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Home Publications Blogs Beat the Press NYT Warns That Debt Ceiling Crisis May Boost Net Exports and Increase Growth

NYT Warns That Debt Ceiling Crisis May Boost Net Exports and Increase Growth

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Thursday, 21 July 2011 04:57

Of course they did not know that this was their warning. The NYT told readers that:

"Deterioration of investor confidence in the United States could also hurt the value of the dollar, according to William H. Gross, co-chief investment officer of Pimco, a bond fund based in California. Mr. Gross said he believed that the dollar would become weaker because of the country’s inability to deal with its rising deficit. Instead, he favors currencies in China, Canada, Brazil and Mexico."

While Mr. Gross, as a major actor in financial markets, may not want a lower dollar, the vast majority of people in the country should. A high dollar makes our exports more expensive to people in other countries, meaning that they will buy less of them. Raising the value of the dollar is like imposing a tariff on our exports.

A higher dollar also reduces the cost of imports relative to domestically produced goods. A higher dollar is comparable to subsidizing imports, leading consumers to buy imports instead of domestically produced goods.

This means that if Mr. Gross is correct, then most workers should be rooting for a continuation of the standoff on the debt ceiling. The drop in the value of the dollar would result in an increase in net exports, thereby providing a powerful boost to the economy and potentially creating millions of jobs.

While this is 100 percent standard economics that most students would be taught in an intro econ class, most economics reporting is so bad that very few people understand how much of a stake they have in a lower valued dollar. There are few policies that more directly transfer income from the middle and bottom of the income distribution to the top than an over-valued dollar, yet the implications of the value of the dollar is virtually never discussed in economics reporting.

This article also reports on the price of credit default swaps on U.S. Treasury bonds as a measure of the risk that investors assign to the risk that the U.S. government will default on its debt. This is not accurate. A credit default swap (CDS) effectively involves two bets. First the bet that the U.S. government will default on its debt. Second, it is also a bet that the financial institution issuing the CDS will survive after the U.S. government has defaulted on its debt.

Since the latter bet has a low probability, since U.S. debt is the basis for the world financial system, the price of CDS bears little relationship to the risk that investors assign to the U.S. actually defaulting. It is most likely a bet on the future direction of the price of CDS, sort of like the high price paid for a really awful painting by a great artist. No one really wants the painting, but it is still possible to make money off holding it, if one gets the timing right. 

Comments (4)Add Comment
High Dollar Value Also Requires High Gross Domestic Prices
written by izzatzo, July 21, 2011 7:10
This means that if Mr. Gross is correct, then most workers should be rooting for a continuation of the standoff on the debt ceiling. The drop in the value of the dollar would result in an increase in net exports, thereby providing a powerful boost to the economy and potentially creating millions of jobs.


As usual Baker fails to grasp the obvious broader vision of Gross, et al.

Since the drop in the value of the dollar is equivalent to moving down the demand curve for importers of USA exports the same policy should be applied domestically.

The high value of domestic dollars and production can be retained by preventing productivity increases, cost reductions and competition by adding more market power.

This will increase incentives that attract supply side resources necessary to create full employment at high wages consistent with high prices since domestic price elasticity is at least as high as it is internationally.

Stupid liberals.
Retired
written by Donald Slovin, July 21, 2011 9:45
Hello Dean,
I am sure that you have read Joseph Stiglitz's concerns about the effect of lowering the value of the dollar - e.g. "it could result in exchange rate volatility and protectionism; worse, it invites a response from competitors. In this fragile global economic environment, a currency war will make everybody a loser."

I am interested in reading your thoughts on his objections.
Thanks, I read you ever day first thing and have learned a lot.
dls
...
written by skeptonomist, July 21, 2011 9:59
In partial reply to Donald Slovin - and Joseph Stiglitz - we have been in a unilateral currency war for a long time, as the Chinese have been artificially keeping the yuan low. There have been some mild political or diplomatic attempts to get the Chinese to ease up, but no real economic response.

We have also been in a class war which is related to the currency war. Some capitalists have been profiting immensely from international trade while US workers have been losing as they are brought into competition with those of China and other countries. In principle competition should bring down the profits from this kind of trade, but this has not been happening. Capitalists have means of controlling competition which workers do not, in the absence or weakness of unions.
Partial Reply to Mr. Slovin
written by Jeff Z, July 21, 2011 12:41
I would add that Stiglitz does not usually address other forms of 'protectionism' such as patent and copyright.

While it might invite a response from competitors (or our trading partners, take your pick), what skeptonomist says is exactly right. The class war is a rather obvious ploy to fix the rules to benefit capitalists, especially in the financial sector, to garner huge incomes at the expense of the rest of us.

How? Those incomes are part of the cost of allocating capital to productive uses within the economy. If there are no productive uses, as now or any other depression, financial wizards turn to speculation. Since they now have an explicit government backstop for this, and since the recession for normal people continues unabated, this activity will continue. In economist lingo its called 'rent seeking' and the incentives to do so are huge. In plain english, its called 'gaming the system.'

You could view it as a tug of war between the competing capitalist classes inthe U.S., in China in, the E.U., and in the rest of the world. The workers by and large are left out in the cold.

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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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