Posted on 11/16/2010 9:33:18 AM PST by Hoodat
Right. Goods is what I’m focused on. All other things remaining the same, a country that devalues its currency should sell more goods than one that increases its currency value. What did you think of my timing point? That one year measurements may not be the right unit of measure?
This is like when the ancient Greeks rejected the scientific method saying that if observations conflict with reason then the observations are wrong because everything has to make sense.
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No. I prefer to look at it like those that said the world looks flat but that doesn’t really describe the world well. You just need to look to the horizon. Your unit of measure may be off.
If you're assuming that capital purchases and sales are zero, then goods sales and purchases will also have to equal out.
Today's headline explains it: U.S. Stocks Climb As Dollar Dips. The dollar dips, foreigners buy stocks, stock sellers buy foreign goods, trade deficit caused by falling dollar.
And a stable but lower dollar will help US manufacture sales and exports and hurt imports by making them more expensive. Same reasoning. I don’t think the economists are cutting through the noise of other variables effectively.
Not really. Dollar (any currency's) international exchange rate has no effect on the local cost of labor, because it's dictated by local tax and regulatory environment, e.g., minimum wage, take-home pay etc.; but it actually might increase other domestic input costs of goods produced for export, like domestically produced raw materials... in addition to more expensive foreign input goods and materials.
That's why the bulk of the problem is the cost of taxation and regulations (including "environmental"), not so much an exchange rate which only marginally affects overall balance of trade (positively or negatively, depending on the mix of foreign input / output in particular industries). In addition, input from raw materials produced from domestic sources but used in export output also get more expensive (due to internationally weaker currency) so the output gets more expensive and less competitive, whether internationally or domestically. So overall domestic production costs - greatly affected by politicians and bureaucrats, laws, mandates and regulations - have by far, by far greater input costs than the potential net benefits of output marginally affected by the weaker exchange rate.
Basically, weaker currency acts as a tax on domestic consumption and production so its potential benefits are ephemeral, at best. That's why devaluing / debasing the currency never works over long term, even if it serves sometimes as a cover (and a fodder) for politicians trying to justify their actions which increased the cost of production and consumption. In pushing dollar down, Bush got (not the only) bad advice from his weak economic team. Ronald Reagan's and Bob Rubin's policies of "strong dollar" served the U.S. much better in this respect.
Add to all of the above the intangibles, that while the free trade Americans / the West are used to and don't generally have a problem with buying foreign-made goods, in many developing countries people in much larger numbers may still choose locally made products, even if more expensive compared to the similar foreign-made goods, due to culture, habit, pride or other real or perceived advantages, i.e. cheaper exported goods will generally find easier market in the developed / "old" economies than comparably cheaper exports in emerging, less culturally diverse markets, which may negate any exchange rate "advantages" in those markets.
You can see the above empirically in the current account / trade balance of the U.S. generally becoming negative as the cost of domestic labor and production went up sharply, whatever the exchange rate was. To sum up, weaker currency is a tax (a de facto tariff on all foreign goods) imposed by government, which in the long term always punishes consumer, without any concrete (and usually temporary, at best) benefits to the exporters, with the government, in effect, choosing the winners and losers between industries.
--and also help US sales and exports of T-bills and real estate. If sales of land and bonds exceeds manufacture sales we get an increased trade deficit.
Thanks for laying all that out! I understand what you are saying. Your point that regulatory, labor costs etc. can have a bigger impact, I’ll agree. Input prices going up as well I understand. I do have one quibble: “In addition, input from raw materials produced from domestic sources but used in export output also get more expensive (due to internationally weaker currency) so the output gets more expensive and less competitive, whether internationally or domestically.” But those input prices will be the “same” as before for the nations being exported to, denominated in their own currency. Labor costs and domestically produced inputs not effected by international markets so greatly will go down in terms of those other currencies. So the overall price of our goods in foreign terms will go down on average.
Purchase of US land by foreign buyers increases the trade deficit?
Yes, it will be the "same" for everyone, and initially I even put it in as "the same," but I edited it because in real terms, using the same raw material input as before, will actually result in the increased cost of making the product and I wanted to describe the increase in the final cost of the product due to the exchange rate, whether it affects final international "competitiveness" of this product or not.
I also didn't mention the productivity component, but it has nothing to do with exchange rate, and "productivity gap" has been closing fast, especially with many Western countries setting up or helping to set up and manage the production lines and plants overseas.
In either case, it's pretty clear that the weaker currency introduces much more and higher negative inputs on cost of production and delivery of the goods than it can ever be offset by temporary, marginally "competitive" benefits of the fluctuating, unstable, at best opportunistic exchange rates. People who only look for "weaker dollar" = "cheaper goods" usually do not take into account all the other negative (and often permanent, or long-term) inputs.
Right, a capital surplus is a trade deficit. Foreigners exchange pesos for dollars and buy land, land sellers swap dollars for pesos and buy foreign goods. Payments balance.
What if they buy land with the pesos? : )
In either case, it’s pretty clear that the weaker currency introduces much more and higher negative inputs on cost of production and delivery of the goods than it can ever be offset by temporary, marginally “competitive” benefits of the fluctuating, unstable, at best opportunistic exchange rates. People who only look for “weaker dollar” = “cheaper goods” usually do not take into account all the other negative (and often permanent, or long-term) inputs.
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Nonetheless, countries with significant tariffs and in the modern era “artifically low” currencies tend over time to become dominant in trade. Britain, then USA, Japan (used regulation/subsidy/etc) briefly, and now China. When Britain and the USA moved to more “open” market philosophies they lost competitive advantage and declined relative to a dominant trading partner.
Seriously, when foreigners buy US capital assets they have to exchange their money for US $ in order to make the transaction in the US. Banks don't sit on trillions of dollars of foreign money waiting to be exchanged. They get pesos for $US from one guy and they get $US for pesos from the next.
They didn't lose competitive advantage because of "open" market philosophy which opens other markets for already existing and the new tailor-made for new markets goods. They are losing it because of ever more intrusive, expansive and expensive role of the government in the production of such goods, for foreign or domestic consumption, basically pricing U.S. and U.K. products and/or services out of the free market.
Are the U.S. states with higher cost of production (taxes, regulations, "living wage" etc.) more or less competitive with their neighboring states? Just as an example, mandate minimum (or "living") hourly U.S. wage of $25 and see how much the dollar exchange rate is going to help you sell the products overseas, while businesses and people within the U.S. adjust themselves internally to new price regime. Is this equivalent to effective devaluation of the dollar? Yes, but would that make U.S. goods more competitive in other countries? Deliberately gross exaggeration, I admit, but it does make a point pretty clear. And there are many other, often hidden but mostly related to government interference, costs of production that make stagnant developed countries less competitive in trade, besides minimum wage.
To freely export things, you must allow for thing to be freely imported, to sell them you must allow them to be competitive against the others... Tinkering with the currency exchange rates or building a "Berlin Wall" around the trade of goods ignores the unintended (or, for some, intended) consequences and has never made the standard of living better - only enslaved the population to its government - and can only make the trade imbalance issues worse, not better.
"Big government is not the solution to our problems. Big government is the problem." - Ronald Reagan
I view all trade as managed; our alleged free market approach since the 1990’s has led to a situation where we are just not active in its management while everyone else is and it hasn’t worked well. Don’t get me wrong, the freer our markets are internally and the lighter the hand of government the better we do economically. I wouldn’t be a FReeper if I didn’t believe that. Reagan negotiated with the Japanese and they built the auto plants here. It didn’t happen by pure market forces. We’ve given up our big stick in trade and are left with just speaking loudly. Obama’s recent attempt to renegotiate with Korea and the general disdain of the world for us economically shows that.
If we cut the budget in 1/2 and taxes by 1/4, we’d boom. Simple as that, and likely end up with a balanced budget or a surplus over time. If we combined that with a more managed trading regime to let our manufacturers recover and eliminated the perverse incentives to go offshore, we’d recover some of our dominance in a decade or two.
Freedom doesn't make a nation less competitive, it allows people to create wealth. Ben Franklin said it well: "no nation was ever destroyed by trade." So many thanks to all for a rousing interchange. I know I've learned a lot about sharing information and I hope y'all are better off too.
Freedom doesn’t make a nation less competitive. But being forced to pay taxes for a military is compulsion (and necessary). We have to deal with the world as it is. GATT and so forth have reduced tariffs. Other nations have pegged their currencies to the dollar in a way that enhanced their competitiveness, put in place non-tariff barriers to entry, negotiated trade advantages, etc.
My view is that trade is analogous to military security in that nations are both competitive and cooperative based on their interests at the time. It’s a dangerous area to play with the status quo, because trade wars during economic downturns can be very ugly. If we began to protect our own manufacturers more we’d have to be very careful about implementing it. The current trade regime has been set up over the course of many decades. Modifying it will be the same if done right.
Off the top of my head, in order of importance, we would need to get our internal fiscal policy in order, put in a Freidman like monetary regime with monetary growth targets and preferably no Fed, end all immigration, lower and simplify tax rates and begin to negotiate general tariffs designed to raise revenue (and thus lower income tax and corporate tax rates — if we could eliminate corporate tax rates completely with it we’d get a double effect — corps would have more money to grow with plus some protection from foreign manufacture as they grew inside our borders).
tariffs designed to raise revenue protection from foreign manufacture
--it's only one or the other, as revenue increases come with rate cuts and protective rate hikes cut revenue;
Freidman like monetary regime with monetary growth targets and preferably no Fed
Freidman was happy with the Fed during the early '80's because cared more about fed policy than it's abolition, and the only economic policy he clearly wanted abolished was tariff protection;
end all immigration
--humans move around and all nations have always had some immigration.
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