densities, like Japan, Germany, Korea, China and many others, have very low per capita consumption due to over-crowding and are thus incapable of consuming at anywhere near the level required to absorb their productive capacity. This makes them utterly dependent on exports to sustain their economies. They will never let currency exchange rates erode their U.S. market share, as a long history of trade with Japan has proven.

In 2006, with the half of nations below the global mean population density, the U.S. had a trade surplus in manufactured goods of $17 billion. With the other half – those above the global mean population density – we had a $480 billion deficit.

The only way for the U.S. to restore a balance of trade is through a tariff structure on manufactured products that is indexed to population density.

Pete Murphy
Author, “Five Short Blasts”

 

Why are all the commenters above crazy?

What is this concept of “debasing” a currency? Currency is freely exchanged on markets and subject to the principles of supply and demand. Exchange rates do affect international trade balances.

As for the population theory, “Nations with extreme population densities, like Japan, Germany, Korea, China and many others, have very low per capita consumption due to over-crowding and are thus incapable of consuming at anywhere near the level required to absorb their productive capacity.”

In other words, they have tons more people who can supply things… but apparently these same masses of people cannot demand things? Of course they can!

Posted by JD | Report as abusive
 

Dear people reading this thread,

Please listen to JD above; no one else is making sense.

Thanks.

Posted by AC | Report as abusive
 

Back in the early fifties, when America became the biggest Mercantilist beast on the planet (like China now), a deficit debt would have been a very dirty word. America has since moved into its final “huge deficit and debt” stage now and the only economic way that fits this outright consumer model is Keynesian. This has nothing to do with a script, and everything to do with economic survival. This last is certainly not a global tenet, but is a very individual tenet that applies differently to the varying economic needs of all countries. Therefore each country’s government must do exactly what it takes to survive economically, simply because that is, undeniably, the mandate of every government in the world today.

Deficits certainly do matter to some countries that follow these Keynesian deficit ways. But to newly Mercantilist countries such as China, Russia, India and Brazil, there is simply no need for deficits simply because they have their own massive savings. Why should such countries adopt huge deficits just to feed and waste their savings to support the Keynesian debts of western countries?

As I’ve said, the mandate of every government must be to ensure the economic survival of their own country. And herein lies the greatest fault with adopting huge Keynesian deficits — America for too long has been too dependent on foreign credit, to the extent that her own government has now completely forfeited her mandate for individual economic survival because of too heavy a reliance on these outside dependencies. The US government is not therefore fulfilling its economic mandate for survival, this control has been lost because of her loose Keynesian debt and deficit policies.

America, under the guise of modern leadership, has thus become nothing more than a weak banana republic, with no individual mandate or any control over America’s economic survival, no urgency, dwindling leadership, running on empty, even now going begging to the likes of China to buy more of her IOUs to support the American economy.

Regarding the author’s disgruntled description of China’s currency manipulation, I really think this is very amusing. For decades now, the US govt has been manipulated commodities like gold and oil for the sole benefit of propping up the dollar. And when this precedent was set so many years ago, is it any real wonder that China is only now doing the same. After all, it could be said that China has only learned all this from The Master.

So, concerning America’s laughable manufacturing as well export figures as perhaps the saviour of the US economy, can we perhaps have some real and valid reasons why a weak dollar is so good for America?

 

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