The Brutal Price of a Dollar

The Heritage Foundation ^ | May 31, 2005 | Tim Kane

[Toddsterpatriot]

As for the third link, the notion that the exchange value of the dollar is related to the cur­rent account does not seem to exist in empirical data. The logical breakdown between deficits and dollar prices is that trade alone does not drive the global flow of monies. Investment is the other half of the equation, and one should think of it as the dominant half. In a recent speech, Federal Reserve Governor Ben Bernanke made this same case, characterizing the U.S. trade balance as “the tail of the dog.”

The rule is this: Capital flows balance out trade flows. It is a mistake to interpret weak export demand as weak dollar demand. As Brian Wesbury puts it, “The dollar system is a closed system.” Every dollar supposedly lost in the externally neg­ative trade imbalance is really just counterbalanc­ing the excess of dollars in the externally positive investment flows.

[Toddsterpatriot]

Don't fear the trade deficit ping!

[JDoutrider]

Interesting points...

[demlosers]

The record-high $61 billion monthly trade deficit is a sign of strength, not weakness.

I've said this in so many words a few times here on FR.

for the U.S. current account deficit of roughly 6 percent of GDP

The stupid journalists that permeate the US media think this is a problem - laughable.

[Toddsterpatriot]

The record-high $61 billion monthly trade deficit is a sign of strength, not weakness.

Countries that have problems with trade deficits are those countries that have weak currencies. Argentina had a problem because they couldn't buy goods with their own currency. So they had to borrow dollars. Then they couldn't pay them back.

Foreigners who want to invest in America have to use dollars to do so. So when they sell us their goods they use the dollars received for investment. Foreigners pouring investment into America is not a sign of American weakness.

No one wanted to invest in Argentina, because the economy was weak and their government was untrustworthy.

[uscabjd]

When the euro wes first introduced, what was its initial value vis-a-vis the dollar?

[Colinsky]

The exchange value of a dollar bill can be expressed in terms of nondurable goods (wheat or cigarettes); metals (gold or uranium); or other cur rencies (the yen or the peso). A useful rule of thumb is to think that a dollar has two prices—the prices to which Congress and Wall Street pay the most attention—and that both prices represent supply and demand in peculiar markets.

That tired old relic, the US Constitution, defined the "dollar" as a weight of silver (371.25 grains troy). But it's no longer a useful rule of thumb for Congress.

[xzins]

I have never understood the concerns about trade deficits. I'm taught that it's a bad thing if we import more stuff than we export. I think the logic is that we're giving all our money away???


If I have a family widget business and I buy more $'s of stuff than I sell in $'s widgets, then that would seem to be a problem. Unless I have other ways of making money that don't involve my widget buying and selling business.

Would someone explain all this to me? (If you have time and energy, that is...:>)

[Fabozz]

"That tired old relic, the US Constitution, defined the 'dollar' as a weight of silver (371.25 grains troy)."

No it didn't.

[RS]

" I'm taught that it's a bad thing if we import more stuff than we export."

Yep, that's what they say... but giving them green pieces of paper for DVRs seems to be a good deal to me.
If at any point they wish to have something more tangible for those green pieces of paper it has to be something that WE have ( or produce ) that we are both willing to make the trade for.

[proxy_user]

It is not that our economy is so great or we don't have any problems.

But everyone else is in worse trouble, and investors have to invest somewhere, or stuff their money in a mattress.

[AZLiberty]

This article, We Think, They Sweat, explains it all. It uses Apple as an example of a company that outsources almost everything, except its intellectual property creation. Although almost all the work is done outside the country, most of the compensation actually returns to the shareholders, including Apple's employees and (mostly U.S.) mutual funds.

[petercooper]

bttt

[Fabozz]

"If I have a family widget business and I buy more $'s of stuff than I sell in $'s widgets, then that would seem to be a problem. Unless I have other ways of making money that don't involve my widget buying and selling business."

The key isn't whether you have other ways of making money that don't involve widgets; it's whether the people you buy from have something to do with dollars that doesn't involve you. Imagine that your family widget business bought stuff not with dollars but by handing out gift certificates that could only be redeemed for widgets. Every one-widget certificate you spent to buy stuff would have one of two ultimate fates: It would be used later on to "buy" a widget, or it would not. If it was exchanged for a widget, then you'd basically be exchanging widgets for stuff, and you could keep that up forever. If it wasn't exchanged for a widget, then you got stuff effectively for free, which you could also keep up forever.

That's the situation with imports. We buy imports with dollars. Those dollars are either used to buy exports from US companies, or they're used to invest in US companies (which is just another kind of export), or they stay outside the country. Each way we come out ahead, as we trade wheat for cars, stock certificates for computers or scraps of green paper for Pokemon cards.

[patton]

For example, Senators Hillary Clinton (D–NY) and Byron Dorgan (D–ND) recently proposed a law that would cap the trade deficit at 5 percent of gross domestic product (GDP). While this may sound reasonable, it betrays an ignorance of the economic forces of nature. Senators might equivalently pro­pose bills to cap the number of calories per home-cooked meal, cap the number of Fs in high school math classes, or cap the force of gravity.

And in other news...Sinator Clinton proposed legislation to make the value of pi exactly equal to 3...

LOLOLOL. What an idiot.

[theBuckwheat]

With all due respect to the people who put this report together, there is a serious flaw: the "trade deficit" is a buggy-whip era statitistic that is so flawed as to be meaningless.

Why has nobody in the press seemed to care how this statistic is compiled? I guess they assume it is both correct and too complicated to understand, let alone explain simply.

The Census Bureau compiles trade figures based on an exporter's Shipper's Export Declaration (SED). (http://www.census.gov/foreign-trade/regulations/forms/)

Companies that export intellectual property (IP) such as media content (video, music, graphics, etc.) do not fill out a SED. Companies that license IP such as software or patents do not fill out a SED.

The big problem with the trade deficit as a statistic is when Boeing exports a $100 million order of jetliners, the Census Bureau gets a SED declaring that value. When George Lucas earns $100 million of box office royalty payments from his Star Wars movie, he doesn't have to tell anyone except as part of the total income on his tax return. The former becomes part of the net trade balance, the latter does not.

As I said, this statistic is worthless and must be ignored. If someone is trying to guage the health of the US economy and the dollar they must look elsewhere. You cannot judge a 21st Century economy based on a statistic developed for a totally different business and technology environment.

[RWR8189]

Friday, January 1, 1999

1 US Dollar = 0.85696 Euro
1 Euro (EUR) = 1.16692 US Dollar (USD)

Median price = 0.85660 / 0.85696 (bid/ask)
Minimum price = 0.85201 / 0.85233
Maximum price = 0.85867 / 0.85910
75% of the prices were above 0.85499 / 0.85530 and below 0.85741 / 0.85778
Computed from a sample of 2548 prices on Thursday, December 31, 1998

[uscabjd]

Thanks. Why no money to the NRSC? Assuming that refers to the Senate, the Reps could pick up a seat or two if we get out the vote. Could be, therefore, no need for a nuclear option - which would be nice.

[RWR8189]

Because of weak leadership in the Senate I've opted to donate to individual Senate candidates instead of the NRSC, and to give to organizations such as the Club for Growth.

[uscabjd]

Thanks again. Someone posted on another post that Bush devalued the dollar in 2001. What did he do, or do you not agree? What can a Pres. do to devalue currancy? Econ is not my strong suit.