Darkness before dawn?

Caroline Baum
Analyst, "Bloomberg News"

The most discussed, analyzed, bloated and politicized topic of the past six months has been the topic of reducing the U.S. dollar and increasing U.S. trade deficit. Relationships do not work in the manner as expected - economists say. The fall of the dollar, seen as making U.S. exports more attractive to foreigners and increases the price of imported goods, reducing demand and reducing the trade deficit. The message a week ago about the record trade deficit of $ 60.3 billion in November, causing a new wave of "Ohoven and ????" the observer, the shock and fear among analysts (the deficit was at $ 6 billion higher than average ratings), and the cries of "this does not work "with anyone else. And just in case someone missed the main quote in all reports on this topic, the trade deficit is still "nezhiznesposoben" after all these years, reducing the dollar. Turning back to the late 1980's, you can remember that was a great conversation about what some called "J-curve effect." The effect of the first order of substantially supported by the devaluation of the currency is the worsening trade deficit because imports cost more. It will take time to export and import adjustments - exports rose and imports declined - in this case, the deficit is shrinking.

Darkness before dawn?

The American current account deficit, which was at near-record 5.6% of gross domestic product in the third quarter could be even worse in the fourth, before the situation improves. It took a 58.5% drop in th trade-weighted dollar index since the beginning of 1985 until the end of 1987, before any improvements have begun to emerge in the current account deficit - the measurement of the extended trade. Only when the United States have been infected with an old disease - recession - in 1990, 1991., The current account returned to surplus for the first time after almost a decade. In such a case may be, increased globalization and interdependence influence the reaction of reducing currency. As part of its review of the business in December, the Federal Reserve Bank of Philadelphia, including a special issue on the dollar. Respondents were asked to evaluate the effect of reducing the dollar as the import prices, and on exports.

Negatives outweigh the positives

The results are not entirely consistent with the intuitively-expected. More than half (54.4%) stated that the weaker dollar had a negative impact on the business of import prices, while only 37.7% said that it had a positive impact on exports. The answer to the question of import is likely to reflect higher prices for imported products and increased competition from countries whose exchange rates do not greatly fluctuated, according to Mike Trebingu, a senior economic analyst at the Federal Reserve Bank of Philadelphia, who was responsible for monthly review.

Even more curiously, that 45.4% of respondents stated that the U.S. has not had any effect or had a negative effect on the export of - yes, export! that compels us to ask for the prescription of a weaker dollar as a panacea to the economic problems the United States. The benefits of a weaker dollar may be lost due to adverse effects on foreign economies, which depend on the huge U.S. appetite for imports to encourage domestic production ", said a senior U.S. economist," JPMorgan Chase and Co. " Jim Glassman.

"In a perfect world, where economies of trading partners to ensure the U.S. grew at a pace weaker dollar would change the balance of trade," said Glassman.

The lack of effect

As the world is not perfect, and most of our trading partners have some problems adjusting the balance of trade takes place through various channels, "continued Glassman. Foreign exporters' prefer more down the differential exchange rate and lower cost to repay it in another location, such as the location of production in other countries, he said. Euro rose by about 50% against the dollar over the past three years, and yet the "BMW" and "Gucci" is not shut down stores in the United States. German exports to countries outside the Euro-zone rose by 10.8% last year, according to preliminary data released by the Federal Department of Statistics of Germany.

Since the early 1990's, the U.S. dollar was very weak and very strong against the various European currencies and the euro, which was introduced in January 1999. Yet the U.S. trade deficit with the European Union knows only one direction - a. Looking at bilateral trade deficits at all, "it is difficult to find a statistical correlation between the movements of the dollar and trade," said the president "Bianco Research" Jim Bianco.

Reduced productivity

"Even if there is a correlation," Bianco continued, "the trade deficit is approximately 25% of the total U.S. production base. We do not have domestic manufacturing capacity to produce required to correct this imbalance volume. The degree of capacity utilization was 77.8% in December, while 30-year average level, according to the Federal Reserve. Assuming that productivity growth and the extent to which measured correctly (this is a big issue) and, assuming that the dollar could decline enough to eliminate the trade deficit is not destabilizing the market for bonds and stock markets, there is no sufficient production capacity in the U.S. to produce more products at $ 600 billion that the U.S. imported last year (the U.S. has a small surplus in the service sector). And the idea of slowing domestic growth a priority to stop unviable trade deficit, which will not be supported if it nezhiznesposoben has the same meaning as the destruction of our own infrastructure to stimulate growth through its recovery.

Forex Magazine
based on www.bloomberg.com