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Home Publications Blogs Beat the Press It Isn't Trade Deals That Prevent the Obama Administration from Lowering the Value of the Dollar

It Isn't Trade Deals That Prevent the Obama Administration from Lowering the Value of the Dollar

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Wednesday, 05 June 2013 04:54

Harold Meyerson has an interesting column warning of conditions that are likely to be in the Trans-Pacific Partnership. However it is misleading in one important respect.

At one point the article notes efforts by Senator Sherrod Brown to require rules that will the United States to retaliate against currency "manipulators," countries that deliberately prop up the value of the dollar against their own currency in order to increase their trade surplus. This is misleading because the United States already has this authority (see this piece, for example) and under almost any conceivable set of circumstances will possess ample means to force down the value of the dollar relative to other currencies.

The reason that the United States runs an over-valued currency, placing U.S. goods and services at a competitive disadvantage, is that powerful interest groups profit from having an over-valued currency. Retailers like Walmart have spent large amounts of money setting up low-cost supply chains in China and other developing countries. This is an important source of their advantage over smaller competitors. They are not anxious to see this advantage eroded by a fall in the value of the dollar.

Similarly, large manufacturers like GE have much of their production overseas. These companies also do not want to see their profits eroded by a fall in the value of the dollar. Major financial companies like Goldman Sachs and JP Morgan also tend to favor a high dollar since it means that their money goes further elsewhere in the world and it minimizes the risk of inflation in the United States.

These and other powerful domestic interests are the main reason that the United States does not take steps to reduce the value of the dollar and bring the trade deficit closer to balance. It is misleading to imply that the problem is trade agreements that prevent the Obama administration from acting.

Note -- "rise" was changed to "fall" in 3rd paragraph, thanks David H.

Comments (8)Add Comment
fall instead of rise?
written by David H, June 05, 2013 6:14
Dean,

Shouldn't the last sentence in paragraph three say fall instead of rise?
To Manipulate or Be Manipulated: That is the Question
written by Last Mover, June 05, 2013 7:03
Speaking of trade and Walmart, where's the outcry from politicians and economists when Walmart has to subsidize its "low cost supply chains" not only through a higher dollar but domestic government subsidies as well provided to its underpaid employees?

Why isn't Walmart held up as the poster child of cultural dependency inbred by a socialist state, the same way its employees are?
a problem with trade
written by pjm, June 05, 2013 7:14
Dean, I have to point out that you have argued (excluding considerations of the financial industry) that our "free" trade paradigm creates an incentive to have the most socially disruptive experience of trade possible.
I.e., we want the benefits from trade and we want to be able to manage the costs (potential disruption, inequality, etc.) but trade policy spawns a political bloc that benefits (via a strong US dollar) from the most disruption (e.g., rapid loss rate of manufacturing).
So is promoting trade (free, distorted, whatever) and a weak dollar policy a political counter-factual?
...
written by skeptonomist, June 05, 2013 8:54
One thing that will discourage US politicians from acting to reduce the value of the dollar is that it must cause inflation if it is to be effective. The price of foreign goods must go up before production is returned to the US and jobs are re-created. I don't know how aware politicians are of this connection now, but if inflation does become significant there will certainly be calls for authorities, including the Fed, to do something about it. Dean and others who call for reducing the dollar's value and for inflation in general seem to be oblivious to these political difficulties, and to the (temporary) reduction in standard of living in the US that would be involved.
http://cob.jmu.edu/rosserjb
written by Barkley Rosser, June 05, 2013 2:32
It is not obvious that the US $ is all that overvalued. When the latest round of QE was put in, both the Germans and the Chinese screamed bloody murder that the US was engaging in "beggar thy neighbor" currency manipulation, and indeed at first the dollar did fall. The yuan/rmb has recently reached major new highs against it, although the euro has slid back somewhat, and of course with Abenomics, the Japanese yen is falling sharply.
wack a mole dollars
written by pete, June 06, 2013 10:18
If there are fewer dollars, dollars are expensive, in terms of U.S. goods and services, or foreign currencies. Thus, the fed controls the value of the dollar, not the treasury. Currenly the monetary base is high, but "money" has not grown much. When money finally grows, the dollar will fall, down will come baby, cradle and all. Falling dollar means real U.S. wages (both on a global basis and in domestic terms) will fall, making U.S. manufacturing more competitive. But for consumers, goods will cost more. No more cheap clothing/shoes/wine/blueberries. Why is this good?

This is like Krugman saying the U.S. was better off during WWII. Of course, GNP was up! We produced a lot of tanks and boats, some of which are still sitting in SF Bay, but there was nothing to eat, no gasoline, there were food coupons, etc.
The current account is the measure of whether a currency is over-valued
written by Dean, June 06, 2013 4:22
Barkley,
what measure do you use, the Rosser-test? Isn't whether or not people buy more of country A's goods and services or country B's the best measure of the whether a currency is properly valued? If there is no intervention by governments and not unusual factors (e.g. an investment boom in one country) we would expect a current account surplus to be associated with a rising value of the currency and a deficit to be associated with a falling value.
...
written by zinckly, June 07, 2013 7:40
"The reason that the United States runs an over-valued currency, placing U.S. goods and services at a competitive disadvantage, is that powerful interest groups profit from having an over-valued currency. Retailers like Walmart have spent large amounts of money setting up low-cost supply chains in China and other developing countries. This is an important source of their advantage over smaller competitors. They are not anxious to see this advantage eroded by a fall in the value of the dollar."

That one paragraph pretty much sums up the thing that ails the US and lays low the whole free trade BS.

The damage caused by Terrorism is small potatoes compared to the damage inflicted on the US by our the free trade corporate sector. The mystery is why we tolerate it.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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