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Home Publications Blogs Beat the Press The Post Talks About the Trade Deficit Without Mentioning the Over-Valued Dollar

The Post Talks About the Trade Deficit Without Mentioning the Over-Valued Dollar

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Friday, 27 August 2010 07:13

The Washington Post accomplished what might have seemed impossible: it had a major front page article on the trade deficit without once mentioning the over-valued dollar. The only vague reference comes near the end in a sentence that refers to "China's currency and other policies."

Those folks who took economics would remember that the main determinants of a country's trade deficit are its GDP and the value of its currency. Other things equal, when a country's economy expands, it buys more of everything, including more imports. This means that GDP could be a culprit in the trade deficit, but there would be few people who would claim that our GDP was too high in the years 2005 and 2006 as the trade deficit was hitting record shares of GDP.

This leaves the other culprit, an over-valued currency. The value of the dollar determines how expensive imports are relative to U.S. goods. If the dollar fell in value, we would buy fewer imports. This is a point which is widely accepted outside of the confines of the Washington Post. Of course, a lower dollar will also boost U.S. exports since it will make our exports cheaper to people living in other countries. For these reasons, a discussion of currency values would be featured front and center in a serious discussion of the trade deficit.

 

Comments (12)Add Comment
Lower Standard?
written by James, August 27, 2010 11:58
Lower $ also means lower standard of living for us. That's the trade off not many people are ready to take yet.
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written by CDW, August 27, 2010 1:47
"If the dollar fell in value, we would buy fewer imports."

I guess that means we would not be buying very much due to the fact that not very much is made in the U.S. any more.
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written by vorpal, August 27, 2010 2:03
I think its important to point out that oil is a large chunk of the trade deficit.

A lower dollar would make gasoline more expensive, decreasing the amount of oil we use.

GDP is directly correlated to oil consumption, so it is likely that the deficit would decrease because of recession.

Moreover, the US would permanently lose purchasing power over global oil exports, and therefore have access to less oil in perpetuity.

So, it's not that simple, and nobody is doing the issue justice. IMHO.
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written by vorpal, August 27, 2010 2:08
In short, I think discussing the trade deficit without mentioning the petroleum component is just as a agregious as failing to mention currency valuation.
What Amercian exports?
written by scott, August 27, 2010 5:51
What American exports are there? Your argument presumes we have a manufacturing base of note. The comments about the sticky wicket relative to oil are on point as well.
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written by zinc, August 27, 2010 8:03
I agree that the mercantilists have to be confronted and managed, especially the communist PRC. For what reason do the people of the US allow the destruction of our jobs base (highly paid industrial manufacturing jobs have a multiplier of 3.2) for the benefit of a totalitarian communist regime in China ? The answer, I think is Walmart and the agricultural lobby, you know, the real mericans.

The same is to be said for our energy policy. Home grown synfuels, supported by a large tax on imported fuel, would not make energy cheaper but it would contribute six million jobs to the domestic economy and increase energy efficiency.

The trade deficit is really only a symptom of the real problem: the polarization of wealth and income in America. Latin America, as in most of the world, has been stymied by the wealthy controlling the economy, denying others even meager wages in their quest for domination. Now we have it in America where the average family, burdened with paying more of their income for basic services even as their income drops while billionaires pay less and less. It is Plantation Capitilism and it is the sickness that currently engulfs this country.
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written by vorpal, August 28, 2010 3:54
zinc, those are all conventional wisdom political talking points. I see little basis in fact for any of your statements. The truth is not so convenient.
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written by purple, August 28, 2010 2:41
The US dollar will be overvalued relative to US production because it is the main global reserve currency.

Unless the US wants to wipe out its competitors in global war, there is no way to restore US dominance in production to equilibrium with its dominance in world finance.

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written by zinc, August 28, 2010 5:29
Vorpal

"A lower dollar would make gasoline more expensive, decreasing the amount of oil we use."

Cheap oil has caused much trouble in the US, alternately preventing investment in alternatives and efficiency and creating economic dislocations when the price spikes.

"GDP is directly correlated to oil consumption, so it is likely that the deficit would decrease because of recession."

GDP is correlated with energy consumption. However the output per unit energy input has declined significantly over time as energy efficiency increases.

"Moreover, the US would permanently lose purchasing power over global oil exports, and therefore have access to less oil in perpetuity. "

Hogwash.

It's not that simple, and nobody, especially you, are doing the issue justice. IMHO.
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written by Mel, August 30, 2010 12:50
Weakening the dollar would raise the price of imported goods, thereby increasing the cost of living. This would particularly impact working people, a large part of whose income goes for food, clothing, and energy and fuel. Dropping the value of the dollar by say 20% would certainly reduce the US trade deficit but the working class would bear the brunt of the cost.

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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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