Tuesday, October 26, 2010

A little perspective on the impact that a weaker USD will have on overall economic activity

The Japanese yen, the Eurozone euro, and the British pound have appreciated 16%, 14%, and 9%, against the USD, respectively, since their 2010 lows. Some say that the "US wins" since the Fed's quantitative easing (QE2) will drive export growth via a weaker dollar. (Note that the Fed has not actually announced QE2, this is all just speculation.)

I'm not suggesting that the stated Fed policy will be to drive down the dollar. What I do know, however, is that the United States production model is not structurally positioned to enjoy the economic panacea that is a persistent debasement of the dollar, neither in the near- nor medium- term.



The bottom chart illustrates the export share in overall economic GDP, as forecasted by the European Commission (you can download this data at the Eurostat website). Notice that the US share of exports, expected to be just 12.3% in 2010, is minuscule compared to the export markets in Europe. So what I gather from a chart like this is that the weak dollar will hurt Europe much more than it will "help" the United States.

We need domestic policy to support full employment and the expansion of our export sector that will eventually arise. See Marshall Auerback's post this week at Credit Writedowns for a discussion on austerity, currency wars, and exchange rates.

Rebecca Wilder

2 comments:

  1. hi Rebecca - clicked on your Marshall link hoping for the "intelligent discussion" that would influence my view, only to find it a wee bit one-sided i.e. a discussion between Marshall and Marshall!

    he knows that whilst I respect his views (widely aired previously on Ed's site and elsewhere of course), I've been unable to get to grips with them without seeing the pot-holes on his particular road - holes that have been well-aired by greater minds than mine...

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  2. Hi Stevie,

    I believe that this part is interesting:


    "The irony, of course, is that (as Warren Mosler, amongst others has noted before), when China does begin to construct policies which allows its population to fully consume the fruits of its own economic output, then we’ll be paying a lot more for basic stuff.  Remember how great it felt to be paying $5.00 per gallon for gas during the oil run-up in the summer of 2008?  That’s going to be child’s play compared to what’s ahead.  But we don’t take advantage of the gift that China is giving us and things will get worse because we don’t understand basic public reserve accounting.<span>"

    See, people are essentially asking for stronger global demand and higher energy prices (given the supply limitations) - that's part of the process, but often goes unreported when discussing the USDYEN.</span>
    Thanks for coming by,

    Rebecca

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