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

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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.