$US-KRW Exchange Rate vs U.S. Balance of Trade with S. Korea

September 20, 2010

Continuing my series of examining the effect of exchange rate (or lack thereof) on trade imbalances, I’ll now examine South Korea, America’s 7th largest trading partner (year-to-date in 2010). 

Thus far, we’ve found that in trade between the U.S. and less densely populated nations, fluctuations in currency exchange rate has the effect that economists would predict:  a rise in the value of the dollar worsens our balance of trade while a falling dollar improves it.  However, in trade with more densely populated nations, there is no such effect.  In fact, if anything, the data indicates an opposite effect – that a falling dollar is more likely to yield a worsening in the balance of trade. 

The data for South Korea is an exception, but with a huge asterisk.  Here’s the chart showing the U.S. balance of trade with S. Korea, a nation almost 15 times as densely populated as the U.S., and the dollar-won exchange rate:

$US-KRW Rate vs Balance of Trade

There is a slightly positive correlation between exchange rate and the balance of trade.  But some closer examination casts doubt on the effect.  The effect was strongest during the period of ’93-’98.  However, during most of that period, the won was effectively pegged to the U.S. dollar.  In 1997, the IMF (International Monetary Fund), forced S. Korea to end that peg.  That, along with a simultaneous depegging of the Thai baht from the dollar and an economic collapse in that country, caused the East Asian financial crisis in 1997, an event that briefly threated global economic collapse.  The dollar soared vs. the won and resulted in a dramatic worsening in the balance of trade with S. Korea, turning a small trade surplus into a huge trade deficit. 

During the decade that followed, a year-by-year analysis shows a slightly positive correlation between balance of trade and exchange rate.  But when that decade is taken as a whole, a falling dollar actually had no effect in stemming the increase in the U.S. trade deficit with S. Korea. 

So this piece of data bucks the trend in the relationship that was taking shape, where the effect of exchange rate on the balance of trade decays as the population density of trading partner rises.  But I’ve included an asterisk for S. Korea, since the exchange rate was affected by unusual forces. 

However, the trade data with South Korea correlates perfectly with my population density theory.  We have a large trade deficit with S. Korea, just as it would predict. 

Here’s the correlation score sheet and chart:

Theory Correlation Score

The population density theory continues to be a far better predictor of balance of trade than the exchange rate theory. 

Next up will be U.S. trade with France, America’s 8th largest trading partner year-t0-date in 2010.


Exchange rate data provided by www.oanda.com.



Obama Unveils Export Strategy

September 17, 2010


I couldn’t let this story (above link) pass without comment.  It seems that the president has finally gotten around to laying out a “strategy” for his plan to double exports in five years.  Why the hurry, Mr. President?  It’s only been eight months since setting the goal. 

And the strategy couldn’t be more laughable. 

– An “outreach campaign” to raise awareness among small and medium sized companies about export opportunities and available government assistance.

— Implementing a “government-wide export promotion strategy” for markets in Colombia, Indonesia, Saudi Arabia, South Africa, Turkey and Vietnam.

— Increasing U.S. trade missions abroad.

— Bringing more international buyers to U.S. trade shows and boosting participation of U.S. companies in international trade shows.

That’s it?  That’s the strategy?  It took eight months to come up with that? 

Yeah – trade shows – that’ll work.  At least bringing more international buyers to U.S. trade shows will help our balance of trade in services, since foreign travel to the U.S. counts as a services export.  And, regarding the 2nd point, why these countries?  The population of all of them combined accounts for only 7% of the world’s population.  In terms of market, it’s even smaller.  Why isn’t a single European country on the list?  Why not China?  Why not Japan?  Why not India?  And “increasing U.S. trade missions abroad?”  We’ve seen where that’s gotten us in the last four decades.  No thanks.

This isn’t a strategy.  It’s a show designed to create the appearance of doing something.  It’s a joke.  Is it any wonder that we’re already falling behind the president’s goal?

Finally, I can’t let this pass without comment:

“Exports are actually leading our economic recovery,” Commerce Secretary Gary Locke told reporters on a conference call ahead of the report’s release, noting exports were up roughly 18 percent over the same period last year.

Locke conveniently omits the fact that imports are up more than 22% in the same period, more than offsetting the gains in exports.  The net result is a bigger trade deficit and loss of jobs.  So exports are not “leading our economic recovery.”  The growing trade deficit is leading our back-slide into a double-dip recession.

Our trade deficit will remain the same or worsen, as will our economy, until this president and future presidents come to the realization that boosting exports is not within our control, but limiting imports is.  The problem is not that Americans consume too much but that overpopulated nations consume too little.  Since it’s impossible for them to boost their domestic consumption and imports, the only choice is to limit imports into the U.S. if we want to restore a balance of trade.

Cumulative U.S. Trade Deficit Surpasses $10 Trillion

September 14, 2010
Today, September 15th, 2010, America’s economy has reached a very sad milestone.  Our cumulative trade deficit, since our last trade surplus in 1975, expressed in current dollars, has now eclipsed $10 trillion.

America experienced its last surplus of trade in 1975. Since then, through July, the most recent month for which trade data has been released by the U.S. Bureau of Economic Analysis, when adjusted for inflation using the Consumer Price Index published by the Bureau of Labor Statistics, the cumulative trade deficit was $9.93 trillion. Assuming a continuing monthly trade deficit of $45 billion (the current 3-month moving average), it is estimated that the trade deficit has now reached $10 trillion as of September 15th.

The U.S. is on track for its 35th consecutive annual trade deficit in 2010 since its last trade surplus in 1975. The U.S. trade deficit of $759 billion set a record in 2006. With the onset of the global recession in 2007, it fell steadily to $375 billion in 2009, but is expected to rise again to over $500 billion in 2010.  Almost half of all Americans alive today have never known an America with a trade surplus.

Through July, 2010, America’s largest trade deficit is with China, at $145.3 billion. The trade deficit with Mexico is second at $38.4 billion. The trade deficit with Japan is third at $31.6 billion. The trade deficit with Germany is fourth at $18.7 billion.

America is $10 trillion poorer today as a result of bone-headed trade policy based on failed 18th century economic theories.  That’s $32,250 for every man, woman and child in America – almost $130,000 for every family of four.  It’s enough money to solve virtually every financial challenge facing America, including putting the social security fund back on sound footing.  It’s enough money to nearly wipe out our national debt.

In 1947, when America signed the Global Agreement on Tariffs and Trade, it was so easy for our leaders to come together and hold hands with the rest of the world, like the old “I’d like to teach the world to sing in perfect harmony” Coke commercial.  Now we see what their sappy good intentions and simple-minded economists have wrought – an America in serious decline and a global economy collapsed by enormous trade imbalances.  Nowhere is a leader to be found with the courage to undo what our 1947 predecessors stumbled into so blindly.  If our founding fathers ever thought it conceivable that our trade policy would be abandoned to a global trade organization bent on pillaging America, they would surely have included in the constitution a requirement for a balance of trade that also made it illegal to join such a global organization.

Never has America been so threatened by neglect of its economy and by a complete failure of leadership.  Never has it so badly needed an amendment to its constitution to mandate the inclusion of common sense in its trade policy.  (See https://petemurphy.wordpress.com/more-good-stuff/28th-amendment-to-the-constitution-of-the-united-states/ )

Decline in Imports of Consumer Goods Leads Trade Deficit Lower

September 9, 2010


As reported by the BEA (Bureau of Economic Analysis) this morning (link to report provided above), the July trade deficit fell to $42.8 billion from $49.8 billion in June.  This is good news.  Or is it?

The decline was driven by a $4.2 billion decline in imports, supplemented by a $2.8 billion rise in exports.  The rise in exports can be attributed to two products – fuel oil and civilian aircraft.  (That’s right, we do export some petroleum products.)   The decline in imports is virtually all due to a decline in consumer goods.  That would be good news if it was due to a shift toward domestic manufacturing of these goods.  But it’s not.  It’s due simply to a slowdown in consumer spending – bad news for the economy in general.  Reducing the trade deficit is an important goal for the economy, but a recession isn’t the way to do it.

I’ve been tracking exports vs. President Obama’s pledge, made in January, to boost the economy by doubling exports in five years.  Here’s an update:

Obamas Goal to Double Exports, 1st year

As you can see, we’re beginning to fall behind on this goal.  For the first time since making this pledge, exports have been below the goal for two months in a row.  Of course, rising exports don’t help the economy at all if imports rise at the same rate or faster.  So the real goal is to reduce the trade deficit.  Let’s see how we’re doing there:

Balance of Trade

We see a nice improvement from June’s horrible performance but, aside from July, the trade deficit has steadily worsened. 

During the campaign, the president promised to renegotiate NAFTA to correct inequities with Mexico.  He also promised to improve our balance of trade with China by forcing them to unpeg their currency from the dollar.  He’s broken his promise on NAFTA and, since he took office, the value of the yuan has actually gotten worse, falling instead of rising since China “officially” decided to let the yuan float.  The president need look no further than his failure to act on the trade deficit for the state of the faltering economy and stubbornly high unemployment.  If this trend continues, as it almost surely will, both the economy and unemployment are going to worsen in the coming months.

Wiggling Left and Right on the Road to Ruin

September 7, 2010


When attacked on the slow pace of economic recovery and asked about the prospects of big losses for the Democrats in this fall’s election, President Obama is fond of asking, “would you rather restore to power the same people and ideas that got us into this mess in the first place?”  It’s a valid point, but I have to ask:  What the hell is the difference? 

As reported in the above-linked CNBC article, the president will announce this week a plan to give businesses tax credits for capital investments.  He has also announced plans for tax credits for research and development investment.  He’s also advocating putting a hold on the expiration of most of the Bush tax cuts.  Republicans would counter that, no, they would extend all of the Bush tax breaks.  Even the Economic Recovery Act (the “stimulus plan”) that was passed only weeks into Obama’s administration was very little different from the stimulus plan that Bush had proposed just before leaving office.

With Democrats we get a little more spending – ultimately doomed to failure when the political environment turns against rising budget deficits.  With Republicans we get lax business regulation and enforcement and more tax breaks, but no more fiscal discipline than we would have under a Democratic administration.  None of this is going to improve the economy.  Anyone who suggests that we can boost the economy with more deficit spending, or with more tax breaks that can be paid for by cutting spending is either naive or is flat-out lying.  There aren’t enough mythical $500 toilet seats in the military to make even the tiniest dent in the deficit.  If our only approach to the deficit is to cut spending, it’s simply not possible without taking on social security, medicare and medicaid.  Yes, the economy can be boosted by cutting taxes, putting more spending power in the hands of all Americans.  But paying for those tax cuts with cuts to social security and medicare takes purchasing power back out of the economy just as fast.  In the final analysis, we’re no better off.

All we’re doing is wiggling left and right on the road to economic ruin.  As I pointed out in Five Short Blasts, shifting our aim slightly left or right isn’t going to make the least bit of difference if our aim is completely off-target.  Our economic ills can’t be solved by taxing a little less or by cutting spending a little more.  The problem with our economy is that we’ve carved out a huge sector, loaded it onto ships and sent it packing to China, Japan and Germany, tax free.  In addition, we continue to import 120,000 additional laborers every month at the same time that employers are cutting jobs.  Tinkering with tax rates isn’t going to fix any of this.

I’m extremely disappointed with President Obama but, looking around, I don’t see any real alternatives.  If some Republican stepped foward with a real plan to address our trade imbalance and to restore sanity to our immigration policy, I’d be leading the parade with his/her banner.  But all I hear is the same, lame, worn-out, been-there-and-done-that approaches that have gotten us to where we are today.  It’s enough to make one ponder emigrating to Canada, eh?

Employment Situation Holding Steady

September 3, 2010


The Bureau of Labor Statistics (BLS) this morning released its monthly report on the employment situation for August.  The good news is that the employment situation seems to be holding steady.  The bad news is that it’s holding steady at very nearly the worst level of the recession reached in October of 2009.  There’s not been one iota of improvement, in spite of spending under the economic stimulus plan reaching a crescendo in the 2nd quarter of this year. 

Here’s the calculation:

Unemployment Calculation

As you can see, the employment level rose for the first time in five months.  But so too did the size of the labor force – either a coincidence or a controlled reintroduction of workers that the government has been steadily removing, with the explanation that some people had decided to drop out of the labor force.  The net result is that the government’s calculation of unemployment actually ticked back up by a tenth of a percent, while my own calculation, which holds the labor force at a fixed percentage of the population, ticked down by that much.  For anyone with an understanding of the concept of “statistical significance,” the real take-away here is that employment conditions aren’t improving one bit.  What’s worrisome is that the stimulus spending will soon be winding down. 

Here are the graphical presentations of the data presented in the spreadsheet above:

Unemployment Chart          Labor Force & Employment Level          Unemployed Americans

The change in employment reported by the BLS breaks down as follows:

  • health care:  + 28,000 jobs
  • construction:  + 19,000 (including 10,000 returning from strike)
  • professional & business services (temp help):  + 17,000
  • mining:  + 8,000
  • retail:  + 2,000
  • manufacturing:  – 27,000
  • government employment:  – 121,000 jobs (including 114,000 census workers)

Until now, manufacturing has been one of the bright spots so far this year, but much of the growth in manufacturing employment was in rebuilding depleted inventories, a process that’s basically complete.  The drop in manufacturing employment in August isn’t a good sign. 

This is a picture of an economy that has stagnated at a low level of economic activity and a high level of unemployment.  No surprise, given that the administration has done nothing to address the underlying problem with our economy – the trade deficit – which, if anything, seems to be accelerating.

$US-GBP Exchange Rate vs Balance of Trade with the U.K.

September 1, 2010

Continuing the series in which I am researching the validity of the economists’ claim that a weaker dollar improves our trade balance, we now turn our attention to the United Kingdom and the dollar-British pound (GBP) exchange rate.  So far we’ve seen that, although a weakening dollar does improve our balance of trade when dealing with less densely populated nations, we’ve seen that there is no effect at all with much more densely populated ones.  In fact, if anything, a falling dollar seems to have the opposite effect.  Trade balances worsen. 

But, so far, we’ve only examined a relatively few nations.  So now let’s turn our attention to trade with the U.K.   The U.K. is nearly 7-1/2 times as densely populated as the U.S.  So my theory would predict that changes in exchange rate would have no effect on our balance of trade with them, since the influence of the disparity in population density  would dwarf any effect of changes in exchange rate. 

For some reason, I had a gut feeling that this one was going to fly in the face of my theory.  But that gut feel was wrong.  Here’s the chart:

$US-GBP Rate vs Balance of Trade

As you can see, there is no correlation between exchange rate and the balance of trade with the U.K. whatsoever.  In fact, there seems to a “weak negative correlation,” since changes in exchange rate were more likely to yield the opposite effect upon trade imbalances than what economists would predict (if there is any cause and effect at all).  The correlation score landed almost right on the trend line and strengthened the correlation between population density and the logarithmic decline in the effect of exchange rate.  Here’s the correlation chart, with the U.K. now included:

Theory Correlation Score

It’s hard to overstate the significance of this study.  I’m not aware of any other study that has attempted to quantify the effect of exchange rates on trade imbalances and how that effect may be influenced by disparities in population density.  It’s becoming quite clear that currency exchange rates are powerless to prevent a trade deficit in manufactured goods with a nation that is much more densely populated (by more than a factor of two). 

I’ll continue this series until all of America’s top fifteen trade partners have been included.  Next on the agenda:  South Korea.


Currency exchange rate data provided by www.oanda.com.