Weaker Dollar Seen as Unlikely to Cure Joblessness

NY Times ^ | 16 Nov 2010 | MOTOKO RICH and JACK EWING

[Hoodat]

A weakening currency traditionally helps a country raise its exports and create more jobs for its workers. But the declining value of the dollar may not help the United States increase economic growth as much as it might have in the past.

Though a weakened dollar would help exports to some degree, business executives and economists said that because of the ways American multinational companies operated, it was uncertain whether it would cause much of an increase in hiring.

The issue is crucial for President Obama, who made economic growth and job creation the main themes of his recent 10-day trip to Asia. He has also held out the prospect that a surge in exports would reduce the nation’s stubborn unemployment rate, currently 9.6 percent.

[Hoodat]

This move by the Fed was never intended to ease unemployment. The ONLY reason they did it is because the federal government is out of cash. They need to sell $1.3 trillion in bonds to finance their spending, but there are no buyers. If the Fed has wanted to help alleviate unemployment, they would have given the money to wealth creators and entrepreneurs instead.

[expat_panama]

a weakened dollar would help exports

That's where the NYT sticks its head back in it's armpit.  Sure, everyone says weak dollar = more exports but it doesn't and they're wrong.   Exchange rates do not affect the balance of trade.

[Pollster1]

We have tried a long list of Dem “solutions”, ranging from the Bailout, TARP, Stimulus, and ObamaCare to a weak dollar. I’m shocked, shocked I say, to note that so far each Dem solution has made things worse. A monkey throwing darts at a list of choices would do far better than the Obama/Pelosi regime has done.

Even a blind squirrel will find an occasional nut (which should be the new TSA motto given their search tactics) but Obama and Pelosi have so far been wrong 100% of the time. It’s almost like they are destroying America on purpose. Almost.

[November 2010]

Exchange rates do not affect the balance of trade.
___________________________________________________________

? How can they not? If our currency becomes 10x stronger, all foriegn goods are cheap. If our currency becomes 10x weaker, our goods will be a bargain internationally.

[expat_panama]

? How can they not?

There are plenty of ways anyone can look up trade balance trends along with exchange rates and to see how there's no connection.  There are also lots of links to explanations on why things are the way they are.  If you're interested I can help you with finding both.

You might want to fix that sticky question mark key first though.

[November 2010]

I’d like a piece on it. Lack of correlation is counter-intuitive.

[ex-snook]

'A weakening currency traditionally helps a country raise its exports"

Export what? the only things we export is money an factories.

WE HAVE TO MAKE MORE OF WHAT WE IMPORT.

[expat_panama]

Lack of correlation is counter-intuitive.

It sure is and that's probably why most people either don't know the facts or refuse to face them.  About a year ago we got into the subject on this thread with Will88, and over in post 24 I went and got out the record going back to 1973 that showed the correlation was just not there.

Will got all mad at me and I don't think he's ever been willing to accept things as they are, but as far as why there's no correlation I can dig out the reasons for that too if you're interested.

[Hoodat]

A weaker dollar means that the supply curve will shift downward to the right based upon value of foreign currency. And lower price translates to higher demand, thus higher sales of American-made goods. As for foreign goods bought in America, the converse is true. Supply curve shifts leftward-upward, and demand shrinks based upon higher price.

So in essence, with all other factors remaining unchanged (the economic impossibility upon which all economic theory is based), a weaker dollar will cause our trade deficit to decline. However, the trade deficit isn't our problem.

Having a trade deficit is a good thing because it sends dollars into the rest of the world - the goal is to have those dollars reinvested in American capital markets, businesses, entrepreneurial ventures, etc., within the US. The problem now is that this Administration is doing everything in it's power to scare off this investment. Currently, $500 billion per year is flowing out of the US, and none of it is coming back via investments. Foreign investors are hesitant to invest when they don't know what the tax rate is going to be for the next two years. So they continue to sit on these dollars and wait it out, hoping that the US will come to it's senses and decrease corporate and capital gains tax rates, and eliminates it's draconian restrictions on the movement of capital across the US border.

[BfloGuy]

Exchange rates do not affect the balance of trade.

Of course they do!

Trade is determined by price differences. If the US dollar is overvalued (as it has been for much of the last 40 years), then American goods are more expensive abroad. It's what killed the American steel industry for Pete's sake.

Now, there's a lot we could do in the US to improve our competitiveness (lower taxes on profits and capital), but even those won't be able to overcome a high exchange rate. Now, don't get me wrong -- I do not agree with the current policy of deflating the dollar to drive its value down.

But a stable money supply combined with a balanced federal budget (no constant supply of Treasurys to sell abroad) would help bring our exchange rate back to some semblance of where it should be.

It would do wonders for the trade deficit, too.

[expat_panama]

"...shift downward to the right based upon value of foreign currency. And lower price translates to higher demand..."

That's an impressive sounding justification for a belief in something that does not happen.

What the argument overlooks is the fact that foreigners do not buy American goods with foreign currency.  They sell their things to get dollars that are used to buy our exports.  That 'shift downward to the right' on one graph is canceled by an opposite 'shift upward to the left' on the other.

[November 2010]

What you say Hoodat makes sense to me. Weaker currency = lower trade deficit all other things being equal. Expat Panama’s post showing a lack of correlation between currency and trade ignores the “other factors” it seems to me. We’ve had a steadily growing trade deficit over time with fluctuations in our currencies value.

[expat_panama]

Of course they do!

Seems we got a lot of people interested in convincing me that a weak dollar increases exports.  OK people, first you'll need to show me how the exchange rates go up and down---

--and then explain why the trade balance 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

Seriously, 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 anyone's 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

[Hoodat]

They sell their things to get dollars that are used to buy our exports.

No, they exchange their currency to get our currency. And with a weaker dollar, their currency buys a lot more US dollars.

Let's say we want to purchase Audis made in Germany. We would have to purchase Euros with US dollars in order to have the correct currency to purchase them. And in order for Germans to purchase Boeing Aircraft, they would have to purchase US dollars with their Euros in order to have the correct currency to purchase them.

When the dollar weakens, Europeans are able to purchase more dollars for their Euros, thus making the price of American goods less expensive in terms of their Euros. At the same time, it requires more dollars to purchase Euros, thus the price of European goods relative to the dollar goes up.

Your mistake is that you are assuming a zero-sum game in the short run. That is not the case. The fact that we even have a trade deficit quickly dispels that notion. When we run a trade deficit with Germany, dollar flow out of the US and Euros flow into Germany. And currency exchangers do a brisk business selling Euros and buying dollars.

[expat_panama]

...lack of correlation between currency and trade ignores the “other factors”...

OK, other 'factors' (which will not be named) aside, we'll have to at least accept the fact that there's no corrrelation.

[expat_panama]

No, they exchange their currency to get our currency.

This is good; we then consider the banks that make the exchange, how they then have to  trade those foreign notes back for our money with someone else who's importing something.  It's called the 'balance of payments' and it's always equal to zero.

If you want, you could get lots of good links about the balance of payments by googling "balance of payments".   FWIW, the BOP is tallied by the Bureau of Economic Analysis at the BEA's international data site, and at the top is a tab "glossary" where if you go to 'B' it starts with: 

Balance of payments. Record of transactions between U.S. residents and foreign residents during a given time period. Includes transactions in goods, services, income, assets, and liabilities. It is broken down into the current accounts (international), capital accounts (international), and financial accounts (international).

Balance on current account. Record of net receipts or payments on goods, services, income, and unilateral current transfers. Current transfers include U.S. government grants to foreign countries, private remittances, and other current transfers. Related terms: Balance on goods, Balance on goods and services.

Balance on current account, national income and product accounts. Current receipts from the rest of the world less current payments to the rest of the world, formerly called "net foreign investment." Current receipts equal exports of goods and services plus income receipts from the rest of the world; current payments are the sum of imports of goods and services, income payments to the rest of the world, and current taxes and transfer payments to the rest of the world (net).

Balance on goods. Record of the difference between exports of goods and imports of goods. Related terms: Balance on current account, Balance on goods and services.

Balance on goods and services. Record of the difference between exports of goods and services and imports of goods and services. In the broad sense, this balance is conceptually equal to net exports of goods and services, which is a component of gross domestic product (GDP). Related terms: Balance on current account, Balance on goods.

 

If you want, you could get lots of good links about the balance of payments by googling "balance of payments".   FWIW, the BOP is tallied by the Bureau of Economic Analysis at the BEA's international data site, and at the top is a tab "glossary" where if you go to 'B' it starts with: 

Balance of payments. Record of transactions between U.S. residents and foreign residents during a given time period. Includes transactions in goods, services, income, assets, and liabilities. It is broken down into the current accounts (international), capital accounts (international), and financial accounts (international).

Balance on current account. Record of net receipts or payments on goods, services, income, and unilateral current transfers. Current transfers include U.S. government grants to foreign countries, private remittances, and other current transfers. Related terms: Balance on goods, Balance on goods and services.

Balance on current account, national income and product accounts. Current receipts from the rest of the world less current payments to the rest of the world, formerly called "net foreign investment." Current receipts equal exports of goods and services plus income receipts from the rest of the world; current payments are the sum of imports of goods and services, income payments to the rest of the world, and current taxes and transfer payments to the rest of the world (net).

Balance on goods. Record of the difference between exports of goods and imports of goods. Related terms: Balance on current account, Balance on goods and services.

Balance on goods and services. Record of the difference between exports of goods and services and imports of goods and services. In the broad sense, this balance is conceptually equal to net exports of goods and services, which is a component of gross domestic product (GDP). Related terms: Balance on current account, Balance on goods.

 

[November 2010]

You discount other factors, but unionization, trade agreements, other nations openness to imports, raw material costs, subsidies, welfare policies, minimum wage laws, etc. will have an effect. A chart of trade balance for the USA shows a steadily increasing trade imbalance over time. To reject correlation with currency seems to me to reject common sense (the cost of goods doesn’t effect sale of goods). That flies in the face of basic economics and you offer no explanation. I’m all “ears” if you have one.

[Will88]

Will got all mad at me and I don't think he's ever been willing to accept things as they are, but as far as why there's no correlation I can dig out the reasons for that too if you're interested.

Lol, your entire contention was and is nonsense. My statement was:

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?

Play all the games you like with exchange rate data, but when the dollar weakens and imported goods become more expensive, Americans buy fewer imported goods.

And when the dollar is weaker, foreigners buy more American goods. That assumes that that the exporter to the US whose goods have become more expensive actually passes the increased cost in dollars along to the consumer. There were times in the past when Japan considered the continuing production and flow of exports so important that they often did not pass along the higher dollar costs of a stronger yen/weaker dollar.

I guess you've missed the recent higher cost of crude oil imports which is being attributed to the weaker dollar. What you're really pretending to prove is that price does not affect supply and demand levels in international trade.

[Will88]

Actually, taking another look at your data from that old thread, you don't even address the statement that I had made because all the trade data in your 'analysis' is in dollars. My statement again:

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?

My statement is 100% correct because I, or anyone discussing increased or decreased trade due to currency fluctuations is referring to an increase or decrease in volume, or units, not in total dollar amounts.

If the dollar weakened against the yen in the past, and Japanese cars became more expensive, then Americans would buy fewer cars unless some other factor affected their buying decision. So, the dollar value might stay near the same, but for fewer total vehicles.

Not sure what you were trying to show with that data because the dollars of trade would naturally reflect the exchange rate fluctuations unless some nation decided to eat the ups and downs. Has to be in units to show whether fewer goods were traded.

[CutePuppy]

"Expecting" weaker U.S. dollar to ease unemployment is like "expecting" Zimbabwe to have lower unemployment due to hyperinflation, so I don't even understand how someone could even come up with the premise... ah, I see it's from New York Times.

The problem with many people not understanding why the exchange rate / weak currency has little or no correlation with the current account / balance of trade is because they fail to take into account that weak currency in many cases also leads to increased cost of producing the goods (e.g., when the domestically manufactured goods rely on imported raw materials which become more expensive) so the overall competitiveness of the final products made for export may be little changed; but it would depend on the mix of goods and products that country's companies export, particularly in any given year. So the "competitively devalued" currency may help some industries / sectors / companies that don't rely on foreign raw supplies, while hurting other companies within other industries / sectors (usually finished goods manufacturing) suffers from increased domestic production costs. At best, currency devaluation is a net zero for the balance of trade, but is usually a drag / tax for the consumers.

This would also help explain why currencies of resource-rich-export-driven countries like Australia and Canada have held up better than USD$. Another example is how China can have high trade surplus (and high inflation) with their [ostensibly] devalued yuan / renminbi, while devalued USD$ didn't lead to either trade surpluses or high inflation. Basically, it's more related to the mix of import / export goods and products by country than a currency exchange.

The USD$ Cash Index is slightly higher now (~ 78) than it was at the end of 2007 (~ 76), and has been higher ever since the multi-decade bottom in March-July of 2008 (~ 72), and the peak was in June 2001-February 2001 (~ 120) ...

Crude Oil was about US$27 in January 2001, $20 in January 2002 (post-9/11) and peaked at US$145 in July 2008 (pre-crash).
Gold was around US$260 in early 2001, US$1030 in March 2008, and broke US$1400 in Novemebr 2010. Silver was about US$4.50 in early 2001, US$21 in March 2008, and broke US$29 in November 2010.

All without the "benefit" of TARP, QE, or QE2... The U.S. dollar has been "competitively devalued" starting with Bush administration (despite all his Treasury secretaries having to assure with a more-or-less straight face that they had a "policy of strong dollar") and this devaluation was well before and had nothing to do with TARP, QE1 or QE2... Don't know who on his economic team advised him on this. BTW, give Bob Rubin some due on this - when he was talking about having a "policy of strong dollar" he really meant it, and people knew it. Of course, the 1997-1998 "Asian flu" and Russian Ruble crises didn't hurt the USD$, either.

So, why all this hand-wringing about U.S. dollar "devalued due to QE2" now? Because the politicians found they can have a convenient boogieman and scapegoat - the Fed and QE2 - rather than having to explain their reckless fiscal policy of higher spending, deficits, and onerous regulations which make it very difficult for companies to expand, hire or start business in the U.S. when it's so much easier and more profitable to deploy capital where it's welcome and, for now, is well treated.