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Home Publications Blogs Beat the Press The Post Warns that U.S. Savings Could Increase Quickly

The Post Warns that U.S. Savings Could Increase Quickly

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Wednesday, 04 May 2011 07:01

This is what the Post was warning about in its article headlined, "The dollar, at risk: U.S. efforts to speed the economic recovery could transform currency's slow decline into a precipitous fall," although it is possible that no one at the paper knows the introductory economics that would allow them to make this connection.

Those who have been through an intro econ class know that the trade surplus is by definition equal to net national savings. This means that countries that have large trade deficits like the United States must by definition have negative net national savings.

The main determinant of the trade surplus (or deficit), given a level of GDP, is the value of the dollar. If the value of the dollar were to fall precipitously, which is presented here as a bad scenario, it would lead to a quick adjustment towards balanced trade through strong growth in net exports. Higher levels of net exports would boost the economy, leading to stronger private savings and a smaller budget deficit. So, the Washington Post headline is actually warning that if we are not careful, we will see stronger economic growth and a smaller budget deficit.

As a practical matter, the precipitous fall in the dollar warned about in the article is almost impossible for exactly this reason. The euro zone countries would not let the dollar fall to 2 dollars to a euro precisely because it would destroy Europe's export market in the United States and make U.S. goods hyper-competitive in Europe. The same is true of Canada, Japan, China and other U.S. trading partners. If the dollar were for some reason go into a free fall all of these countries would almost certainly actively intervene in currency markets (as China already does) to limit the decline. This should be obvious to anyone who has reflected on the situation for even a minute.

The article gets several other important points wrong. First, the fall in the dollar is only reversing the run-up in the dollar that began with Robert Rubin's stint as Treasury Secretary. Rubin's high dollar policy sent the country on the course of bubble driven growth of the late 90s and the 00s that led to record low private savings rate and in last few years, high budget deficits. The recent decline in the dollar is just reversing the Rubin run-up.

fredgraph

The other important fact that the Post got completely wrong was its assertion that:

"History is full of examples of countries where large budget deficits eventually led investors to lose faith, causing the currency to tumble. The Asian financial crisis, which rocked the likes of Thailand, Singapore and South Korea in the late 1990s, is one recent example."

According to the IMF, in the year prior to the East Asian financial crisis, Thailand had a budget surplus equal to 2.7 percent of GDP. Singapore and South Korea had surpluses equal to 14.4 percent of GDP and 2.6 percent of GDP, respectively. These countries clearly do not support the claim in this article that large budget deficits lead to declining currency values. 

Comments (13)Add Comment
...
written by Bloix, May 04, 2011 9:12
I read that article at the breakfast table this morning and I said to myself, why is that graph starting in 2001? I think the point of the Post is to make you stupid.
...
written by Dennis Doubleday, May 04, 2011 9:21
The quoted passage at the end of your post is ludicrously wrong. Thanks for pointing it out.

I have long thought that the Post used to be a good paper back in the 80s. But now I wonder if it was always this bad, and I just didn't have access to alternate sources of information that would have pointed that out to me.
...
written by paine, May 04, 2011 9:29
"quick adjustment towards balanced trade "

over selling your point

first comes the import price surge tsunami
to close the trade gap any party in power would need the sold super majority only hyper employment from a burst of massive deficit spending could produce
including a worsening of the import gap
the dollar plunge after the usual price resistence of international traders would give way to the tsunami the substitution effect overwhelming at long last the income effect

to repeat the party in power caring this out would need roosevelt like majorities
they could be won by a WH willing to launch phase one
ie the huge payroll tax cut
uncle health premium pick up and freeze
and large SSI index boondoogle pay outs
after that miracle hit the job markets any wh would wein a roosevely majority in the next federal election cycle
now the trade gap could be close
and the proper price level cap and trade mechanism installed

turn this program over and you see the names
of lerner and vickrey
dead hero's of fearless macronautics
...
written by paine, May 04, 2011 9:41
"the run-up in the dollar that began with Robert Rubin's stint as Treasury Secretary"
thank you never miss a change to tag bondage bob
the devil at work during the smoke screen provided by clinton II's unmerited economic miracle years

----------

btw i agree diving the dollar would prove quite a fete
in fact i suspect a trade war would need to be entertained as a possible outcome

my approach would be to state the goal balanced trade set a date and call for a global trade/finance extra ordinary summit
aimed at a bretton woods like comprehensive reform of the system

with a clear campaign to educate the public on purchasing power versus forex etc
fair competition trade
green product and proces trade
free to choose labor trade
sweetness and light talk
all while running a full employment economy
still in deep trade deficit
watching the foreign held debt mount
talk of monetization ratios
tax burden shist etc
while playing
vast locomotive pulling the global economy forward

forbare a while
cut overseas commitments
ie military posting
warn more
and prepare the necessary social institutions

debt carrying wealth surchage taxes

a mark up market etc
then strike after an ultimatum
strike with fair trade emergency trade boder adjustments
...
written by paine, May 04, 2011 9:43
the hack on the asian flu is much like the hack on the irish spanish etc recently
fiscal policy was superbly imf waspo pure
prior to the dropping hammer of location lot value collapse
...
written by Dom, May 04, 2011 9:53
It appears that the Post doesn't have competent journalists or reporters anymore. No wonder they are facing bankrupcy. They should be sued for engaging in misleading or deceptive conduct.
How low can the dollar fall before other currencies intervene?
written by Anthony, May 04, 2011 11:39
Dean-

You have made the case for the low dollar many times--and always with the countervailing, and somewhat contradictory, notion that other countries would intervene to stop it from falling. So the question I have is: how low can the dollar fall before other governments--like mine in Canada--take action? And would such a fall be enough to trigger an export recovery?
...
written by izzatzo, May 04, 2011 2:07
turn this program over and you see the names
of lerner and vickrey
dead hero's of fearless macronautics


A heavyweight has arrived on the scene.
A Free Falling Dollar Will be Stopped Quickly
written by Baker, May 04, 2011 3:56
Anthony,

it would be a political decision on the part of the Canadian government to decide how low it would allow the dollar to fall before it decided to intervene. I don't have any special insights on this.

I can say that if the dollar entered something that looked like a free fall (e.g. dropping 1-2 percent a day), Canada would intervene very quickly (less than a week).
...
written by Paine, May 04, 2011 5:49
Forex adjustment among the advanced economies of nor America
western
EUROPE operate quite differently Ghent with east Asia

But it's the east Asian forex moves that would signal a real dollar adjustment
If the five aces and japan and china fold arms as the dollar slides that is historic
It's also not going to happen

Adjustment in our present system comes thru relative rates of change in national price level and income these are more stable markers
Then forex that jumps around too much unless managed ala east Asia chindia the gulf oilers etc



Trade war is the only threat even uncle hegemonic can use to lever a big structural change in funds or product flows
And not gonna happen so long as big arbitrage profits exist
By crossing borders and playing the differences
...
written by Calgacus, May 04, 2011 8:17
As far as I understand him, have to disagree with Paine on one point. All it would have required was the will and knowledge of real economics (e.g. Lerner) on the part of Obama to have had a Rooseveltian / functional finance / New Deal program that would have quickly and easily achieved full employment and financial stability. The rest of the world would almost certainly been happy to continue saving dollars, keeping it strong, then. The whine that Obama needed bigger majorities is ridiculous. Unfortunately Obama neither knew nor was really interested in what he was doing, nor cared to do the right thing for the people who voted for him.
...
written by paine, May 05, 2011 7:41
not sure i agree now

however if we were talking february 09
and o'barry had been willing to sieze
the big banks like he siezed AGI
not bail em out and showr the bankster boss class with goodies and praise

recall
larry summers as we know
torpedo-ed a fiscal thrust
twice the size of the one we got
and that was based on a somewhat low estimate
of the strength of the spontanaous contraction underway

all the potus needed to do THEN
in my estimation

announce a recovery program with quaterly ue targets
and say
we will see to it these targets are4 kept to as closely as possible
by doing what becomes necessary forecasting
jobs by quater in turbulent times like these
is not an exact science not even close
not even as good as 7 day weather forecasts
but we got feed back here
if for a quarter we fall behind we'll increase the stimulus
if we get ahead ..so much the better we can ease off a bit near the final two three quaters as needed

with the support of all of us
all the the american people
we can get thru a fast and full recovery here


what the potus has to do now
is what i wrote above

opportunity has passed
the crisis has stabilized
corporates are back on their feet the gop is biting back hard and pre emptively

the reason i wouldn't expect a dembo super majority to act as i'd hope let alone even emerge
has anotyher basis

the dembot party is still in the griip
of the bobby rubin larry summers wall street sunny side gang

we need a bryan to chase em out at
some potus nom convention
not gonna happen eh ??

like the old brooklyn dodger fans

maybe next cycle here
gets to get to maybe being
the cycle after the cycle
after the cycle ...

but there came a 1955 !!!!
weak dollar & exports
written by DE, May 07, 2011 9:18
What I have yet to see from Baker and Paul Krugman, who also argues in favor of weakening the dollar to promote U.S. exports, is an answer to the following questions:

1) What's the ideal USD-EUR/JPY/CNY exchange rate? How low does the dollar have to go?

2) If weak currencies are such a great way to promote exports and strong currencies stifle exports, then how is it that the euro and yen are significantly stronger than the dollar, yet Germany and Japan both have significant trade surpluses with the United States?

The reason we have trade deficits is because of outsourcing of manufacturing by U.S. companies, not currency exchange rates. Those "Chinese goods" flooding the U.S. market are, in large part, U.S., European and Japanese products manufactured in China.

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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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