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Home Publications Blogs Beat the Press News Flash!!!! A Falling Currency Is How Trade Deficits Adjust!

News Flash!!!! A Falling Currency Is How Trade Deficits Adjust!

Saturday, 06 November 2010 15:46

Okay, let's wash away the ungodly stupidity. Doesn't anyone take intro econ anymore? Here's the test question and no one gets to write on currency or trade policy until they get it right.

If a country has a large trade deficit in a system of floating exchange rates how does it move to balance? Yes, that's right, its currency falls in value. That's the whole story, everything else is secondary.

So, the United States has a large and growing trade deficit. Do you want the trade deficit to fall? If so, then you want the dollar to decline in value. The value of the dollar determines the cost of U.S. exports to other countries and the cost of imports for people in the United States. The former is high now and the latter is cheap. That is why we have a trade deficit.

We shouldn't have to read any more pieces like this one in the NYT. Make these folks learn a little basic economics.


Comments (8)Add Comment
written by izzatzo, November 06, 2010 7:54
From the NYT article, this quote:
“We will never use our currency as a tool to gain competitive advantage,” Mr. Geithner said after the meeting, adding that the United States was committed to a strong dollar.

Damn. All that spending on imports that resulted in negative national savings and not a penny of comparative advantage to show for it. At least we know that Bernanke's QE move won't raise prices at WalMart and reduce the good jobs.
Bernanke's song:
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How far do we need to go?
written by Bob Spencer, November 07, 2010 7:11
A big goal is to create jobs. So, to do that, how far does the dollar have to fall in comparison to other emerging economies when we factor in the cost of labor?

Can the dollar fall far enough to make a difference when production costs are so low other places?

Bob Spencer
written by fuller schmidt, November 07, 2010 7:15
I would guess that the Tea And Republican Party (TARP) will soon think that a weak dollar is Communism.
strong dollar = gold standard proxy
written by Benedict@Large, November 07, 2010 8:54
From: http://www.nytimes.com/2010/11...04fed.html
More of the same:
"There are other risks, as well. The actions are likely to further drive down the dollar. That could worsen trade and exchange-rate tensions that have threatened to unravel cooperation among the world’s biggest economies."

Say what? Cooperation will unravel if we actually ask for a few jobs to come out of that cooperation? What is that cooperation on? Certainly not trade.

I think it's pretty obvious at this point: editorial policy at the NYT is clearly to default to right wing talking points when talking about the economy. Jobs thus are unimportant; a strong dollar must be maintained to insure gold standard integity over the value of US currency-denominated wealth.

What? You thought otherwise? You one of them Marxists?
written by proofreader, November 07, 2010 10:47
"...it's currency falls in value"

No, *its* currency falls in value.

Dean, you're such a bright guy. I wish you would hire an intern-- who is not dyslexic and understands punctuation-- to proofread your entries before you post.

Your whole blog is predicated on exposing bad logic and stupidity elsewhere, so you need to appear literate yourself.
The better mousetrap option?
written by Landru, November 07, 2010 9:28
I may be slow, but I don't necessarily see an absolute link between decreasing the trade deficit and weakening the dollar. Isn't it simpler to imagine that the trade deficit will decrease if we, ie Americans, start to make/create/manufacture more and more good stuff that people in other countries will want to buy? Then, they will buy more American exports and the trade deficit will decrease. Does the dollar necessarily go down as a result of our making better products for export? I don't see why; if we make enough good stuff for export, then people across the world will want dollars to use to buy that stuff and so the dollar may even rise.

So this connection between rising exports and a falling dollar seems true only in the very short term, where the quality/desirability of the exports is not changing. But isn't making better stuff a better option in the longer term?
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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.