Political Crossfire Forums

[TheKrava]

I found something interesting in one economics book and wanted to present it to you.
I also wanted to find out what you think about it.

My opinion is that dollar should keep losing value to improve our balance of payments and trade deficit.

Quote:
We have seen that currency depreciation tends to improve a nation's competitiveness by reducing its costs and prices, while currency appreciation implies the opposite. Under what circumstences will currency depreciation succeed in reducing a payments deficit?
Several approaches to currency depreciation must be considered [...] The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation works the best when demand elasticities are high. The absorption approach deals with the income effects of depreciation; the implication is the a decrease in domestic expenditure relative to income must occur for depreciation to promote payments equilibrium. The monetary approach stresses the effects depreciation has on purchasing power of money and the resulting impact on domestic expenditure levels.

International Economics, 10th edition, Robert Carbaugh, p. 422

[LeopardPM]

TheKrava wrote: I found something interesting in one economics book and wanted to present it to you.
I also wanted to find out what you think about it.

My opinion is that dollar should keep losing value to improve our balance of payments and trade deficit.

Quote:
We have seen that currency depreciation tends to improve a nation's competitiveness by reducing its costs and prices, while currency appreciation implies the opposite. Under what circumstences will currency depreciation succeed in reducing a payments deficit?
Several approaches to currency depreciation must be considered [...] The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation works the best when demand elasticities are high. The absorption approach deals with the income effects of depreciation; the implication is the a decrease in domestic expenditure relative to income must occur for depreciation to promote payments equilibrium. The monetary approach stresses the effects depreciation has on purchasing power of money and the resulting impact on domestic expenditure levels.

International Economics, 10th edition, Robert Carbaugh, p. 422

thats all well and good - except that what is ignored is the unintended consequences of currency devaluation:
1: Inflation (could also spark hyperInflation and currency crash - very bad thing)

2: disincentive to savings - leads to lower future productivity increases

3: wealth transfer from the poor and those on fixed incomes (the aged) to the rich and politically connected.

4: general decrease in overall wealth

5: the assumption that it is legal to do such a thing (violatation of rights by government via central banks)

[LostSoul3412]

Deflation is a very dangerous and chaotic thing for any economy... More often than not, deflation leads to depression because of the market's inability to stop it.

However, inflation is also a bad thing. While it is not as dangerous as deflation is, inflation still harms a domestic economy.

Ideally, a currency's value should remain constant; but this is impossible under modern economics. Under mondern economics, the medium of trade (currency) is also a commodity. Its value should fluxuate with the market.

[Free Thinkr]

"We have seen that currency depreciation tends to improve a nation's competitiveness by reducing its costs and prices, while currency appreciation implies the opposite."

What is this supposed to mean (improve a nation's competitiveness)?

[Iriemon]

LeopardPM wrote: TheKrava wrote: I found something interesting in one economics book and wanted to present it to you.
I also wanted to find out what you think about it.

My opinion is that dollar should keep losing value to improve our balance of payments and trade deficit.

Quote:
We have seen that currency depreciation tends to improve a nation's competitiveness by reducing its costs and prices, while currency appreciation implies the opposite. Under what circumstences will currency depreciation succeed in reducing a payments deficit?
Several approaches to currency depreciation must be considered [...] The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation works the best when demand elasticities are high. The absorption approach deals with the income effects of depreciation; the implication is the a decrease in domestic expenditure relative to income must occur for depreciation to promote payments equilibrium. The monetary approach stresses the effects depreciation has on purchasing power of money and the resulting impact on domestic expenditure levels.

International Economics, 10th edition, Robert Carbaugh, p. 422

thats all well and good - except that what is ignored is the unintended consequences of currency devaluation:
1: Inflation (could also spark hyperInflation and currency crash - very bad thing)

2: disincentive to savings - leads to lower future productivity increases

3: wealth transfer from the poor and those on fixed incomes (the aged) to the rich and politically connected.

4: general decrease in overall wealth

5: the assumption that it is legal to do such a thing (violatation of rights by government via central banks)

A supplement to #2 pertinent to current time where our irresponsible Govt is funding itself by borrowing trillions of dollars --

One of the reasons why the USGovt has been able to borrow $1.4 trillion in the open market since 2000 is because the USGovt is viewed as a safe investment. That comes from two components -- the stability of the govt (that is pretty safe) but also the stability of its currency.

If you lend $1000 and expect to get $1000 back in a year plus interest, you would accept a low rate of interest.

However, if you lend $1000 and expect to get back currency that is only worth $900 relative to every other currency in the world, you are going to demand 10% for expected currency devaluation plus interest. That will increase the Govt cost of debt and cause the interest expense component of the Govt expenditures to rise dramatically.

Perhaps we are already seeing this happen -- hard to tell exactly because the interest rates are also affected by the money supply (which in turn affects the value of the currency).

[Gus]

Free Thinkr wrote: "We have seen that currency depreciation tends to improve a nation's competitiveness by reducing its costs and prices, while currency appreciation implies the opposite."

What is this supposed to mean (improve a nation's competitiveness)?
It means that as the U.S. dollar depreciates, then demand for U.S. exports tends to rise.

Suppose in 2010 that $1 = ¥10. In 2012, if $1 = ¥20, then the Japanese would have to pay twice as much for a unit of corn. That would tend to drive U.S. export demand down a LOT (and would increase the trade deficit). The opposite happens during depreciation--the Yen would buy more U.S. dollars, instead of less, so the Japanese demand for U.S. exports would rise because Japanese prices for U.S.-produced commodities would be lower.

Basically, currency depreciation tends to decrease the trade deficit.

[LeopardPM]

Gus wrote: Free Thinkr wrote: "We have seen that currency depreciation tends to improve a nation's competitiveness by reducing its costs and prices, while currency appreciation implies the opposite."

What is this supposed to mean (improve a nation's competitiveness)?
It means that as the U.S. dollar depreciates, then demand for U.S. exports tends to rise.

Suppose in 2010 that $1 = ¥10. In 2012, if $1 = ¥20, then the Japanese would have to pay twice as much for a unit of corn. That would tend to drive U.S. export demand down a LOT (and would increase the trade deficit). The opposite happens during depreciation--the Yen would buy more U.S. dollars, instead of less, so the Japanese demand for U.S. exports would rise because Japanese prices for U.S.-produced commodities would be lower.

Basically, currency depreciation tends to decrease the trade deficit.
while that has some merit, the underlying 'problem' is really no problem at all - there is nothing wrong with a 'trade deficit'... so what if we buy more goods to a particular country than they purchase from us.... they get more of our worthless currency than we get of theirs PLUS we get actual tangible goods in exchange for this paper we print up at our whim.... bad deal for the exporter to us, I say. The trade deficit crisis is no crisis at all, bunch of political propogandizing and attempts at nationalistic fever for political gain. OMG! I have a HUGE trade deficit with my grocer! I buy all manner of goods from him and he buys NOTHING from me!!! Whatever shall I do?!!!

[Iriemon]

LeopardPM wrote: Gus wrote: Free Thinkr wrote: "We have seen that currency depreciation tends to improve a nation's competitiveness by reducing its costs and prices, while currency appreciation implies the opposite."

What is this supposed to mean (improve a nation's competitiveness)?
It means that as the U.S. dollar depreciates, then demand for U.S. exports tends to rise.

Suppose in 2010 that $1 = ¥10. In 2012, if $1 = ¥20, then the Japanese would have to pay twice as much for a unit of corn. That would tend to drive U.S. export demand down a LOT (and would increase the trade deficit). The opposite happens during depreciation--the Yen would buy more U.S. dollars, instead of less, so the Japanese demand for U.S. exports would rise because Japanese prices for U.S.-produced commodities would be lower.

Basically, currency depreciation tends to decrease the trade deficit.
while that has some merit, the underlying 'problem' is really no problem at all - there is nothing wrong with a 'trade deficit'... so what if we buy more goods to a particular country than they purchase from us.... they get more of our worthless currency than we get of theirs PLUS we get actual tangible goods in exchange for this paper we print up at our whim.... bad deal for the exporter to us, I say. The trade deficit crisis is no crisis at all, bunch of political propogandizing and attempts at nationalistic fever for political gain. OMG! I have a HUGE trade deficit with my grocer! I buy all manner of goods from him and he buys NOTHING from me!!! Whatever shall I do?!!!

Yeah, I never quite understood what the big deal was with a trade deficit as well. It's not like it builds up a big trade debt or some other obligation with long term effects, that I am aware of.

[Free Thinkr]

Gus wrote: Free Thinkr wrote: "We have seen that currency depreciation tends to improve a nation's competitiveness by reducing its costs and prices, while currency appreciation implies the opposite."

What is this supposed to mean (improve a nation's competitiveness)?
It means that as the U.S. dollar depreciates, then demand for U.S. exports tends to rise.

Suppose in 2010 that $1 = ¥10. In 2012, if $1 = ¥20, then the Japanese would have to pay twice as much for a unit of corn. That would tend to drive U.S. export demand down a LOT (and would increase the trade deficit). The opposite happens during depreciation--the Yen would buy more U.S. dollars, instead of less, so the Japanese demand for U.S. exports would rise because Japanese prices for U.S.-produced commodities would be lower.

Basically, currency depreciation tends to decrease the trade deficit.
Oh, that much I understand; my problem is with the term "competitiveness."

[Free Thinkr]

Iriemon wrote: LeopardPM wrote: while that has some merit, the underlying 'problem' is really no problem at all - there is nothing wrong with a 'trade deficit'... so what if we buy more goods to a particular country than they purchase from us.... they get more of our worthless currency than we get of theirs PLUS we get actual tangible goods in exchange for this paper we print up at our whim.... bad deal for the exporter to us, I say. The trade deficit crisis is no crisis at all, bunch of political propogandizing and attempts at nationalistic fever for political gain. OMG! I have a HUGE trade deficit with my grocer! I buy all manner of goods from him and he buys NOTHING from me!!! Whatever shall I do?!!!

Yeah, I never quite understood what the big deal was with a trade deficit as well. It's not like it builds up a big trade debt or some other obligation with long term effects, that I am aware of.
LeopardPM hit the nail on the head: it's about political propaganda. Individuals want public money in the form of "protections," and the general public's ignorance is preyed upon in order to push the policy through.

If you polled people, I'd bet my right nut that 80% or more would agree that protections are a good idea in principle.

[ubikk]

TheKrava wrote: I found something interesting in one economics book and wanted to present it to you.
I also wanted to find out what you think about it.

My opinion is that dollar should keep losing value to improve our balance of payments and trade deficit.


I agree. The downside is that anything we import a lot of, like oil, goes up in price. The drop in the dollar over the last 2 years has probably added $15 to the price of a barrel of oil. It makes it cheaper for people with other currencies to buy and they compete with us for it.

[ubikk]

Iriemon wrote:
Yeah, I never quite understood what the big deal was with a trade deficit as well. It's not like it builds up a big trade debt or some other obligation with long term effects, that I am aware of.

Yes it does. When you spend more than you make, you have to bring in money from another country to make up the difference. Our trade defcit is being balanced by foreign investment.

IOW, we're selling a piece of America every day to foreigners in echange for stuff. Be it stock, bonds, real estate, whatever. If it goes on indefinitely, eventually, they'll own everything.

The only way out of that is to nationalize everything and take it back. Then no one will ever invest in your country again.

[LeopardPM]

ubikk wrote: Iriemon wrote:
Yeah, I never quite understood what the big deal was with a trade deficit as well. It's not like it builds up a big trade debt or some other obligation with long term effects, that I am aware of.

Yes it does. When you spend more than you make, you have to bring in money from another country to make up the difference. Our trade defcit is being balanced by foreign investment.
and here is where the misinformation starts - just because we buy more stuff from another country than they buy from us does NOT mean we are spending more than we make.... that is simply an untrue analogy. Compare total imports to GDP and you will see that we spend like 5-10% of 'what we make'.

Now, the second part of your response is much clearer - this is the way the transactions occur:
1) We trade dollars for foreign goods

2) They then have a bunch of dollars and they can't spend them anywhere but in the US and for oil (since the agreement by OPEC to sell all oil in dollars, thus the name for the dollar of 'petro-dollar'). They use the dollars to purchase their oil, but they still have a great abundance of dollars so they buy stuff from us, not what we make, cause they don't want it, so they buy assets (companies, land, buildings, etc) and they buy Treasurey bills so they get some sort of return (interest).

so, the end reult is basically as you said, we are trading our assets for goods and services - this is not a great thing to do in the longterm - you want to pay for expenses out of income, NOT from the proceeds of asset sales because you eventually run out of assets (the entire country 'owned' by foreigners - which doesn't mean its a bad thing, just not the best policy).

Quote: IOW, we're selling a piece of America every day to foreigners in echange for stuff. Be it stock, bonds, real estate, whatever. If it goes on indefinitely, eventually, they'll own everything.
yes - except there is a natural market pressure which will stop the direction of asset flows and cash, and the market will correct itself before other people 'own everything'.


Quote: The only way out of that is to nationalize everything and take it back. Then no one will ever invest in your country again.
no way - this is far from the only thing to do. The best thing to do would be to get rid of the federal reserve and allow private money to form to not only correct the current problem, but also prevent such things from occuring so badly in the future. Nationalizing everything would be a complete disaster, not only in our credibility, but we would make some serious enemies... ALOT of them. What happens if you don't pay your debts to the mafia? Worse fate would befall americans.

[Iriemon]

LeopardPM wrote:
...

The best thing to do would be to get rid of the federal reserve and allow private money to form to not only correct the current problem, but also prevent such things from occuring so badly in the future. ...

I was with you until this part. Somehow getting rid of a national currency and basing monetary exchange on an infinite variety of bank notes doesn't seem like a solution to anything to me.

[ubikk]

Quote: yes - except there is a natural market pressure which will stop the direction of asset flows and cash, and the market will correct itself before other people 'own everything'.

Normally there is, but in the case of China, they have pegged their currency to the dolalr and essentially blocked that pressure. They like being able to buy up our assets and to see our technology and production capacity moving into their country.

China's actions have been enacted at the expense of their own people, who's wealth should legitimately be rising and they should be buying more of our exports.

[lowchen]

The us dollar will be worth less by at least 20%. Ths is why many continue to buy gold and sliver.

[ubikk]

lowchen wrote: The us dollar will be worth less by at least 20%. Ths is why many continue to buy gold and sliver.

The natural consequence of a lower dollar is inflation and a loss of wealth. It means that everyone's net wealth and income will decrease by 20% in your formula.

This is going to have to happen, but I'm not sure people are ready for a net decrease in their standard of living. That is what is going to have to happen until the balance of trade reverses and net wealth starts flowing back into the country.

[TheKrava]

ubikk wrote: lowchen wrote: The us dollar will be worth less by at least 20%. Ths is why many continue to buy gold and sliver.

The natural consequence of a lower dollar is inflation and a loss of wealth. It means that everyone's net wealth and income will decrease by 20% in your formula.

This is going to have to happen, but I'm not sure people are ready for a net decrease in their standard of living. That is what is going to have to happen until the balance of trade reverses and net wealth starts flowing back into the country.

The US economy is elastic, so depreciation of dollar percentage-wise will not have the same effect in people's incomes. Also, lower dollar will stimulate exporting industries, thus creating jobs. ;)

Also, if you noticed: last several years dollar was falling, but peoples incomes were actually raising. ;)

[LeopardPM]

Iriemon wrote: LeopardPM wrote:
...

The best thing to do would be to get rid of the federal reserve and allow private money to form to not only correct the current problem, but also prevent such things from occuring so badly in the future. ...

I was with you until this part. Somehow getting rid of a national currency and basing monetary exchange on an infinite variety of bank notes doesn't seem like a solution to anything to me.

who said anything about 'bank notes'? How about if people choose to use whatever they determine best - in the past it has been gold and silver mostly. But these days, with technology, I might think that some kind of money market/basket of commodity goods account could easily facilitate all of peoples needs: diverse value security, easy ability to calculate exchange rates and trading prices, all through electronic 'debit cars' or whatever. If freed up from the dual yokes of regulation and federal reserve monopoly law, I would bet that we could see a variety of very secure, very stable banking choices and methods of exchange choices.