Posted on 10/13/2009 7:02:04 AM PDT by SeekAndFind
Imagine a world with a small current account deficit in the US, a somewhat larger deficit in the eurozone and a not too excessive Asian surplus. In such a world, economic commentators would no longer bang on about global imbalances and would have to find a different subject.
In the long run, such a world would require significant reform of the international monetary system. In the short term, a fall in the dollar’s exchange rate would help get us there. And I note with some satisfaction that it is happening.
A lower dollar is desirable because it would help America achieve the right kind of recovery. The US economy is severely constrained by household and financial sector deleveraging and possibly by a permanent fall in potential growth. In the absence of another housing bubble and consumer boom, an export-led recovery is the best growth strategy the US could employ.
I do not buy the strong-dollar pledges by Tim Geithner, Treasury secretary, and Larry Summers, director of the National Economic Council. They have to say that. It is the official policy line. The bond markets would go crazy otherwise. But a strong dollar is the last thing the US economy needs right now.
There are two further factors that support a weaker dollar. The first is, of course, the double-digit public sector deficit, which has already unnerved investors and which is not going to come down with any haste. The second is monetary policy.
There is little risk of inflation in the short run but a very significant inflation risk beyond the crisis. I doubt the Federal Reserve will set itself a target of a 6 per cent inflation rate, as some US economists are now proposing. But I suspect the Fed will not lean too heavily against the wind, should inflationary pressures emerge.
The latest published comments from Bill Dudley, president of the New York Fed, confirmed my suspicion about the Fed’s asymmetric bias when he said he was more concerned about deflation than inflation and that interest rates would stay low for a long time. This is 2003 and 2004 all over again, except this time the chances are higher that it will end in inflation rather than in a housing and credit bubble.
What about the rest of the world? Would the Europeans, for example, not fight tooth and nail against a weakening dollar? Not necessarily. Just look at the situation from the perspective of the European Central Bank. Ideally, it would like to exit early by withdrawing liquidity support and raising interest rates, but it is severely constrained because many European banks are still dependent on low interest rates and ECB life support operations for their survival.
Fiscal policy is also extremely loose and likely to remain so. From the ECB’s point of view, a strong euro is probably the most effective insurance against resurgent inflation, at a time when interest rate policy remains constrained.
A strong euro would nicely take care of Germany’s persistent current account surplus. The surplus countries will never adopt policies to get rid of their surpluses. The exchange rate will have to do the job for them. Last week’s announcement of a surprise fall in German exports during August tells me that the hopes of another export-led recovery, as in 2006, are unrealistic. I expect a much reduced current account surplus for Germany in the next few years and, for the eurozone, a sizeable, probably not excessive, current account deficit.
The sensible goal of a more balanced world economy is entirely consistent with a weaker dollar and a stronger euro. I am not trying to make a short-term prediction. Foreign exchange markets are crazy, and I have been wrong too many times. But what persuades me that the dollar has further to devalue is the observation that, for once, politics and economics are pushing in the same direction.
Exchange rates cannot solve the problem of global imbalances. They did not in the past. Reform of the global monetary system is necessary for sustained balance. I agree with the views of Fred Bergsten, director of the Peterson Institute for International Economics in Washington, that the world will ultimately have to move to maximum targets for current account imbalances.
In a forthcoming article in Foreign Policy, he proposes a current account deficit ceiling of 3 per cent of gross domestic product for the US. He also argues that a reduced international role for the dollar would be in the best strategic interests of the US as continued imbalances would end up producing intolerable instability, no matter whether they are financed or not.
Several proposals are floating around for how this could be achieved, for example the creation of special reserve baskets or the use of the International Monetary Fund’s special drawing rights. I expect we will see neither but are moving towards a dual system in which the dollar and the euro act as the world’s de facto reserve currencies.
The rise in the euro’s international role, which is already formidable, is not a reflection of the strength of the eurozone economy but of the liquidity of its bond markets and the need of foreign investors to diversify.
It is important not to confuse the international role of a currency and its exchange rate at any particular time. But in the case of the dollar, there is a link. A fall in the dollar’s exchange rate would be a very useful contribution to global balance. A reform of the global monetary system is needed to ensure that imbalances do not return. We are not there yet, not even close. But some of the parameters are slowly falling into place.
The deceived of the world grow in number.
They should look to the Lord God of Israel and His only begotten Son lest they be left behind when God translate (aka. raptures) the body of Christ and then sends the anti Christ to rule over and destroy the godless of the nations.
Nice tagline.
When you read tripe like this you realize just how stupid so called experts have become. Or is it that they “understand” the way to destroy America and think the people are stupid enough to buy into it?
Much of internal US economic issues are just that, internal. Social obligations, government expenditures, and purchasing power parity with regards to foreign goods will all rise in a devaluation scenario. Eliminating gains made by inflation. The spending internally needs to be kept in check for this to have any real benefit.
“economic commentators would no longer bang on about global imbalances and would have to find a different subject.”
*THAT* is making the case for a weaker dollar?
>> an export-led recovery is the best growth strategy the US could employ
And how shall we do that?
Maybe we can buy cheap crap from China and resell it to Europe and South America and Africa?
The US can become “Walmart To The World”!
“Uncle SamMart”! Kind of catchy, huh?
Since we don’t actually MANUFACTURE much to export anymore, I don’t see any other way.
Lawyer services, financial manipulation services, government, and healthcare — upon which we seem to want to build our vibrant economy — just aren’t in that much demand in the world, as I understand.
(Or we could maintain a dollar that’s worth something, maybe, and forego this “deprecated dollar is wonderful” BS...)
The dollar isn’t all that screaming weak. It has been here before, and quite recently.
http://quotes.ino.com/chart/?s=NYBOT_DX&v=dmax
It has gotten montonically, linearly weaker in a relatively short period of time, but again, it has moved across bigger ranges, faster, in very recent history.
IMO what *is* remarkable or notable is all the press it has been getting “being weak”. I think the whole world is on one side of this trade.
We are largely captive to the onslaught of “news” on this issue and how the stock market has been “rejoicing” over the weak dollar. I believe the stock market is discounting a very healthy recovery, which I myself do not see. But it’s doing this in an attempt to propagandize us into believeing a recovery is in the cards. I remain pessimistic, but that’s my nature.
Inevitably, some kind of bounce is likely to occur, perhaps fairly soon, mostly as a technical matter. There is some intuition as to how the stock market might or will react, but that also remains to be seen. There is not a single whisper about how the market has run roughly 60% off its’ March lows, by far the biggest and fastest rally off a reaction low in history. There is also not a single bear left standing.
When we need the Philippines to help prop up the dollar like earlier this week, that shows that there are major structural problems that need to be fixed, like some house which has a couch on the front porch is holding up the wall and a broom wedged under the ceiling fan can't be moved or else the ceiling will collapse.
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Point well made. Bad news is if we don’t drill for our own oil (and other energy sources) then we’re worse off. Combine a lower dollar with reduced regulations and American energy production, then we’ve got a better scenario. Cut union power and we’ll boom.
[A lower dollar is desirable because it would help America achieve the right kind of recovery.]
It is theft, out right theft, from anyone who has savings. We are currently sending our family money out of country.
You are exactly right and it's a damn shame!
We need a government policies that promote economic independence and growth of the domestic economy:
1) End to “free” trade as currently practiced. Instituted reciprocal non-tarrif barriers. Levy tariffs to offset export incentives and rebates provided by our trading partners on a nation by nation basis.
2) Levy a minimum 20% tariff on all imported products to raise revenue. Through most of the 19th Century, when our industrial infrastructure was being constructed, the government relied heavily on the tariff for funding.
3) Assess every shipping container brought into the US fees to fully cover the cost of the Coast Guard, Customs Service, Immigration Service, Army Corps of Engineers, and other federal government departments associated with facilitating imports of products into the country.
4) Aggressively pursue nuclear power and development of petroleum resources in the United States. Goal is to reduce energy imports dramatically if not become energy independent.
5) Eliminate federal taxes on profits made from goods manufactured in the United States. This will encourage investment in factories and the creation of middle class jobs.
6) Establish flat 15% corporate tax rate on all profits not associated with US manufacturing, including repatriated profits from overseas activities. Eliminate all corporate tax deductions and credits.
7) Tort reform. Institute requirement that the loser pay all costs of litigation for both parties.
8) End double taxation of dividends for companies producing 100% inside the US.
9) Regulatory overhaul.
10) Education reform. Focus on the basics — reading, writing, mathematics, science, and civics (American history and government) in public schools. Eliminate Department of Education as a cost savings measure and return responsibility for public education to the states.
11) An immediate across the board cut in federal and state bureaucracies with the exception of the active duty armed forces, Coast Guard, Customs Service, Immigration Service, and FBI.
12) Rebuild highway infrastructure with a gasoline and diesel fuel surcharge.
13) Amend US Constitution to require balanced budget.
14) Simplify US personal income tax code. Eliminate deductions and credits, particularly the earned income credit. Establish flat tax.
None of that will happen with the crew we have in charge now.
I will switch all my savings again to USD when it hits 1.10 CDN or thereabouts. :)
Currency fluctuations are not necessarily bad, provided they are a result of market forces and not manipulation by central banks.
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