Weaker Dollar No Solution to Joblessness

November 18, 2010

http://www.cnbc.com/id/40214520

As I was postig the results of my study of currency exchange rates and trade imbalances – a study which showed that changes in currency exchange rate have no effect on trade – the above-linked article titled “Weaker Dollar Seen as Unlikely to Cure Joblessness” appeared on CNBC. 

The article begins by re-stating the now disproven economic theory:

A weakening currency traditionally helps a country raise its exports and create more jobs for its workers.

The article then goes on to make the case that a falling dollar won’t have this predicted effect.  I can add one more reason – the theory is flawed and not supported by the data.  A weaker dollar will have no effect on the prices of imports, as exporting nations will simply cut costs and subsidize their industries to hold the line on price, assuring that they maintain their share of the U.S. market.

Rising prices for imports certainly would bring manufacturing jobs back to the U.S.  But there’s only one way to make sure they rise sufficiently, and that’s for the U.S. to set the prices.  In other words, the U.S. needs to apply tariffs.  Tariffs must be applied to manufactured products, and the size of the tariffs must be proportional to the population density of the country of origin.  This would result in big tariffs on all products from China, even bigger tariffs on products from Germany, Japan and South Korea, but would leave products from nations like Canada, Australia, Saudi Arabia, Brazil and a host of others completely free of tariffs. 

The only problem we’d have then would be building factories fast enough to keep pace with demand.

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Study Finds No Relationship Between Currency Exchange Rate and Trade Imbalance

November 17, 2010

Economic theory tells us that a falling dollar helps American exports by making them cheaper for foreign buyers and slows imports by making them more expensive.  Thus, a falling dollar helps domestic manufacturing and improves our balance of trade A stronger dollar has the opposite effect.  It seems to make sense, but the theory isn’t supported by the facts.

My study of the currency exchange rates between the U.S. and its fifteen largest trade partners (and one other) has found no relationship between exchange rates and the balance of trade.  I studied the total balance of trade for these nations for the period from 1990 through 2008, and the balance of trade in manufactured products from 2001 through 2008 against the rise and fall in exchange rates for the currencies of each nation in question.  (Data for manufactured products not available for years prior to 2001.) 

The study finds that, for total trade, there is absolutely no relationship between exchange rate and balance of trade.  The U.S. balance of trade was just as likely (or slightly more likely) to worsen in response to a weaker dollar as it was to improve, and vice versa.  A year-by-year analysis shows that the balance of trade responded to exchange rate changes as economic theory would predict almost exactly (but slightly less) than half of the time.  When the 19-year period is taken as a whole and compared to the change in exchange rate for each country, the balance of trade behaved as economic theory would predict in less than half of the cases.  And it seemed to make no difference whether the trade partner was more or less densely populated than the U.S.

If we narrow our scope to manufactured products only, the story is exactly the same except that if Singapore (the tiniest of America’s 15 largest trade partners) is removed from the data set, then population density does seem to matter.  For trade between the U.S. and nations less densely populated, the balance of trade does seem to respond to changes in currency exchange rates as economic theory would predict.  But that tendency decays with rising population density and, for trade with nations more densely populated than the U.S. by a factor of two, a weakening dollar has no effect on improving the balance of trade.  If anything, in trade with densely populated nations, the balance of trade tends to worsen regardless of a weakening dollar.

The population density of the trade partner is a far better predictor of the balance of trade in manufactured products.  (The population density theory applies only to manufactured products and not trade in natural resources.)  For trade partners less densely populated than the U.S., the theory correctly predicts a surplus of trade in every case.  For those nations more densely populated, the theory correctly predicted a trade deficit in 9 out of 11 cases.  (Since the theory doesn’t apply to tiny city-states, Singapore is excluded from the data set.) 

Here’s a summary of the study’s findings:

Theory Correlation Score

Conclusisons and comments regarding total trade:

  1. Among the trade partners less densely populated than the U.S., the balance of trade responded to changes in currency exchange rate as predicted by economic theory, year-by-year, only 47% of the time.  Taking the 19-year period as a whole, the balance of trade responded as predicted by economic theory for only two out of five nations – 40% of the time.
  2. Among the trade partners more densely populated than the U.S., the balance of trade responded to changes in currency exchange rate as predicted by economic theory, year-by-year, only 46% of the time.  Taking the 19-year period as a whole, the balance of trade responded as predicted by economic theory for only five out of twelve nations – only 42% of the time.
  3. This lack of correlation between total balance of trade and currency exchange rate may be partly explained by the fact that, aside from manufactured products, the remainder of total trade is dominated by oil.  Since oil is priced in dollars, there is no exchange rate involved in the trade of oil. 

Conclusions and comments regarding trade in manufactured products:

  1. Among the trade partners less densely populated than the U.S., the balance of trade in manufactured products responded to changes in currency exchange rate as predicted by economic theory, year-by-year, 49% of the time.  Taking the 19-year period as a whole, the balance of trade responded as predicted by economic theory for three out of five nations – 60% of the time.  Thus, there’s at least some slight indication that currency exchange rate does play a role in trade in manufactured goods with less densely populated nations.
  2. Among the trade partners more densely populated than the U.S., the balance of trade in manufactured products responded to changes in currency exchange rate as predicted by economic theory, year-by-year, only 48% of the time.  Taking the 19-year period as a whole, the balance of trade responded as predicted by economic theory for six out of twelve nations – 50% of the time.  Thus, for densely populated trade partners, currency exchange rate plays no role in determining the balance of trade.
  3. On the other hand, population density plays a powerful role.  In every case in the study, the U.S. enjoys a surplus of trade in manufactured products with less densely populated nations.  Conversely, the U.S. has a surplus of trade with only three out of twelve more densely populated nations.  One of these three, Colombia is only very slightly more densely populated than the U.S.  Both of the remaining two share a common trait – they are tiny nations that serve as a port of entry for the larger surrounding countries. 

In conclusion, other than some slight indication of a correlation for trade in manufactured products with less densely populated nations, currency exchange rate has absolutely no effect upon balance of trade, especially with densely populated nations. 

Clearly, those who are pinning their hopes on a weaker dollar to rebalance the global economy, especially trade with China, are barking up the wrong tree.


“Race to the Bottom” Author Endorses Tariffs to Reduce Trade Deficit

November 15, 2010

http://finance.yahoo.com/tech-ticker/the-high-cost-of-%27free%27-trade-obama-%22doesn%27t-understand-fundamental-reality%E2%80%9D-expert-says-535581.html?tickers=FWI,EEM,EWJ,EPP,EWY,PIN,INP

Thanks to Mike Folkerth for sending me the above link to a video of an interview of Alan Tonelson, author of Race to the Bottom.  Mr. Tonelson makes the point that no economic recovery in the U.S. will be possible until we make major changes in trade policy, implementing tariffs to massively shift from offshore production to domestic production of the products that we consume.  Mr. Tonelson says that doubling exports will do nothing to help the economy – that what’s really needed is a boost of net exports, which means reducing the trade deficit.  I couldn’t agree with him more.  It’s a great interview.  Enjoy! 

(Thanks again, Mike!)


2011 Predictions

November 15, 2010

I have just published my annual predictions for the coming year.  Click “2011 Predictions” under “pages” on the right hand side. 

To summarize, I’m predicting that the economy will continue to erode while global tensions increase.  But I’m not yet predicting an event that pushes the escalating trade war over the brink.


Time to “Man Up,” Mr. President!

November 12, 2010

http://www.cnbc.com/id/40130051

President Obama will be returning home from Asia empty-handed.  The G20 has pushed him around and South Korea poked its finger in his eye with their refusal to open their market to American cars, in spite of selling millions of them in the U.S.  Aside from a promise by India to buy a few cargo planes (which they probably had planned to buy anyway), he has nothing to show for his efforts except a few footprints on his backside, a black eye and a fat lip.  Bullying Barack has become the new sport on the global school playground. 

It should come as no surprise.  Like a pack of wolves, these bullies can smell fear and weakness.  His weakness in negotiating became evident almost immediately.  When he went to Mexico to complain about the terms of the NAFTA trade agreement, he was sent packing with a bunch of new Mexican tariffs.  He made no response.  When he delayed allowing Mexican big rigs access to American highways, they smacked him with even more tariffs.  Still no response.  At the same time, while everyone inside and outside the auto industry knew that the Japanese were dumping vehicles on the American market, Obama pretended not to notice. 

So it’s no wonder that he’s now endured the biggest humiliation yet at the hands of South Korea.  In spite of taking in this orphan six decades ago, nurturing it and sheltering it from the bully to the north, it’s now clear that we’ve rasied a spoiled brat.  After all we’ve done for South Korea, including opening our market to their cars, they thank us by refusing to allow us to sell them a few.   They gave our president a swift kick and a push, laughing at his weakness.  He then found himself confronted by the G20 and they too, laughing at his feeble attempts to address China’s currency valuations and global trade imbalances, gave him another shove. 

Yet, all the while, he remains in denial, thinking these are his friends.  As reported in the above-linked article:

…. he contended he has now developed genuine friendships with leaders including Indian Prime Minister Manmohan Singh, German Chancellor Angela Merkel and South Korean President Lee Myung Bak — and even Chinese President Hu Jintao.”That doesn’t mean there aren’t going to be differences,” the president added.

This is sickening.  Mr. President, these aren’t your friends.  They’re your (our) trade adversaries.  Just because you’re unwilling to put up a fight doesn’t mean you’re not in one.  Until you display some backbone and come out fighting, they’re going to continue to treat us this way.  It doesn’t have to be like this.  You could change it in a heartbeat.  Like a kid on a playground who gets pushed around and shoved to the ground one too many times and suddenly comes up with a baseball bat he found lying on the ground next to him, their attitudes would adjust very quickly.  Watch how fast they start back-pedaling.  “Hey.  Barack.  We’re still buddies, right?  You know we were just kiddin’ around, right?” 

South Korea’s refusal to open its market to American cars screams out for a response.  The most obvious response would be to immediately slap a 50% tariff on Korean auto imports.  If we can’t sell them cars, why should we buy any of theirs?  If they don’t like it, then perhaps it’s time to start withdrawing our forces from the Korean peninsula.  South Korea is of little strategic significance anyway.  Who needs them?  Who cares if they end up groveling in the rice paddies for the “dear leader?”  Good riddance. 

It’s time to “man up,” Mr. President.  See that bat lying on the ground next to you (the one whose label reads “tarriffs” instead of “Louisville Slugger”)?  Pick it up.


Exports Lag Further Behind Obama’s Goal

November 10, 2010

http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

This morning the Bureau of Economic Analysis released its monthly report of U.S. International Trade in Goods and Services for the month of September.  (Link provided above.)  The good news is that the trade deficit for September fell slightly to $44.0 billion from $46.7 billion in August. 

And exports did rise very slightly, by about $0.5 billion.  But, in order to keep pace with President Obama’s goal of doubling exports in five years, they need to be rising by about $2.0 billion per month.  Here’s a chart:

Obamas Goal to Double Exports, 1st year

As you can see, exports are beginning to lag well behind the president’s goal.  This is no surprise, since no nation has any control over its exports, other than to make sure its domestic industry is efficient and competitive.  Exports are totally dependent on foreign demand, over which we have zero control.

What we do have the ability to control completely is imports.  The U.S. simply chooses not to.  We choose not to because that wouldn’t be in keeping with the spirit of free trade, and we have blindly placed complete faith in the theory that free trade benefits all, in spite of the fact that it’s nothing more than a theory – one that was never proven and in spite of the fact that it runs contrary to the growing mountain of evidence. 

Nevertheless, imports did decline in September by about $2.0 billion.  That would be good news if the decline occurred for the right reason – because the manufacture of some products was returning to the U.S.  But that’s not the case.  No manufacturing has returned.  In all likelihood, the decline in imports is due to a softening economy. 

The president’s real goal is to export our way out of our huge trade deficit, increasing exports faster than imports.  By this measure too, the plan is a failure.  The trade deficit has widened dramatically, from $35 billion per month when he set this goal in January to about $45 billion per month now.  Here’s the chart:

Balance of Trade

As I write this, the president is on a trade mission to Asia with the stated goal of “opening new markets.”  The problem is that opening new markets always begins with opening ours first.  Decades of “opening new markets” is what’s led to a $10 trillion cumulative trade deficit since our last surplus in 1975.  Einstein once said that the definition of insanity is to keep doing the same thing while expecting different results.  I wonder what he would call doing the same thing for six decades?


2010 Predictions Updated Through 3rd Quarter

November 8, 2010

Just to let you know that I just finished updating my 2010 predictions.  A few big misses, but also some nearly perfect predictions.  It’s important to remember that these predictions were made in November of 2009.  My best predictions were in regards to Federal Reserve actions and the outcome of the 2010 midterm election. 

Just click on the link on the right side of this page.