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| Controlling Falling Currency |
| 2003-10-14 |
| The recent slide in the dollar ought to be a cause for rejoicing that the long-awaited rebalancing of the global economy is finally in train. But while the US currency’s fall is long overdue, the manner in which it is happening gives some cause for concern that its correction will lead to a levelling down, rather than a smooth rebalancing, of the regional contributions to global growth. I understand the concern about a ’leveling down’ which is a byword for deflation, but mild deflation can have benefits for the U.S. manufacturing base, that is, what is left of it The US has been the only engine of growth in the world economy for too long. The best solution would be for the dollar to fall gradually along with a pick-up in internally-driven growth in Europe and Asia. Changes in the relative growth of domestic demand, not the slow and uncertain shift of relative prices caused by exchange rate movements, should lead this rebalancing. However, there has been more action on currencies than on growth. The reference to flexible exchange rates in the recent Group of Seven statement in Dubai was widely seen as an innovation, sparking the dollar’s latest sell-off. Yet the accompanying "agenda for growth", touted by the US and UK as a new commitment to structural reform across the industrialised world, was in reality a thin and unconvincing reiteration of existing aspirations. This statement was a veiled reference to China’s gamesmanship on currency rates, where they are trying to tie the yuan to a fixed US rate. And while the Japanese have tested to destruction the failed idea that currency manipulations are an adequate substitute for economic reform, the upward pressure on the yen against the dollar is of no help in fanning the tiny sparks of growth to ignite a sustained recovery in its beleaguered economy. Above all, the swelling US current account deficit, driven by a fiscal deficit clearly out of control, makes the dollar’s fall a risky business. In one sense the author is right. Falling rates in the US will drive money out elsewhere, giving the US fewer imports and adding the threat of inflation. It will also have a positive effect on the US industrial base, making US exports cheaper. The US administration’s claim that the current account deficit was of little concern, reflecting merely investors’ overwhelming desire to own high-yielding dollar assets, always looked unconvincing. Those investors are often Asian central banks manipulating currencies, not fund managers maximising returns. And they are financing the fiscal consequences of the Bush administration’s irresponsible tax cuts rather than business investment splurges. Growing revenue for government is irresponsible in itself, and given a choice, tax cuts will always have a positive effect on BOTH the economy and government revenues The need to fund the current account deficit is dogging the dollar. Prices of Treasury bonds fell last week along with the currency. If the dollar’s slide gathers pace, it could tip from a benign rebalancing into a dangerous spiral of a falling currency and asset prices. My understanding of general deflation is that speculators are the ones who get hit the hardest. Almost no one else takes a real big bad hit from falling prices. True, asset prices are showing some resilience. The Federal Reserve’s insistence that it will keep interest rates low is helping to support Treasuries, at least at shorter durations. And US stocks, despite improbably lofty valuations, have so far proved largely immune to the dollar’s slide. But precarious balances in financial markets have a way of collapsing suddenly. And if they do, the perils of the US administration conniving at a slide in the dollar while itself borrowing ever more dollars from increasingly reluctant investors will become starkly clear. This is an unlikely outcome to a falling dollar. Bond rates going lower will hurt the current holders of bonds, but will also attract new players into the market. This dovetails nicely into the beginnings of the 2004 political season, I hope. |
| Posted by:badanov |
| #5 Falling currencies are almost always a sighn that something is wrong with your economy. Yes sure, a weak dollar may boost your exports but if you import more than you export that's a weak consolation. "German businesses have contributed to making Germany the world’s largest exporter for the first time in 11 years, raising optimism that unpopular wage capping has boosted the competitiveness of German industry. According to a report in the Financial Times Deutschland, Germany recorded $62 billion (€55.6 billion) in exports in August, over 7 percent more in dollar terms than the United States, the consistent world leader. The report, based on figures from the Organization for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF), shows that Germany has been ahead of the United States in terms of export levels since April this year. (Deutsche Welle) Germany has been able to boost exports even with a strong euro. It boils down to that: Quality always sells. |
| Posted by: True German Ally 2003-10-14 4:15:11 PM |
| #4 OHHHHHH. |
| Posted by: Anonymous 2003-10-14 12:58:33 PM |
| #3 It's fixed. When posting, put the headline text in the Title box and the link to the original article in the Source box. They'll be combined by the program to form the link. |
| Posted by: Fred 2003-10-14 11:33:23 AM |
| #2 The link at the top of the page for this entry is fracked up. |
| Posted by: Bomb-a-rama 2003-10-14 10:55:53 AM |
| #1 And Econopundit says rebutting a Krugman article: ...Second misrepresentation: genuine mathematical models, like the Yale multi-country trade and US macroeconomic models are definitely not predicting that a "crisis could erupt at any time." (Far from it, they're predicting a robust recovery even in the face of Iraq reconstruction costs!)... But he will be setting up the Damocles index to see if Krugman is right. |
| Posted by: Anonymous 2003-10-14 10:49:13 AM |