Posted on 04/19/2006 12:56:38 PM PDT by 1rudeboy
One year ago, the chorus of the consensus told America that the dollar’s exchange rate was due to fall in 2005. Under relentless assault from cheap Chinese imports and facing a record trade deficit, the dollar had nowhere to go but down. The influential Economist magazine went so far as to say, “[t]he deficit is unsustainable: sooner or later it will need to shrink, and that will involve a cheaper dollar.” Politicians and pundits predicted economic trauma at the hands of outsourcing. Time has proven them wrong. What the U.S. needed then and needs now is to stick to the reliable keys to growth: low tax rates, deregulation, limited government, and especially free trade.
A Dollar – Deficit Link?
The U.S. economy did set two records last year. First, 2005 saw a new record trade gap. Imports to the U.S. exceeded exports by $724 billion, or 5.8 percent of GDP. Second, more Americans were employed than ever before in history, arguing against those who preached doom and gloom.
The data continue to support our contention of last May that the trade deficit is not the signal to watch: “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.”[1] Additionally, two papers published last spring pointed out the lack of a historical relationship between currency values and trade deficits.[2] Indeed, despite the widening trade gap, the dollar gained value against other currencies.
The January 5, 2006, Economist admits that the dollar pessimists “were all wrong.” Yet the conventional wisdom of “trade hawks” is again resurgent, arguing that trade deficits are unsustainable and the dollar cannot hold. Last week, the government reported the third deepest trade gap on record, with imports outweighing exports by $65.7 billion. Current exchange rates, however, appear normal compared with exchange rates over the last few decades.
Unless Congress moves from protectionist rhetoric to protectionist legislation, there is no reason to expect the dollar to slide significantly. Trade flows are the “tail of the dog,” as Fed Chairman Ben Bernanke once explained. From time to time the dollar does fall when the world’s investors lose confidence in the superiority of America’s institutions and markets. Sadly, congressional hostility to the U.A.E. port deal was a bipartisan embarrassment and isn’t likely to reassure the world that America is as free and fair as it proclaims. Equally troubling is the Schumer-Graham proposal in the U.S. Senate to place trade barriers on imports from China.
The Chinese Invasion
According to the last week’s data from the Department of Commerce, the U.S. trade deficit with China was $13.8 billion in February. In 2005, the U.S. trade deficit with China grew by 25 percent to $202 billion. That amounts to nearly twice the $103 billion bilateral deficit in 2002. The ratio of imports to exports with China is now 5 to 1, perfect for the “Chinese invasion” storyline. The U.S.-China deficit’s growth probably won’t continue, but not because it can’t. Consider these points:
We should cheer the triumph of capitalism and its alleviation of poverty within China, as well as its benefits for American consumers and shareholders. The only point of debate is whether American workers’ wages are suffering due to trade with China, but there is no clear evidence of wages “racing to the bottom.” Instead, China is experiencing a severe labor shortage that is driving wages up rapidly in a “race to the top”—the level of free-market workers.
The real dangers to America are not free trade or China’s currency. That’s not to say there aren’t smart policies that should be taken to curb abuses of fair trade, rather that protectionism and currency haggling aren’t part of the smart mix. The real danger is that Congress will try to fix what is not broken and adopt a mercantilist policy of import limitation. Congress would do well to stick to the reliable keys to growth spelled out in The Heritage Foundation’s Index of Economic Freedom: strong property rights, low tax rates, low regulation, limited government, and especially free trade.
Tim Kane, Ph.D., is Director of, Marc Miles, Ph.D., is Senior Fellow in, and Anthony Kim is Research Associate in, the Center for International Trade and Economics at The Heritage Foundation.
[1] Tim Kane, “The Brutal Price of a Dollar,” Heritage Foundation Backgrounder No. 1855, May 31, 2005, at http://www.heritage.org/Research/TradeandForeignAid/bg1855.cfm.
[2] See Ibid. and Tim Kane and Marc Miles, “Trade Deficits, Dollars, and China: Wrong Lessons Make Dangerous Policy,” Heritage Foundation WebMemo No. 743, May 12, 2005, at http://www.heritage.org/Research/Economy/wm743.cfm.
[3] A.B. Bernard, J.B. Jensen, and P.K. Schott, "Importers, Exporters and Multinationals: A Portrait of the Firms in the U.S. that Trade Goods," NBER Working Paper No. 11404, June 2005.
Oh, yes there is... when there are more than the two listed variables displayed.
Example: Chinese market intervention annually to prop up their peg: $195 billion.
A pace that is presumably still being maintained...or increased...since the peg is...for all practical purposes... still in full force.
Because it was never "no" correlation. I believe it in fact tracks pretty closely when smoothed from 2000 to 2006. Let's first look at the Chamber of Commerce Chart where you so absurdly claim "NO" relationship:
Here is the recent range from a chart from 2003 to 2005...
When looked at the broader indices of major currencies besides the volatile EU, this is what we see:
The trend is definitely down.
It is mirrored in the simultaneous rise in commodity prices:
The above-noted Commerce chart was posted trying to disprove the relationship of the two listed factors. It failed to to do, first, because it was flawed by failing to acknowedge the multivariant nature of relationships...i.e., it is more than the two factors...albeit they are clearly not unrelated.
Policies in the countries whose baseline currencies are used for comparison are not static. There is give and take, changes of governments and administrations, or other indigenous and exogenous economic factors... Etc.
These make a real difference, as we saw with the political turbulence in the EU as that did a lot to hurt their financial credibility of the EU currency with the failed consitutional votes. There are staggered effects from these swings in valuation. One example: AirBus exploited the currency downturn to sew up a bunch of additional sales and clinched another year ahead of Boeing's commercial sales.
And if the comparison had been done against China...with its artificially-maintained peg...you would have seen a flat dollar...as the deficit mushroomed to over $200 billion annually.
I have no inclination to be a gold bug, but I saw a TraderDan quote from one Jim Sinclair which was a pretty fair assessment of the situation which you are blithely denying:
"Perhaps one of the great tragedies that will be written across the history of our nation in generations to come will be our own lack of the sense of history.No matter how those who insist that a debt based economy is nothing to be concerned with, history and the scriptures teach “the borrower becomes the lender’s slave”.
By my last count, the US trade deficit for 2005 came in near $723 billion. This year is slated to exceed that number and perhaps push closer to $800 billion. As the following story makes clear, China has now surpassed Japan for the honors of possessing the largest foreign reserves with an astounding $853.6 billion. Much of this is due to their huge trade surplus.
One only needs to study history to see economic power and supremacy have been gradually moving further and further East.
This generation will go down in history as the generation that spent itself into the brink and in the process plundered their children’s future."
Example: Chinese market intervention annually to prop up their peg: $195 billion.
Oh, I get it now. A $700 billion dollar trade deficit would make the dollar sink, but the Chinese purchase of $195 billion made it go up instead. Thanks for clearing that up. LOL!
Please, spell it out. What is the correlation that you see?
I believe it in fact tracks pretty closely when smoothed from 2000 to 2006.
Please explain this smoothing you're doing and how it shows that a bigger deficit equals a weaker dollar.
My dollars are buying less, alot less so I do not believe the dollar is not falling.
Good to see you can still laugh at yourself!
I know you aren't denying that China does do market intervention as against the U.S. Dollar...right?
You also wouldn't claim that their manipulatory actions are driven by other than their government actions? I.e., as joe has tried to claim...via their own supposedly-burgeoning private sector?
Note how that is belied just this month with the Reuters report:
REUTERS China not seeking to expand FX reserves -c.bank [FYDGTFN]BEIJING, April 5 (Reuters) - China is not deliberately pursuing expansion of its foreign exchange reserves or any particular level of reserves, a vice head of the central bank said in comments published on Wednesday.
The official Xinhua news agency cited Wu Xiaoling, vice chief of the People's Bank of China, as saying that an excessive trade surplus, the source of much of China's reserves, was not desirable and needed to be addressed through policies.
Officials have previously disavowed any desire for larger reserves or an enormous trade surplus.
The central bank was looking to increase access for individuals and corporations to the foreign exchange trade to make it less dominated by the government, she said, offering no details on how that would be done.
Premier Wen Jiabao confirmed on Monday that China's forex reserves at the end of February totalled $853.6 billion, exceeding Japan's for the first time, which stood at $850.1 billion at the end of February. www.reuters.com
Good to see you can still laugh at yourself!
Good to see you still can't read. I'm laughing at you.
I know you aren't denying that China does do market intervention as against the U.S. Dollar...right?
I've never denied that the Chinese trade currencies to keep their exports cheap.
Without a reference point, your comment is meaningless.
I gave you the benefit of the doubt, silly. I imputed to you the virtue of some humility. Silly me!
If you want to bray like a hyena claiming I'm wrong... well you just go and knock yourself out.
I have no need to bray. You point to this:
Additionally, two papers published last spring pointed out the lack of a historical relationship between currency values and trade deficits.[2] Indeed, despite the widening trade gap, the dollar gained value against other currencies.
and you say, "Note that if smoothed out it does show an interesting historical tracking of the two..." LOL (Me laughing at you)!!
You mean "Claimed".
And the conclusion of the dollar improving was against precisely which "other currencies"?
So the charts which I showed, corrected for volatile EU prices. And the CRB Charts of commodities prices confirmed the decline in real value of the dollar. So, are you still denying the reality?
Reference point, hmmm, electric bill, gas bill, food bill, property tax bill, insurance bill, phone bill, etc, etc, etc all going up up up (fast) ergo dollar going down down down.
I don't mean anything, that was from the article.
And the conclusion of the dollar improving was against precisely which "other currencies"?
That would be a trade weighted exchange rate provided by the U.S. Department of Commerce
So the charts which I showed, corrected for volatile EU prices.
So your charts show that if you correct for the Euro (how exactly would one correct for the Euro?) that a higher trade deficit really does lead to a weaker dollar? And I almost hate to break it to you, but that US Dollar Index chart you posted, looks like the same chart in the article. You know, the one that showed a lack of a relationship?
And the CRB Charts of commodities prices confirmed the decline in real value of the dollar.
The rising price of commodities does not prove that the dollar is getting weaker versus other currencies.
So, are you still denying the reality?
Still waiting for you to find reality.
My phone bill went down down down. Does that mean my dollar went up while your dollar went down? My dollars are American, where do yours come from?
Hate to break it to you, but you're going down, down, down, Todd. You torpedo yourself. It confirms the dollar decline.
The rising price of commodities does not prove that the dollar is getting weaker versus other currencies
Just against real-world prices of things.
Paul, the trade deficit hit a record level and your chart shows the dollar got stronger last year. Is that the correlation you were talking about?
Just against real-world prices of things.
Yes Paul, rising prices means prices are rising. Rising prices does not mean our currency is weakening.
No, it didn't "get stronger." Look where it started from. T'sk. T'sk. An uptick is NOT 'getting stronger.' Its a puny little blip...caused by any number of things as alluded to. But the overall trend is down, down, down.
Yes Paul, rising prices means prices are rising. Rising prices does not mean our currency is weakening.
Or then again, maybe it does.
Right, when a currency goes up that's not getting stronger. LOL!
An uptick is NOT 'getting stronger.'
How can the dollar have an uptick? You said that a bigger trade deficit would make the dollar go down.
ever heard of statistics?
It's called variance:
And Standard Deviation:
Or...
Ever hear of subtraction?
BAC closed yesterday at $46.05 per share. It closed today at $46.28. Now if I subtract yesterdays close from todays close, it looks like BAC went up 23 cents per share. I'm going to go out on a limb and say that BAC is stronger today than it was yesterday.
Feel free to use statistics to prove that BAC is really weaker today than it was yesterday. Don't forget to show all your work. Thanks.
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