Global 'Imbalances' and the Crisis [TRADE DEFICITS ARE GOOD FOR YOU]

Wall Street Journal ^ | JANUARY 11, 2010 | DAVID BACKUS AND THOMAS COOLEY

[expat_panama]

In the 1920s, capital began flowing from Massachusetts to North Carolina, a process that continued until after World War II as textile mills migrated to the South from New England. Beginning in the 1950s capital moved again as textile manufacturing moved to Mexico, India and Malaysia. Capital has long moved to where it can be used most productively, and by and large, that has been a good thing.

Whether capital moves within a country or between countries, its flow addresses imbalances between available local capital and uses for capital (otherwise known as investments). Through much of history, the major capital flows have been from rich countries to poorer ones. England financed canals in this country and railroads in Australia and India.


[snip]

Thus the clamor to rectify global imbalances. In the case of the U.S., doing something presumably means increasing domestic savings and dealing with our federal government's deficit. In the case of China, doing something presumably means revaluing its currency. Both are reasonable choices, in our view, but have little to do with the current account deficit (the net amount of capital flowing into the country). Throughout the 1990s, even in years of budget surpluses, the current account was growing.

[snip]

International capital flows have become huge, and they are arguably a more important part of the global economy in the past decade than ever before. But are they at the heart of the financial crisis, and do we need to control them?

[snip]

[expat_panama]

The current account IS the trade deficit for most all practical purposes...

Welcome aboard!  So few catch on that it seems that being able to understand it puts you and I in a very elite group.

"...decreases in the trade deficit is due to the weakening dollar."

It's amazing how so many people say this even when it's not only untrue, but it's so easy to prove it wrong.  It's like global warming though and just like my posting the record on warming never changes anyone's religion opinion, most people don't want to see how the historical record has no link between exchange rates and the current account.

[expat_panama]

Agreed. Sometimes I have to remind myself that just because something isn’t an issue for me personally that it can still affect others.

[Will88]

It's amazing how so many people say this even when it's not only untrue, but it's so easy to prove it wrong.

You're going to prove it wrong that when foreign goods become more expensive, that Americans buy fewer foreign goods? And that when US goods become cheaper, foreigners buy more US goods. And vice versa?

Things might even out over time, but a weaker or stronger dollar does influence peoples' spending decisions in the short run as goods become less expensive or more expensive.

[expat_panama]

"You're going to prove it wrong that when foreign goods become more expensive, that Americans buy fewer foreign goods?"

Never in my wildest dream would I ever think of proving anything to anyone on these threads, but in case you'd like to persuade me, some historical facts might be a useful approach.  One is the how the exchange rates go up and down---

--another is how the balance of payments goes up and down in a way that has nothing to do with exchange rates--

--and when you check it year by year the two are together half the time and go separate ways the other half.

 

		trade deficit	dollar exchange rate	trade	dollar	correlation
1973		0.14%	108.19
1974		-0.29%	105.84	down	down	direct
1975		0.76%	100.42	up	down	inverse
1976		-0.33%	105.62	down	up	inverse
1977		-1.34%	107.12	down	up	inverse
1978		-1.30%	101.14	up	down	inverse
1979		-0.96%	94.46	up	down	inverse
1980		-0.70%	95.07	up	up	direct
1981		-0.52%	96.03	up	up	direct
1982		-0.74%	107.14	down	up	inverse
1983		-1.63%	115.69	down	up	inverse
1984		-2.77%	125.36	down	up	inverse
1985		-2.89%	138.97	down	up	inverse
1986		-3.10%	120.19	down	down	direct
1987		-3.20%	101.85	down	down	direct
1988		-2.24%	89.62	up	down	inverse
1989		-1.70%	90.55	up	up	direct
1990		-1.39%	92.41	up	up	direct
1991		-0.52%	85.01	up	down	inverse
1992		-0.62%	85.61	down	up	inverse
1993		-1.06%	91.5	down	up	inverse
1994		-1.39%	92.01	down	up	inverse
1995		-1.30%	87.07	up	down	inverse
1996		-1.33%	86.45	down	down	direct
1997		-1.30%	90.04	up	up	direct
1998		-1.88%	98.49	down	up	inverse
1999		-2.84%	94.48	down	down	direct
2000		-3.85%	96.06	down	up	inverse
2001		-3.58%	103.51	up	up	direct
2002		-4.02%	111.21	down	up	inverse
2003		-4.52%	98.77	down	down	direct
2004		-5.23%	84.38	down	down	direct
2005		-5.77%	81.05	down	down	direct
2006		-5.48%	84.44	up	up	direct
2007		-4.84%	82.37	up	down	inverse

When I first learned about this it seemed impossible, but when I checked just how cross border trade worked it made perfect sense.  Let me know if you're interested in what I found out.

 

		trade deficit	dollar exchange rate	trade	dollar	correlation
1973		0.14%	108.19
1974		-0.29%	105.84	down	down	direct
1975		0.76%	100.42	up	down	inverse
1976		-0.33%	105.62	down	up	inverse
1977		-1.34%	107.12	down	up	inverse
1978		-1.30%	101.14	up	down	inverse
1979		-0.96%	94.46	up	down	inverse
1980		-0.70%	95.07	up	up	direct
1981		-0.52%	96.03	up	up	direct
1982		-0.74%	107.14	down	up	inverse
1983		-1.63%	115.69	down	up	inverse
1984		-2.77%	125.36	down	up	inverse
1985		-2.89%	138.97	down	up	inverse
1986		-3.10%	120.19	down	down	direct
1987		-3.20%	101.85	down	down	direct
1988		-2.24%	89.62	up	down	inverse
1989		-1.70%	90.55	up	up	direct
1990		-1.39%	92.41	up	up	direct
1991		-0.52%	85.01	up	down	inverse
1992		-0.62%	85.61	down	up	inverse
1993		-1.06%	91.5	down	up	inverse
1994		-1.39%	92.01	down	up	inverse
1995		-1.30%	87.07	up	down	inverse
1996		-1.33%	86.45	down	down	direct
1997		-1.30%	90.04	up	up	direct
1998		-1.88%	98.49	down	up	inverse
1999		-2.84%	94.48	down	down	direct
2000		-3.85%	96.06	down	up	inverse
2001		-3.58%	103.51	up	up	direct
2002		-4.02%	111.21	down	up	inverse
2003		-4.52%	98.77	down	down	direct
2004		-5.23%	84.38	down	down	direct
2005		-5.77%	81.05	down	down	direct
2006		-5.48%	84.44	up	up	direct
2007		-4.84%	82.37	up	down	inverse

[Will88]

+--and when you check it year by year the two are together half the time and go separate ways the other half.

I'm not sure we're really disagreeing, or maybe we're talking about somewhat different things. The fluctuations in these economic measures are probably never the result of only one or two factors. You're looking at the entire current account for the US. I'm discussing something more narrow.

When I mentioned the strong and weak dollar, I was really relating it to how that might affect our imports and exports with one nation, namely China in this thread. But it could be any nation.

When the dollar is strong against a particular nation's currency, their goods will be cheaper for us to buy and ours more expensive to them and vice versa. We can have situations where the dollar is strong against some currencies and weaker against others, and probably also situations where the dollar is strong against most others, or weak against most others.

Again, I'm looking at the affect of a strong or weak dollar against the currency of one trading partner, and how it affects imports and exports. Taking the US as a whole there could be all sorts of ups and downs and netting to arrive at the totals you're looking at, and no real pattern because the totals involve trade and currency fluctuations with so many different nations.

[Toddsterpatriot]

When the dollar is strong against a particular nation's currency, their goods will be cheaper for us to buy and ours more expensive to them and vice versa.

Are you sure about this? I only ask because you didn't mention the budget deficit in your post.

[expat_panama]

Will88  post 15 "The current account IS the trade deficit..."

Will88  post 17 "...decreases in the trade deficit is due to the weakening dollar."

expat_panama  post 24 "...in case you'd like to persuade me, some historical facts might be a useful ..."

Will88  post 25 "You're looking at the entire current account for the US. I'm discussing something more narrow."

You and I are two peas in a pod, absolutely worthless when it comes to persuading.  I even told you that you could make a sale if you gave me hard numbers but instead all you did was to try and change what you said.  You might want to forego a career in sales or trial law if you're as bad as I am in those fields.  Your only hope is to learn from a pro:

Toddsterpatriot  post 26 "...you didn't mention the budget..."

Todd you've convinced me because you're absolutely right ---I'm sending you my life savings!!!!!

[Will88]

Are you sure about this? I only ask because you didn't mention the budget deficit in your post.

Your usual irrelevant nonsense. What a clown you have become on this forum.

[Will88]

You and I are two peas in a pod, absolutely worthless when it comes to persuading.

I think we agree. You are still looking at the total current account balance which nets all the dollar's strength or weakness against all other currencies. You can't conclude anyting unless you at least look at what effect a strong or weak dollar might have had on trade with specific nations, individually. You'd at least have to look at a few of the major currencies.

I'm talking about how the dollar's strength or weakness against one currency affects the trade balance. A weak dollar makes foreign goods more expensive for Americans, and American goods cheaper for foreigners, and vice versa. But the dollar is not necessarily weak, or strong against all currencies simultaneously. - Then the current account balance nets that trade effect for all currencies, both the strong and weak currencies re: the dollar.

Your historical facts, or the current account balance, is a net of all currencies and doesn't, and can't, prove or disprove what I've said since it nets all currencies. - And there are other factors in the current account. That's just not the stat to look at to prove or disprove the impact of a strong or weak dollar on trade.

And, if you're looking at an entire year, the dollar can become stronger or weaker against the same currencies at different times of the year, thus netting more factors into the annual totals.

[expat_panama]

I think we agree.

We agree that a weak dollar does not affect the balance of trade?

[Will88]

And here’s another factor that is netted into the current account balance, and makes that figure even less useful. The trade deficits from year-to-year include crude oil priced at from around $50 per barrel up to $147. The price of imported crude from 2005 - 2009 has varied tremendously.

Supply and demand, a weak dollar, speculation and other factors have affected the price of crude. More factors netted into the current account balances which make the totals figures less useful for the question we are discussing.

[Toddsterpatriot]

Your usual irrelevant nonsense.

Asking you to prove your silly claim isn't irrelevant, it is a waste of time though.

[Will88]

We agree that a weak dollar does not affect the balance of trade?

We agree that the current account balance does not prove that the weak dollar affects the balance of trade.

I further believe that the current account balance is not a reliable stat for determining whether the weak dollar affects the balance of trade. Far too variables in the current account balance calculations.

And, the weak dollar does affect the balance of trade with specific nations.

[expat_panama]

I further believe that the current account balance is not a reliable stat for determining whether the weak dollar affects the balance of trade.

Belief systems should never be allowed to hamper a grasp of reality, they're supposed to help make it easier.  The current account, the balance of trade, and the exchange rates are all out there ready for everyone to work with.   Enjoy, take your time, and let me know when you've had a chance to kick it around a bit.

[Will88]

Belief systems should never be allowed to hamper a grasp of reality, they're supposed to help make it easier.

You're the one out of touch with reality. Within that current account balance, for many different years of the past decades, you could have the dollar very strong against a weak yen, and on par with or weak against the old German mark or other European currencies, or the Euro in more recent years. There could easily be wide swings in opposite directions that offset and give an average that shows no changes.

There are far too many components of the current account, far too many nations with currencies of difference strengths against the dollar, too many things being averaged to give us summary numbers that could reliable give us a relationship between the strength of the dollar and increases or decreases in the trade deficit.

A far more accurate answer can be found looking at the strength of the dollar against the currencies of our major trading partners, and how the trade deficit might change as the dollar becomes stronger or weaker against those currencies.

What you're advocating is akin to looking at the overall batting average of all major league baseball players, looking at none of the components that have been included, and concluding that there are no 300 hitters in baseball. That's the sort of conclusions averages containing many components can yield if the components aren't examined.

[Toddsterpatriot]

There are far too many components of the current account

Are any of the components the budget deficit? Or will you finally admit you were mistaken?

[Will88]

Are any of the components the budget deficit? Or will you finally admit you were mistaken

I'm not mistaken, and you continue to engage in public displays of ignorance. You're like a jack-in-the-box with a big red nose, popping up at inappropriate times and saying dumb things.

[Toddsterpatriot]

I'm not mistaken

You said there was a close relationship between the trade deficit and the budget deficit. So what is it?

Year	Trade Deficit	Budget Deficit
2000	$436 Billion	-$236 Billion (surplus)
2001	$412 Billion	-$128 Billion (surplus)
2002	$468 Billion	$158 Billion
2003	$532 Billion	$378 Billion
2004	$655 Billion	$413 Billion
2005	$772 Billion	$318 Billion
2006	$828 Billion	$248 Billion
2007	$809 Billion	$161 Billion
2008	$816 Billion	$459 Billion
2009	$404 Billion (Jan-Oct)	$1841 Billion

The budget deficits were basically identical in 2002 and 2007. Why did the trade deficits differ so much?

[expat_panama]

You're the one out of touch with reality

My wording was bad, sorry.  As to whether exchange rates affect the trade balance, the BOT and the ex rate levels simply don't correlate.  Please check the links, let's get together on what is, and then we can then work on why it's that way.

[Will88]

Your third link “simply don’t correlate” has a column headed simply “trade”. My original statement was that a weak dollar made US goods cheaper to other nations, and their goods more expensive to US. And, further, that a weak dollar led to increased US exports.

Some government stats add imports and exports together and call that total “trade”. Not sure what is represented in your column “trade”, but we’d have to look at either US exports, or imports alone to test what I (and many others) said: that a weak US dollar typically increases our exports.

And you are also looking at weighted average exchange rates, and the total Balance of Payments, or the trade deficit since that’s all we’ve experienced for years. Again, there can be so many ups and downs with various nations’ currencies that you end up with a big average where all the high and low flucuations in specific dollar exchange rates have been smoothed out, and those average exchange rates and total balance of payments just don’t really test the statement we’re discussing.

All those weighted averages and totals arrived at by taking data for 100 to 200 nations are just not mathematically or statistically valid for testing the statement.

A test would be: find a year where the dollar became significantly stronger or weaker against the yen. Look at our imports and exports with Japan for that year and following years (or months or quarters). Determine if the exchange rate ups or downs are reflected in our imports and exports with Japan. - It should really show in our imports from Japan if the yen is weaker. If the dollar is weaker, it should show in higher exports to Japan. (Japan would often eat the negative exchange rate impacts if the dollar were weaker and their goods more expensive to the US, to keep their exports to the US going).