The Brutal Price of a Dollar

That word characterizes the consensus of commentators on the U.S. trade deficit, which surged to a record monthly high of $61 billion in February.[1] Even though the trade deficit contracted to $55 billion in March, the U.S. set a record annual trade deficit in 2004—a record that it is far outpacing this year.

Media reports describe a “deteriorating trade situation” and link it to stories that “the greenback is getting weaker.”[2] Even The Economist, which is reliably free-market, has been sounding glum, with numerous stories dissecting the twin trade and budget deficits along with the decline of the dollar. Now the Department of the Treasury has joined the chorus, warning in a May 17 report to Congress that “Current Chinese policies are highly distortionary.”[3]

This is all wrong: Many economists and the weight of history suggest that the trade deficit, a symptom of investment capital inflows, is a sign of national economic strength. All of the angst over the dollar—its recent decline against the euro and calls for a devaluation against the yuan—is unnecessary and even dangerous.

True, the foreign exchange markets have been showing signs of what The Washington Post calls “dollar jitters,” especially in February when South Korea’s central bank hinted that it might buy fewer dollar reserves in the future. The market was quick to dump and run.

It is also true that the dollar has fallen from its heights of 2000, when a single dollar traded for 1.15 euros. Today, one dollar trades for 0.8 euros, a decline that one French official has called “brutal” even as many analysts suggest that the dollar still remains overvalued. For example, Warren Buffet and Bill Gates have declared that they are “short the dollar”[4]—a gamble that, it should be noted, has lost them millions. Some pundits cheer the dollar’s decline as an overdue stimulant to American manufacturing exports, while others fret that it represents economic decline.

Congress is worried. It is worried about trade (or current account) deficits, miniscule national savings, budget deficits, and a possible collapse of the dollar, as if all of these factors were tightly interwoven. They are not. A few interpretations of how they are functionally related are mistaken, and the proposed solutions are downright naïve.

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.

Policymakers need to be very careful about distinguishing what they can control from what they cannot control, and what they should not try to control. If Members of Congress continue to move toward trade protectionism, they will invite a global recession and possibly a Chinese meltdown.

The dollar’s recent swings against the euro indicate neither a dangerous erosion of U.S. power nor an opportunity for industrial rebirth. By the same token, forcing China off its peg is no panacea. While the dollar is worth less against the euro than ever before, we should remember that the euro is an infant currency that has been in circulation only since January 1, 2002. As for the U.S. current account deficit of roughly 6 percent of GDP, it is worth remembering that many countries with trade surpluses are less productive and are growing slower than the United States.

Policymakers need to remember that these “trade deficit” alarm bells have sounded many times before. They also need to keep some basic facts in mind:

The record-high $61 billion monthly trade deficit is a sign of strength, not weakness. It reflects a balance of heavy foreign investment in the high-tech, high-productivity American growth engine. As Treasury Secretary John Snow has pointed out, America is growing much faster than other advanced nations. Nations with trade surpluses like Japan and Germany are economically stagnant and actually suffer much worse budget shortfalls than the U.S. suffers.

There is no doomsday today. None of the suggested links between the federal budget, trade deficit, and dollar exchange rate withstand scrutiny. The basic measures of economic vitality are GDP growth and employment, and America’s continuing strength, according to these measures, is due largely to its superior institutions and freer markets.

Exchange rates are unrelated to economic fundamentals. Academic research has not found clear linkages between the exchange rate of the U.S. dollar and real economic variables. Speculators and emotional momentum appear to dominate exchange markets.

The euro is a new currency that has been in circulation for only four years and has had a fixed internal value only since January 1999. Recent concerns about the dollar’s relative decline should take a longer view: Comparing the dollar against a synthetic euro dating back to 1980 shows that the today’s exchange rate is normal and actually stronger than in 1980 or 1990. As for China, those calling for a flexible yuan should admit that they are calling for a weaker dollar.

Investment follows growth, not the reverse. Studies show that good institutions lead to economic growth, and hence to higher investment. The policy implications for Congress are profound: faster growth above all else. Yes, investors prefer balanced budgets, but they put their money into nations with reality-based entitlement spending, low taxes on capital, healthy entrepreneurship, transparency, and strong property rights.

Everything has a price, the saying goes—everything from $1.3 billion Boeing 787 Dreamliners to 99-cent iTunes. In a free-market system, prices represent value, as determined by the equilibrium of supply and demand. Yet what about the value of money itself? Does the dollar have a price?

Actually, we might say that a dollar has hundreds of prices—the exchange value of a dollar bill can be expressed in terms of nondurable goods (wheat or cigarettes); metals (gold or uranium); or other currencies (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.

The first price of a dollar is the interest rate. One can buy a dollar today with a promise to pay the price of even more dollars in the future. This price is a mixture of patience and risk, the market of supply and demand for credit.

The second price of a dollar is the exchange rate. One can buy one dollar in exchange for another currency. This price is instantaneous, representing supply and demand of many national currencies at the current time. Alan Greenspan famously quipped, “There may be more forecasting of exchange rates, with less success, than almost any other economic variable.”[5] Indeed, economists agree that no variable has proven effective at predicting exchange rates in the real world, despite what various theories suggest. As Federal Reserve economist Greg Hopper wrote in 1997, “What is not so well known outside academia is that exchange rates don’t seem to be affected by economic fundamentals in the short run.”[6]

Economists will tell you that the ultimate price of a dollar is nothing more than its value in terms of actual goods and services, whether those are purchased in the present, in the future, or in a foreign economy. However, the market for dollars includes— and in some ways is dominated by—speculators, who are not focused on real goods and services.

Currency traders try to stay just ahead of the expectations of the market but can create self-fulfilling prophecies of exchange rate movements. They have routinely abandoned a currency when there was a widespread loss of confidence in the underlying economy. In short, market sentiment matters, even if sentiment is impossible to know— much less quantify—beforehand.

When will the dollar stabilize? In a sense, the dollar will never stabilize, at least not as long as it is part of a truly flexible exchange rate system. However, exchange rates are not as volatile as headlines suggest. The yen–dollar exchange rate was fixed at 360 yen to the dollar until 1971, when it began a rapid readjustment. It has varied between 100 and 120 for over a decade with a few exceptions.

In the big picture, the rising value of the euro is not the brutal experience some imagine. (See Chart 1.) The euro was introduced as a new common currency in 1999, so an “all-time low” counts only if time began seven years ago. Comparing the dollar against a synthetic euro dating back to 1980 shows that the current exchange rate is in the mid-range norm and that the dot-com boom years were the outliers for dollar exchange rate valuation.

Those who worry over the dollar’s fluctuations are revealing a lack of faith in the ability of free markets to find balance. Markets are unstable and dynamic by definition, which is not a disease in need of a policy cure or control. Rather, the great lesson of the 20th century is that attempting to control uncontrolled markets for goods or capital never succeeds in creating stability and always destroys prosperity.

In the mind of the control-oriented advocate: (1) Undertaxation causes budget deficits, which are a problem; (2) budget deficits cause trade deficits; and (3) trade deficits cause dollar depreciations. If only we could control those links, the thinking goes, we could achieve stability. Yet each link is weak.

First, the primary cause of budget deficits is too much spending, not undertaxation. Sadly, government spending is a bipartisan addiction. Although there is scant academic support for the crude Keynesianism of policymakers and pundits who believe government spending is essential to a healthy, growing economy, the politics are overwhelming. On the other hand, respected economists of all stripes agree that low taxes provide real fiscal benefits for long-term growth. The result has been deficit spending at record levels.

Budget deficits are indeed a net negative for the economy, but not for reasons commonly assumed. Budget deficits do not correlate with higher interest rates. However, budget deficits do represent deferred taxation tomorrow in favor of spending today. Quite aside from trade policy, it would be helpful for Congress to get spending under control as an intergenerational moral issue.

Second, budget deficits simply do not cause trade deficits. One wonders what lessons of history support such thinking. The notion that balanced budgets and trade surpluses walk hand in hand with economic growth is refuted by Japan’s experience since 1990. Despite its infamously mercantilist strategy—pushing exports and limiting imports— Japan’s trade surpluses over the years have not been matched by budget surpluses. Instead, Japan’s budget has been in the red year after year, and its national debt now totals 169 percent of GDP.[7] By contrast, U.S. national debt is just 65 percent of GDP.

Twin deficits, “joined at the hip and blamed for all the world’s economic woes,”[8] were a rallying cry for the Bill Clinton candidacy in 1992, according to his own Secretary of Labor Robert Reich, but they proved to be economic fiction in the U.S. in 1998 and 1999, when the federal budget was in surplus with no impact on the balance of trade.

Still, the existence of persistent trade deficits with particular countries leads some to believe that America is playing the fool. This was the argument put forth when Japan was an ascendant economic superpower in the 1980s, and the rise of China has revived the argument. Many believe that Asian mercantilism is still a powerful challenge, but China is no Japan. China has a net trade balance globally, not a surplus, so the mercantilist case again rings hollow.

Furthermore, unlike Japan, China is extremely poor, and its financial system is fragile. That is one reason why China’s leaders chose stability by pegging the currency since 1994 at 8.28 yuan per dollar. If the yuan begins to float and causes a currency collapse that ripples through Asia, nobody wins. China’s poor will suffer, and an autocracy in economic recession is likely to be more belligerent than ever.

Turning back to America’s trade figures, the real problem is that there is no real problem. The American current account deficit looks like a canyon as it surpasses 6 percent of GDP only until placed in the context of total exports and total imports. (See Chart 2) The real lesson of Chart 2 is that America is going global, not that it is sinking into debt. The trade deficit will likely persist as long as the U.S. technology-driven growth surge outpaces that of other advanced nations.

The larger lesson is that the dollar has no obvious relationship with the trade deficit. The exchange rate rose and fell from 1990 to 2005 on a trade-weighted basis, while the trade balance simply fell and fell further. By calling for the yuan to float, some voices are actually calling for the dollar to fall further, but there is scant evidence this will bring balance to the trade accounts.

In sum, the public bias against imports is wrongheaded. Trade is the foundation of economics, and an “excess” of imports from Tokyo to a small American town is not fundamentally different from an excess of imports from Detroit. Free people engage in mutually beneficial trade, and it is wrong to “fix” that freedom.

Yes, Americans buy Ferrari, Prada, and Glenfiddich, but the surge in imports is not just a story of conspicuous consumption. For decades now, a relative flood of computer technology imports has given Americans, especially American children, a technological head start on the rest of the world.

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.”[9]

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.”[10] Every dollar supposedly lost in the externally negative trade imbalance is really just counterbalancing the excess of dollars in the externally positive investment flows.

Demand for dollars comes from those who wish to use dollars to buy American goods and from those who want to invest in American stocks and bonds. What New York Times columnist Thomas Friedman calls the “electronic herd” of global investors pushes billions of dollars into and out of the most promising nations, and that herd drives exchange rates, not trade in goods and services. Case in point: Comments about investments—not trade—by the South Korean central banker Park Seung are what shook exchange markets.

The question Congress should ask is: What attracts the electronic herd of global investors? The answers are the same ones that any investor would seek: security, a culture of innovation, free trade, and a record of solid growth. These are the areas on which Congress should focus.

For many years, because Congress has successfully advanced these pro-growth institutions, America has enjoyed massive inward investment flows. Real technology innovations offer unequaled equity returns, and U.S. government securities serve as the global standard for reliability in a dangerous world. The point is that growth causes investment, not the other way around. Indeed, this observation has been a key revelation among academics. According to William Easterly, “[T]he conventional wisdom that investment in buildings and machinery is the key to long-run development is another panacea that has not met expectations.”[11] Cross-country studies show that nations need to “get the institutions right”—strong property rights, low taxes, and minimal regulation—if they intend to grow and subsequently attract capital.

The flow of investments into the U.S. has pushed up dollar exchange rates in the past, but exchange rates themselves are a secondary effect, and they should be a secondary concern for policymakers. The right question to ask is: How can Congress help the economy grow?

Congress can start by passing DR–CAFTA[12] and empowering the President to negotiate more free trade agreements. If Congress makes America the best business environment in the world, the dollar will take care of itself.

America continues to be the fastest growing advanced country, which would not be the case if trade deficits were actually harmful. Germany and France, still sorting out their slow-growth socialist hangover, are still plagued with unproductive labor regulations and uncompetitive tax policy. According to a recent global survey by The Economist:

The [International Monetary Fund’s] economists expect Japan’s GDP growth to be a mere 0.8% in 2005. The outlook for the euro zone’s big economies is similarly bleak, with unemployment high and domestic demand low. Like most other economists, the IMF’s number crunchers have scaled back their euro-zone growth projections to a mere 1.6% for this year.[13]

In contrast, U.S. growth over the past year was 4.4 percent, and future forecasts are equally optimistic. This kind of contrast is a powerful signal to global investors to stay away from Europe and to continue investing in the United States.

The lesson for American policymakers is profound. The policy focus should be on faster growth above all else. Yes, investors prefer balanced budgets, but they also prefer nations with reality-based entitlement spending over runaway demographics. They prefer low taxes on capital. They prefer risk-taking, entrepreneurship, transparency, and strong property rights.

The value of a dollar has little to fear from lower taxes or high imports. Likewise, the dollar is unlikely to collapse due to foreign meddling, especially since mercantilist foreign countries prefer stronger dollars.

The only real danger to the value of a dollar is American politics. Overly stimulative monetary policy by the Federal Reserve might create an inflationary headache and distort prices, but only misguided fiscal and trade policy by Congress can permanently poison free markets.

If Congress is dominated by weak leaders who cannot say no to spending, cannot acknowledge the entitlement crises, and cannot stop nudging up taxes, then investors are right to start questioning America’s commitment to economic freedom. It is well and good to be for a strong dollar, which is a public good, but the epidemic of government spending on special interests is putting great strain on America’s fiscal credibility. In other words, the trade deficit is infinitely sustainable, but the spending-fueled budget deficit is not.

While big government is rhetorically out of fashion in America, actions speak louder than words. That concern hurts the dollar.

Tim Kane, Ph.D., is Bradley Research Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation.

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[1]News release, “U.S. International Trade in Goods and Services, February 2005,” U.S. Department of Commerce, Bureau of the Census and Bureau of Economic Analysis, April 12, 2005, at bea.gov/bea/newsrel/tradnewsrelease.htm (April 21, 2005).

[2]Nelson D. Schwartz, “The Dollar in the Dumps,” Fortune, December 13, 2004.

[3]U.S. Department of the Treasury, “Report to Congress on International Economic and Exchange Rate Policies,” May 2005, at www.treas.gov/press/releases/reports/js2448_report.pdf (May 21, 2005).

[4]Ted C. Fishman, “Betting on China,” USA Today, February 17, 2005, p. A11, at www.usatoday.com/news/opinion/2005-02-16-china_x.htm (May 21, 2005).

[5]Alan Greenspan, testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, July 16, 2002, at www.federalreserve.gov/boarddocs/hh/2002/july/testimony.htm (May 21, 2005).

[6]Gregory P. Hopper, “What Determines the Exchange Rate: Economic Factors or Market Sentiment?” Federal Reserve Bank of Philadelphia Business Review, September/October 1997, at www.phil.frb.org/files/br/brso97gh.pdf (May 21, 2005).

[7]Sebastian Moffet, “Japan Risks Recession with Tax Increases,” The Wall Street Journal, January 19, 2005, p. A2.

[8]Floyd Norris, “This Deficit Is Soaring Again,” The New York Times, February 15, 1998, Section 3, p. 1.

[9]Ben Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit,” remarks at the Homer Jones Lecture, St. Louis, Missouri, April 14, 2005, at www.federalreserve.gov/boarddocs/speeches/2005/20050414/default.htm (May 21, 2005).

[10]Brian Wesbury, “Don’t Blame a Weak Dollar on the Trade Deficit,” GKST Inc. Monday Morning Outlook, November 15, 2004.

[11]William Easterly, The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics (Cambridge, Mass.: MIT Press, 2001), p. 48. Easterly provides a masterful summary of capital fundamentalism, noting that even Nobel Laureate Robert Solow’s workhorse model of economic growth shows that capital investment has severely diminishing returns and that growth is driven by technology above all else. Technology, we now know, means everything except the input factors, including institutions, culture, and scientific technology.

[12]DR–CAFTA is a free trade agreement with the Dominican Republic, Costa Rica, Guatemala, Honduras, El Salvador, and Nicaragua.

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Well Todd, I see you have been busy while I was away (getting rid of Chairman Ebensteiner here in our Minnesota state GOP) and then celebrating up at the lake cabin over the weekend. T'sk, t'sk. Now all you Phony free traders, take a seat and learn something.

You have collectively misrepresented what I said about the chart...which I cited merely because it proves what has happened the last four years. And devastatingly so.

The question always was (for about the 12th time Todd, shall we say Mr. Know-it-all), has the U.S., with respect to foreign "investments" pumping up our dollar, reached a tipping point? Where such actions actually fail to counterbalance the dollar's slide due to an overwhelmingly bad trade picture...

That was the primary point.

Let me repeat this point another way to try to get past your obfuscations and refusal to legitimately debate: Knowing "investments" are the countervailing force holding up the U.S. dollar (which in fact I presupposed)...you must confront the fact that it appears it has failed to do so the last four years

This demands an explanation from your side. And Kane doesn't give anything close to credible. And "Bush did it" as some on your side purport...doesn't cut it. Laissez faire is his approach. You do believe in the "unseen hand" don't you????? Guess not.

I asked the pertinent question, still unacknowledged by you. Instead you launched into an argument on the chart's "relationships" which I never argued for time-series correlation beyond the last four years. Kane can't deny the last four years. Hence he tries to confuse the issue. You grasp on to his framing of an issue I am not arguing.

We are dealing with multivariant analysis, and those two listed factors have no controls for the foreign entities investment flows. I just pointed to the last four years hard history...and it conclusively destroys Kane's and your side. All your thoughts. All your reasonings. All your excuses. Laid waste. So much for you hunt for Moby Dick, Ahab.

Your failure to respond to my particular points are proof of your sides' disengenousness... Such continued omission of what I said is outright intellectual dishonesty...and indeed it is evidence that your little F-Troop of Disinformation is just a little herd-psychology spin group.

I could rag about how you constantly try to bamboozle folks with your inanity. Probably because you have some nefarious self-interest in Chinese importing. But I won't. :-)

Kane's graphs really do undermine his, and Griswold's thesis pretty decisively.

Let's deconstruct the fairly glaring mistakes replete in Kane's article. It is so richly ironic, that his own charts "does in" his....and your whole spin operation. He argues that we should look at the longer term, not wishing to confront the last four years. Trying to argue things go up and down more or less randomly or so. One can just as cavalierly suggest nations rise and fall, and its okay if the U.S. does too.

I, for one, don't think so. Methinks Mr. Kane is just a tad too unconcerned to be credible in advocating for "our" side.

Meanwhile, while you grasp at the last 3 months of the EU's French-driven decline, Kane grabs for the 15 year long period chart as follows on the Dollar against the "Euro" (which did not even exist back then)

What does it prove? That 12 long years of increased wealth in the U.S. as measured by the dollar's pain-staking gains against at least some European main currencies, has vanished completely in the last four.

Most of the Free Traders who apologized for the "creative destruction" of the U.S. industrial base routinely genuflected in the direction of the appreciating U.S. currency. Now that its evaporating under trade stress...the phony free traders have developed a sudden amnesia... omitting their history of praising U.S. dollar appreciation. Kane's dollar-praising amnesia is now starkly contrasted with his apologia and rationalizations for the collapsing dollar, and pretending it is without any cost to the economy...and national well-being. The disproofs of that is seen in a variety of commodity areas, with oil, LNG, steel, copper, tin, lead, beef, etc.

Then there is the U.S. Dept. of Commerce Chart from '92 to 2004:

This tries to apologize for the huge increase in U.S. imports primarily by two main misrepresentations:

(1) Kane argues by captioning in his chart and in the body of his text that U.S. "exports" also "surged". But note, this was at only half the rate of growth of the imports. Which now eclipse U.S. exports by over $620 billion a year and are running on a track nearing $70 billion in the red each month to set a new annual record.

There is a companion rationale inisipidly advanced to apologize for this discrepancy which I am sure everyone has heard ad nauseum. You would think Kane et al. would be tired of proffering the same tired shibboleth:

Argument (2) is that when the imports accelerate faster than our exports...it is a sign of a "strong" economy. Fifteen years of progressively increasing trade imbalance makes this more than a little suspect. The free traders used to say that a falling dollar would make us more competitive. Now we have Kane saying it doesn't matter that it doesn't. Anyways, a trade imbalance is demonstrably also a sign of a weak economy. And let me remind you Todd, you are the one who said as follows: "Countries that have problems with trade deficits are those countries that have weak currencies. " So which is it Todd?

And stop the presses. Undercutting Kane's thesis is this factual conundrum: a large and growing portion of the U.S. "exports" are in fact components shipped abroad...for combination with foreign materials and fabrications, and re-import to the U.S. The Mexican Maquilidoras are a perfect illustration of this phenomenon. These "exports" merely facilitate increased imports!

Thus, the argument that the chart is showing export strength...may in fact be showing precisely the opposite...that the U.S. is becoming more and more prone to depending on imports out of competitive weakness ...ever-more dependent on lower-cost foreign labor, and hence economically imbalanced in its payments.

Then there is the chart I have been showing now for sometime, which you have finally looked at, but as usual, misunderstood, misrepresented, and just plain missed the boat on.

Notice the last four years of decline, where the dollar, floating on the free market, has fallen in value.
(a) Controverting the notion that there are some mysterious uncounted exports to hold it up.
(b) Or that the Chinese and Japanese will be able to effectively thwart force of gravity on the dollar of our trade imbalance by buying up our Treasury paper infinitely. That helps them manage their individual currency trade-levels and pegs, and can hold up the general dollar for a while.

But can...and will...it stop the dollar from sliding as it is currently doing? Are the fundamental weaknesses of the U.S. export sector simply too much and sinking the dollar's trade value [the brief dip of the EU notwithstanding, thanks to French voters]? [ Sound of crickets on Todd's end.]

And then there are the last four years of our society becoming demonstrably, and irrefutably, poorer. In precise contradiction of the assertions of the self-appointed "optimists" who have no idea what is really going on. [With any more optimists lke that, who needs enemies?]

Another rich irony Todd, is that it is in precise agreement with your own proclaimed economic understanding (I previously alluded to your statements supporting these very analytic points before, but you blew it off). I surmise you are simply either too intent on "getting" me, or even more egregiously...simply blowing smoke and trashing the thread so no one learns an important set of facts. Here is what you said in this very thread (reiterating at further length to really grind your nose in it):

"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."

You presuppose...without proof...that "Foreigners pouring investment into America is not a sign of American weakness."

Prove they are in fact "pouring" in financial investments. Your numbers will have to show effectiveness. Prove the dollar is in fact stronger than ever, and has recovered all its losses of the last four years.

But you can't can you? And neither can Kane. In fact, you guys hoist yourself by your own petards, Todd. That is why those charts are so devastatingly bad for your side. And it makes clear that the case you made against Argentina applies with potentially equal force against the U.S. currency which is in fact now demonstrably weaker than it was not just the last four years ago...but almost fifteen.

Good going phony free traders. Got any more bright ideas? Let's sell some retired MX missiles to the Chinese...and recoup some of the money, eh?

The question always was (for about the 12th time Todd, shall we say Mr. Know-it-all), has the U.S., with respect to foreign "investments" pumping up our dollar, reached a tipping point?

Well Paul, do you know the answer? Do you even know what directly determines the exchange rate between currencies? I'll help you here: the market's demand (that includes all buyers, public or private) for a given currency is what ultimately determines its exchange rate with other currencies. Any "tipping point", where foreigners (collectively) stop using their capital to purchase dollar dominated assets; thereby shifting the demand curve, will only result in getting more of what you wish for - a shrinking trade deficit.

Where such actions actually fail to counterbalance the dollar's slide due to an overwhelmingly bad trade picture...

You're really going to have to make up your mind here, Paul. Is this really a bad trade picture? Next, why is a falling dollar a bad thing in your opinion? If you write that a weaker dollar makes commodities much costlier for purchase but you simultaneously do not what any of the foreigners raw materials, then why should you care? Oh, I know, you're afraid that American companies that extract raw material commodities will decide to sell to foreigners instead, since they'll be able to better afford the stuff. I know the solution to this dilemma, Paul, and it's in keeping with your autarky beliefs...we should make law that "allows" American owners of commodities to sell them at an American discount as long as they submit a waving American flag with their purchase orders.

Let me repeat this point another way to try to get past your obfuscations and refusal to legitimately debate: Knowing "investments" are the countervailing force holding up the U.S. dollar (which in fact I presupposed)...you must confront the fact that it appears it has failed to do so the last four years.

Again, it's really the demand that's the determinate. Demand for dollar denominated assets is only one such portion of overall demand.

Now all you Phony free traders, take a seat and learn something.

I have no idea how the most "phoniest" of the free traders have learned something from your post. Other than you seem to use your language skills to get across a lot of nothing. It's reminiscent of John Kerry speak and do you even really know what in the hell you are saying? For instance, when you write "We are dealing with multivariant analysis, and those two listed factors have no controls for the foreign entities investment flows.", do you even know what the word "multivariant" means? Why not talk of "models" and "explanatory variables"? I think I know why, because you don't really understand the stuff you're trying to get acRoss.

You have collectively misrepresented what I said about the chart...which I cited merely because it proves what has happened the last four years. And devastatingly so.

Your own words :My, my, my, you are flummoxed. The chart proves the relation of the issues. Trade Deficit charted over time against US Dollar Value Against Major Currencies. They have been going in adverse directions in precise tandem....and I remember how 4-5 years ago the "phony trade" apologists for the deficit pooh-poohed this... where are they now?

That's the funny thing about a relation, it should work both ways. It should work over more than just the last 4 years. If there was truly a relation.

The question always was (for about the 12th time Todd, shall we say Mr. Know-it-all), has the U.S., with respect to foreign "investments" pumping up our dollar, reached a tipping point?

No, the dollar has not reached a tipping point. This is what a tipping point looks like.

U.S. Dollar vs. Argentine Peso

Let me repeat this point another way to try to get past your obfuscations and refusal to legitimately debate: Knowing "investments" are the countervailing force holding up the U.S. dollar (which in fact I presupposed)...you must confront the fact that it appears it has failed to do so the last four years

No one said that investments must hold up the dollar. Only that investments are more important than trade deficits in determining the value of the dollar. Kane also said "However, the market for dollars includes— and in some ways is dominated by—speculators, who are not focused on real goods and services. Currency traders try to stay just ahead of the expectations of the market but can create self-fulfilling prophecies of exchange rate movements. They have routinely abandoned a currency when there was a widespread loss of confidence in the underlying economy. In short, market sentiment matters, even if sentiment is impossible to know— much less quantify—beforehand."

Kane can't deny the last four years. Hence he tries to confuse the issue. You grasp on to his framing of an issue I am not arguing.

If Kane can't deny the last 4 years then you can't deny the 4 years before that. Keep dancing though. Love the Moby Dick reference. F-Troop too.

Everyone knows the Euro did not exist 15 years ago. That's why the chart says "Euro per Dollar Synthetic Exchange Rate" For someone who uses such big words, you continue to have a hard time reading the titles on charts.

So, please educate all us free traders. Tell us when the Euro was created and what its value was on the first day it traded.

Most of the Free Traders who apologized for the "creative destruction" of the U.S. industrial base routinely genuflected in the direction of the appreciating U.S. currency.

I don't know anyone who genuflected in the direction of the appreciating U.S. currency.

Argument (2) is that when the imports accelerate faster than our exports...it is a sign of a "strong" economy.

When do US imports accelerate fastest? Isn't it when we experience fast growth coming out of a recession? When do US imports decline? Isn't it when our economy slows down during a recession? Now who's obfuscating?

And then there are the last four years of our society becoming demonstrably, and irrefutably, poorer.

Demonstrably poorer? Where is your proof?

Prove they are in fact "pouring" in financial investments.

Your words: I see you miss that the rate of Chinese U.S. capital accumulations is accelerating on an exponential curve...more evidence of absolute advantage. In 2003 they had $400 billion in their U.S. slush fund. Now it is over $610 billion...

See, the Chinese have poured $610 billion in investments into the US. You know the Japanese have even more.

Your numbers will have to show effectiveness. Prove the dollar is in fact stronger than ever, and has recovered all its losses of the last four years.

You show your economic ignorance, again. Just because they invest in the dollars, in the US, doesn't mean they are "effective", doesn't mean they guarantee the dollar rises or doesn't fall. It just means that they feel comfortable investing hundreds of billions in the US, or at least uncomfortable with the alternatives.

And it makes clear that the case you made against Argentina applies with potentially equal force against the U.S. currency which is in fact now demonstrably weaker than it was not just the last four years ago...but almost fifteen.

Huh? Show me how weak it is compared to 15 years ago. And please, stop using the big words that you don't understand. Try using English for a change.

I don't know anyone who genuflected in the direction of the appreciating U.S. currency.

Of course you know such people, so we know that response by you is also dishonest. They're in your own F-Troop.

At least you have finally deigned to reply to the actual question posed. You reliably of course take the defensive posture. Your Argentina tipping point illustration is the only thing cognizable as an responsive proof. But it fails to effectively deny the hypothesis. The situation is distinguishable, since we, as the reserve currency of the planet, may be exhibiting a quite different, and more protracted slide. E.g., one key difference here is that the U.S. dollar is being propped up by any number of importing countries buying our treasuries, particularly China and Japan. And, also, we haven't defaulted yet, although public doubts have surfaced in the trade press. The Argentines defaulted, correct? So anyways, despite the non-default on our part, the U.S. dollar has been sliding down and down over the past four years into territory analogous to that of 15 years ago. A titannic loss of wealth for the U.S.

Your further argument went this way:"No one said that investments must hold up the dollar. Only that investments are more important than trade deficits in determining the value of the dollar."

This is at least in part, a lame admission of the underlying, "Adam Smith" axiomatic connections between dollar value and the trade balance. You and Kane try to embellish the countervailing force of investments as "more important". Then you try to add one more factor, which ultimately is mere hand-waving:

"Kane also said "However, the market for dollars includes— and in some ways is dominated by— speculators, who are not focused on real goods and services. Currency traders try to stay just ahead of the expectations of the market but can create self-fulfilling prophecies of exchange rate movements. They have routinely abandoned a currency when there was a widespread loss of confidence in the underlying economy. In short, market sentiment matters, even if sentiment is impossible to know— much less quantify—beforehand."

Such market sentiments have always been there one way or the other... So, have they ever forced a persistent decline over four years? And ascribing this much power to such market elements tends to undercut Kane's devotion to his blindered notion of one-way free markets. So are you and Kane saying that the drop of the last four years was "dominated by" and hence due primarily to the "speculators"? And that the "speculators" have wrongly trashed the U.S. dollar for the last four years? You need to come up with proof for all those propositions. Those speculators are just part of the same "market" you and Kane previously implicitly trusted with fixing real value. Fundamentals should have corrected this persistent a "market distortion" by now. Unless the other fundamentals are also adverse. Which is what I have been suggesting. The trade deficit, and an incapacity of the investments of the importers to counter the damage caused. So maybe the "market sentiment" which is supposedly playing a "dominant factor" here is weighting the trade deficit a lot more heavily than you apologists are. In other words, the "After the Fact" recognition of this factor. That which you deem inconsequential, they don't. If we posit that the speculators are driving the dollar down, your persistent pattern of stone-wall denial of factors the speculators deem significant...such as the trade deficit for one...would, if followed by the Administration, just result in economic policy that merely feeds those same speculators mistrust in the policies. You guys in F-Troop need some kind of "Ten-Step Program" to get out of your addiction.

Now onto the chart, where I was pointing at the last four years for evidence of a tipping point. Not a precisely general relationship, as we don't know what the variable of the countervailing investment activity...or the variable of the precise market response to it... looks like, (albeit Kane unconvincingly claims it is a larger factor than the trade deficit itself). Hence I said, "the chart proves the relation of the issues. Trade deficit charted over time against US Dollar Value Against Major Currencies. They have been going in adverse directions in precise tandem." Over the last four years. My own words from their context. That is indeed an accurately descriptive history of the last four years, is it not? It's Kane's own chart, after all.

You're reply: "That's the funny thing about a relation, it should work both ways. It should work over more than just the last 4 years. If there was truly a relation."

Actually, if there was no proof of tipping, with your contrarian thesis of the "robust" U.S. economy, I seriously question whether the dollar should be sliding for so darn long. I.e., "just" four years is not so short a time. So as the dollar slides, return on foreign investments in those non-pegged currencies would be hurt. General, non-pegged imports get more expensive. Particularly commodities. These are adverse fundamentals for the economy which have to be overcome.

I reminded you that the U.S. was impacted adversely by this decline in the dollar, as it reflected that we were demonstrably poorer. You replied:

"Demonstrably poorer? Where is your proof?"

Kane's own chart. Deflate the GDP by the dollar decline.

Finally let's look at your response about the countervaling investments. I demanded that you show they be effective at keeping the dollar up.You show your economic ignorance, again. Just because they invest in the dollars, in the US, doesn't mean they are "effective", doesn't mean they guarantee the dollar rises or doesn't fall. It just means that they feel comfortable investing hundreds of billions in the US, or at least uncomfortable with the alternatives."

Their "comfort" is not the issue. The effectiveness is. So you can't duck this, their "comfort" is not being supported by the rest of the market.

Then you finish up with your usual insults: Huh? Show me how weak it is compared to 15 years ago. And please, stop using the big words that you don't understand. Try using English for a change.

You mean YOU don't understand. Sorry Charlie. I am not about to make it too easy for any Chinese agents who only speak English as a Second Language.

Or no protracted slide at all.

E.g., one key difference here is that the U.S. dollar is being propped up by any number of importing countries buying our treasuries, particularly China and Japan. And, also, we haven't defaulted yet, although public doubts have surfaced in the trade press.

You fear the US will default? How so? Economic growth is very strong, 3%+. You're imagining things again.

The Argentines defaulted, correct?

Yes, they defaulted on their debt. The debt that was denominated in other currencies. Our debt is in dollars. I ask again, you expect the US to default on dollar debt? Put down the crack pipe.

So anyways, despite the non-default on our part, the U.S. dollar has been sliding down and down over the past four years into territory analogous to that of 15 years ago. A titannic loss of wealth for the U.S.

Finally, you touch reality. The "horrendous" slide of the dollar puts us where we were in 1990? I thought this drop was historic, unprecedented, earth-shattering? And all it did was put us back to 1990? I guess that's a bad thing because.....that's right, it's not.

"Adam Smith" axiomatic connections between dollar value and the trade balance.

Big words, but like so many of your words, they're pulled right out of your ass. The same axiomatic connections between dollar value and the trade balance exist between dollar value and the capital account. So much for your big words!!

Such market sentiments have always been there one way or the other... So, have they ever forced a persistent decline over four years?

Yes. Just as they forced a persistent rise over the prior four years.

So are you and Kane saying that the drop of the last four years was "dominated by" and hence due primarily to the "speculators"?

No.

And that the "speculators" have wrongly trashed the U.S. dollar for the last four years?

Speculators can over react. Have they? No one knows. That's the funny thing about currency markets.

You need to come up with proof for all those propositions. Those speculators are just part of the same "market" you and Kane previously implicitly trusted with fixing real value.

When did Kane or I implicitly trust anyone with fixing real value? And they aren't part of the "market" they're part of the market. No need for scare quotes. Everyone is part of the market. Even people who don't understand it, like you.

Fundamentals should have corrected this persistent a "market distortion" by now.

You mean by dropping the Euro to a nine month low?

The trade deficit, and an incapacity of the investments of the importers to counter the damage caused.

Damage? It's called a market fluctuation, not damage. Some people win, exporters and holders of foreign currency, foreign debt and foreign equities. Some people lose, importers and those who are short foreign currency, foreign debt and foreign equities.

Now onto the chart, where I was pointing at the last four years for evidence of a tipping point.

I showed you what a real tipping point looked like.

Not a precisely general relationship, as we don't know what the variable of the countervailing investment activity...or the variable of the precise market response to it... looks like, (albeit Kane unconvincingly claims it is a larger factor than the trade deficit itself). Hence I said, "the chart proves the relation of the issues.

Wrong, a four year chart would have showed what happened over the last four years. An eight year chart shows the dollar gaining strength as the deficit increased and then weakening as the deficit increased more.

And when you use these big words (you have an egg head random word generator or what) you just sound silly because you don't understand what you're talking about.

Actually, if there was no proof of tipping, with your contrarian thesis of the "robust" U.S. economy, I seriously question whether the dollar should be sliding for so darn long.

It's not my thesis that the economy is robust. It's a fact. Look at GDP, unemployment or any number of other measurements and you can see that the economy is robust.

Kane's own chart. Deflate the GDP by the dollar decline.

There you go, nice simple words. Easier for everyone to see your error and you don't sound like such an egghead. Why in the hell would anyone think that deflating GDP by the decline in the dollar would give you a number that means anything? GDP stands for Gross Domestic Product. In my world our domestic currency is still dollars.

You mean YOU don't understand. Sorry Charlie. I am not about to make it too easy for any Chinese agents who only speak English as a Second Language.

Yeah, okay. You're like Wiley Coyote. You ordered a nice bomb (chart) from Acme (Heritage Foundation) and when you opened it, it blew up in your face, again.

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