Tuesday, March 26, 2013

Pointing a Finger at Currency Manipulators

President Obama famously said that he wanted to increase the export sales of the US  -- he said he wanted to double their value between 2010 and 2015. In July of 2010 I wrote about this and among other things I likened this doubling to something like the US basketball team scoring 200 points per game in an international competition. I will show below that based on two years of experience, it appears to be even less likely the US will double exports. I bring this up not so much to gloat but so as to head off what appears to be right around the corner – a vigorous attempt by Obama’s administration to paint other countries as exchange rate manipulators and international cheats. It is no secret that the dollar has been rising against the yen and euro – and that portends the usual finger pointing. I try to explain why that approach won’t help matters at all and could make the international trade situation worse. What our government won’t say is that the dollar has been depreciating for many years now and remains a shadow of its former self. If any country has used currency depreciation to its advantage, it is the USA.

Let’s get to the trade data first. I used standard GDP data from the US Bureau of Economic Analysis. http://bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&910=X&911=0&903=128&904=1999&905=2012&906=A

As in my last post on this subject, I use trade data that is in the real terms – that is, the figures have filtered out any price change. In 2010 US exports of goods and services in real terms equaled about $1.67 trillion. In 2012 they had increased to $1.84 trillion, an increase of about 10%. But to put it into a longer term perspective, US exports were $1.19 trillion in 2000. This means that despite a weakening currency it took 12 years for exports of goods and services measured in real terms to increase by 55%. If we ignore the exports of services and just focus on merchandise, the story is similar. US exports of goods in 2012 were $1.54 trillion increasing by about 20% since 2010 and by about 96% since 2000. Exports of goods took 12 years to almost double and increased by about 20% in the last two years. So how can Obama expect to double them again in five years? It is not possible.

Let’s not hold the President to a 100% gain in five years – let’s just see what it might take to keep the champagne flowing for a while. During the last two years the US dollar fell. It fell against the currencies of Canada, China, and Japan but it rose against the euro. The trade-weighted value of the dollar fell by about 10% in those years. Thus, the large improvement in US exports of the last two years seems to have been aided by a depreciating dollar against many foreign currencies (except the euro).

But that information does not in any way establish a strong link between exchange rates and trade results. A look back at the dollar since 1999 shows the dollar has depreciated even more. The trade weighted dollar continuously declined against the world’s major currencies during the time from 2002 to 2012. It declined in those 10 years by more than 20%.  The dollar declined even more against the Japanese yen, Chinese renminbi, and Canadian dollar. The dollar fell against the euro by approximately 50% during those 10 years and despite some recent appreciation of the dollar against the euro, the dollar is still almost 20% below the euro’s beginning value and some 30% below its value in 2002.

As our government starts pointing its finger at China and other countries as currency manipulators, it will do well to understand a few further points. What matters to a country is its net exports – not it exports. Net exports are defined as exports minus imports. For example, if exports double next year while imports triple, the net impact of exports AND imports on spending and employment would be negative. So while we are doing cheers for export growth, what do we know about imports? If we measure from 2010 we find that US goods and services imports measured in real terms increased by 7% and since 2000 by 37%. As a result the US net export balance improved modestly from $-451 billion in 2000 to -$420 billion in 2010 and to -$402 billion in 2012.  So while this key balance has improved we could say it improved by about 4% in two years and by about 11% in 12 years. That’s not much improvement given all the currency depreciation we have witnessed.

Why didn’t we do better than that? What can the President do to make exports AND net exports improve more quickly in this country? The answer is that it isn’t easy. Lasting trade improvements come from durable and real improvements in global competitiveness. Exports will rise and imports will fall if the people of the world increasingly want US goods and services. What makes our goods attractive beyond the current exchange rate? For one thing it helps if our trading partners are strong and growing. We should hope that Europe, China, Japan and other key trading partners find good ways to exit the world slowdown and grow more rapidly. The more they grow, the more they will buy from us. 

But we also must have the best goods and services at the best prices. We need an economic environment that makes firms freer to compete globally. While that involves breaking down foreign barriers it also means having clearer and more supportive regulations as they relate to business activities and costs. The current environment in the US is not conducive to major industry investments in competitiveness. Policy uncertainty is rife with respect to national debt, Fed stimulus, energy, banking, health, and much more. "Depreciating" government regulations would do much more right now for our trade balance than would depreciating our currency!

President Obama could greatly improve our trade performance and that would be an important source of economic growth. But he needs it to be a major and clear objective –not just a talking point. Free trade agreements with Pacific and European counterparts would help but are no more than hot air given the President’s clearly expressed desires to support environmental and union demands. Clearing up uncertainty about federal government business regulation sounds good but there is little evidence of any real focus there. It will be a lot easier for Obama to point his finger at currency manipulators and shift the blame elsewhere. Does that sounds familiar?


  1. Dear LSD. Hope yer feeling better about the skin-thin V over Temple. But, I digress—on to yer blog.

    LSD: “President Obama famously said . . . . .” The Tuna: He’s a bold-faced liar. By now all should recognize that. No need to refer to what Coconut Head says ‘cause it’s meaningless.

    LSD: “Why didn’t we do better than that? What can the President do to make exports AND net exports improve more quickly in this country?” The Tuna: Is this a trick question? POTUS really can’t do squat about the trade balance. It’s not in his Constitutional periwinkle—er, I mean power. But, if you weally wanted to have 1600 Pennsylvania Avenue answer the question—or put forth a solution—then just say he can issue an Exec Order to make it so like he’s done so many times—don’t need the Constitution, don’t need the Congress. Like, it’s magic—let the POTUS wand affect the transformation that Coconut Head promised. LSD, as you know, the trade balance results from global supply and demand, but also is affected equally by currency exchange rates, legislation, and politics. With respect to your commentary about the U.S. controlling (er, I meant manipulating) the value of the dollar—absolutely on target—by virtue of the Fed printing money, printing money, printing money, printing money and so on since the first bailout of banks and foreign countries beginning in the late 20s and early 30s. Note the loss of the value of the dollar since then: loaf of bread = $.05 in early 1900s and $2.50 to $3.00 now. When I worked for Wynn-Dixie in the mid-1960s a loaf cost about $.25. So, what’s the D (delta)?—It’s the Fed and related agencies bailing out miss-managed financial institutions and socializing the losses. Another D (delta) is that absent a hard currency standard and letting currencies float with the world reserve currency (and that would be??) the world is afloat with Parker money—it’s all a fiat shell game. So, what can POTUS do about trade balances? Nuttin, honey—a moot question.

    LSD: “But he needs it to be a major and clear objective–not just a talking point.” The Tuna: With all due respect, do you really think Coconut Head will articulate a defined, “clear objective” to which he can be accountable? Please, pass the JD!—I don’t want you drinking alone.

  2. Dear Charles,

    Not too long ago IU won only 2 games in a whole season. We are grateful for even thin-skin victories. We hope this continues tomorrow night against Syracuse. Go Hoos!

    While this blog testifies to the fact that I dislike most of the current administration's economic policies I enjoy the opportunity to discuss the merits and lack of such with my friends. I spent a lifetime spouting macroeconomics and it is a lot of fun for me to expand on why the President's policies are often fanciful without any real meaning. That's just my way.

    As for one technical point. I do agree with you that US monetary policy has contributed to a decline in the dollar. But equally important in that secular decline is the fact that the rest of the world is catching up with us in economic terms. It was inevitable. As we moved further from the destruction of WWII and the fall of the Berlin Wall and the reforms in Asia and Latin America -- more and more countries have become aggressive global competitors. It is much harder today for US companies to compete simply because there are so many more competitors. Thus a tendency towards trade deficits and declining dollar. It is possible to compete better but the blog explains why pointing fingers at currency manipulators won't help much.

  3. Prof, I agree that monetary policy isn't completely at fault in the decline of the greenback, but it certainly hasn't helped. All one has to do is pull up to the gas pump and fill up. Canadian dollars will buy considerably more gas than the U.S. dollars I use. It's a different meaning when you're speaking about the currency markets, and I don't have enough to play those, but that's the topic you've chosen so my comment is somewhat out of the arena. Of course, that never kept me quiet before.

    As far as talking points, the Prez is, and has always been, loaded with them. In fact, I believe that's all he has. He seems to have lost a bit of focus since the election. Perhaps not having to face another has taken off some of the gleam. He has allowed his agenda for "fundamentally changing America" to become so bloated perhaps he no longer knows where to start. Mr. O appears to be satisfied to allow his henchpersons to carry his water and gives me the impression that he's attempting to hide in order to stop the swan dive his ratings are taking.

    Pointing fingers, especially the middle one, never accomplishes anything yet the D's, and R's to some extent, have done that to us repeatedly. Now that the admenustration...it's a bloody mess...can't really give the finger to W any longer, it seems to be foundering. What think ye?

  4. Dear Fuzzy Meister,

    I noticed you are an official follower of this blog. Champagne and JD are in order! Anyway, as you point out domestic inflation and the depreciation of the dollar against other currencies are connected but are two very different things. The exchange rate of dollars for US stuff as you say is very depreciated and that has a lot to do with monetary policy. We agree on that. As for Obama, recall he has been in office again for less than three months. He has not yet exposed us to his budget -- but that is supposed to come soon. He also has not backed away from his goals for income redistribution which have been a strong driver of his policies. I am betting he will come out swinging and the result will be continued deadlock. But then given the propensities on both sides of the aisle, maybe deadlock isn't so bad.

  5. I certainly hope he doesn't expose himself anymore than he has. Not sure the old eyes can handle it. Of course, you're right that he hasn't backed away from income redistribution. In fact, I see the very public and heated arguments over gun control and same-sex marriage as smoke screens. While we're trying to fight off those two albatroix...is that the plural of albatross?...he'll slip the old income redistribution shaft right up us. Oh wait! He has another albatross hanging around out necks called "immigration reform." We'll get blind-sided one way or the other.