Your post #3 is spot on, but those who choose to not understand it are not going to be pleased with such clear logic being injected into their rants.
Posted on 12/01/2004 11:23:06 AM PST by Toddsterpatriot
Key members of the Federal Reserve Board and a cadre of Wall Street economists have become fixated on the current account deficit as a worrying symptom of economic distress and a sign of impending crisis. This has led a host of Reserve Bank presidents and Fed governors to imply that the dollar should fall in order to rectify imbalances before a crisis becomes inevitable.
Since the theory of imbalances holds that a crisis eventually will ensue, destructive policy actions that surely would trigger a crisis are being advanced as “solutions” to a non-problem. Steep tax increases to augment “savings,” a depreciated dollar to boost exports, and higher tariffs or a sharp domestic-growth slowdown to discourage imports have all been floated as “solutions” to our current account deficit.
In other words, precipitating a crisis to solve a non-crisis only can reduce the severity of a crisis that would have happened anyway. Lord Keynes captured this kind of logic in the general theory when he said that “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
Those advocating a weak dollar to redirect trade flows do not have history on their side. While a depreciating currency is assumed to boost exports and shut off the demand for imports, this is only the first effect. Eventually a weak currency invites inflation, which neutralizes the effect of the lower exchange rate. This was proven by economist Michael Salant, who conducted an exhaustive study of 101 devaluations in 1977 by both developed and emerging countries. In total, the study found that the balance of trade improved in 46 instances of devaluation, deteriorated in 54 cases, and remained unchanged in one episode.
Weak-dollar advocates assert that the dollar can fall without aggravating inflation as long as capacity utilization rates are depressed. This is a dangerous assumption. It is rooted in illusory Phillips Curve tradeoffs between growth and inflation that have been discredited empirically and refuted by history. The data show that capacity utilization rates and employment levels are usually inversely related to inflation. This should not be surprising since the demand for money is positively related to the use for it (i.e., real activity). Inflation occurs when money supply exceeds money demand. Inflation is a monetary phenomenon.
Persistent currency depreciation has never brought lasting prosperity to any government in the history of the world. If the dollar continues to depreciate it will bring higher inflation, higher interest rates, lower real growth rates, and a reduced standard of living for most wage earners. There is zero evidence to support the notion that moving to fiscal surplus from fiscal deficit will have an influence on trade flows or the current account. Japan and Germany both have “strong currencies,” huge fiscal deficits, and capital outflows (current account surpluses). Conversely, the U.S. experienced a dramatic rise in the value of the dollar against a surge in capital inflows (current account deficits) and large fiscal surpluses during the late 1990s. The economics of imbalances and the theory of the twin deficits are thus theoretical constructs in search of empirical evidence that does not exist.
Empirical testing reveals that economic growth differentials explain more than 50 percent of the change in the current account as a percent of gross domestic product, while changes in the dollar’s broad foreign-exchange value explain a scant 9 percent of the same variation. In other words, capital flows to countries where the perceived real, after-tax rates of returns are the highest (i.e., those countries with the fastest growth rates).
Fed Chairman Alan Greenspan spoke eloquently on trade and capital flows earlier in the year only to lapse into a zero-sum neo-mercantilist model in Frankfurt, Germany, on November 19 when he suggested that foreigners may flee U.S. assets (precipitating a further dollar decline) because of the U.S. budget deficit. The fact of the matter is that the Fed, and only the Fed, has monopoly control over the U.S. money stock. The Treasury and foreign governments have nothing to do with it.
It is the Fed’s job to adjust money supply to meet money demand (through the use of its overnight rate target), not to impersonate a trade czar or to stand in as resident deficit hawk. Chairman Greenspan would be well advised to revert back to real time, auction-market indicators — gold, commodities, currency cross rates, and the yield curve — as leading proxies for excess money creation and incipient inflation. Virtually all of these indicators are sending an excess money signal that should not be ignored.
— Michael T. Darda is the chief economist and director of research for MKM Partners, an equity execution and research boutique located in Greenwich, Conn. He welcomes your comments here
I keep hearing this. It sounds very familiar.
I have to disagree. While I agree with the idea that trying (meaning to take action) to lower the dollar is foolish, my take (and I am not currently following this closely) is that what is happening is that we are simply doing nothing to stop it. My understanding is that we are simply letting it float freely. If indeed that is what is happening, I think it is absolutely the correct course of 'action' or more specifically non-action to take.
The bottom line is that the root of the problem is the Chinese peg to the dollar to keep the trade balance where they want it. No buying or selling or rates by the fed or tres is going to fix it...except maybe possibly decreasing the value of the dollar (and thus the yuan) to the point where they change their peg.
If a strong currency is good, why is a strong Euro driving what's left of the Continental economy into the ground?
It's just the Carteresque technique (used previous to James Earl, of course) of monetizing the debt. The Europeans who redeem US bonds get paid in cheaper dollars.
Nothing comes for free. Oil is sold in dollars but often the costs of drilling are in dinars.
Argentina has operated this way for years; the Tango Never Ends.
Exactly. The high Euro just caused me (West Texas) to get a contract from Schlumberger (a French Co) to rebuild certain items to be used in South America that would normally have been fulfilled in Germany.
My sources say my bid came in half --- and I was dramatically over-inflating my bid, because I have too much work to do.
This work --- money already in escrow (don't trust the Frogs) --- will keep 15-20 new men employed for a year at high blue-collar wages.
Your post #3 is spot on, but those who choose to not understand it are not going to be pleased with such clear logic being injected into their rants.
Good point, but do we really want to take economic advice from them? Japan has been in a hole for most of the last 15 years. And if China ever stopped propping up their state run industry or closed down their decrepit banking system, there'd be a revolution.
Are you talking to me?
How about that price of oil, down $3 in one day. Some disaster, isn't it?
It is another excellent day in the market, thank you.
$3/bbl fall in oil, that's great for me, an F-250 driver.
I think this is a frontal economic assault on the Chinese.
I consider any drop in the price of oil a disaster.
Adopt the peso and drop the dollar??
I would prefer the price of oil remain relatively constant. Not large moves either direction. Is $45 okay for Texas? It is okay for Alaska.
As an oil seller, higher is better.
Seriously, though, anything north of $28, I have more than I deserve.
I think oil should be --- stupid market tricks aside -- around $34-35.
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