Trade deficit narrows


By tatupu70   Follow   Thu, 10 Dec 2009, 10:56am   1,411 views   7 comments
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http://finance.yahoo.com/news/Exports-up-for-6th-straight-apf-2526943026.html?x=0

 Hmmm..... Maybe a weaker dollar isn't all bad, after all?

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  1. iwog


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    1   11:09am Thu 10 Dec 2009   Share   Quote   Permalink   Like   Dislike   Protected  

    Devaluing the dollar is like taking morphine and just as addictive. At first, it feels great and makes the pain go away. Exports rise, the economy picks up, and the real value of all your loans fall.

    Like morphine, it takes more and more dollar printing to get the same effect. Eventually everyone around you figures out that you're an addict and they stop enabling that behavior. Then comes the crash.

  2. tatupu70


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    2   12:16pm Thu 10 Dec 2009   Share   Quote   Permalink   Like   Dislike  

    iwog says

    Like morphine, it takes more and more dollar printing to get the same effect. Eventually everyone around you figures out that you’re an addict and they stop enabling that behavior. Then comes the crash

    I don't follow. Once your exports rise and your debt is reduced as a % of GDP, then the dollar will no longer be devalued. Why would it be addicting?

  3. iwog


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    3   2:46pm Thu 10 Dec 2009   Share   Quote   Permalink   Like   Dislike   Protected  

    Because nothing is free. When the government prints dollars, it causes the Forex markets to sell off in anticipation of inflation. That causes the relative value of the dollar to fall, which means you can buy more dollars with fewer Euros and buy American stuff cheap.

    The reason this works is because the Forex currency market revalues the dollar fast, sometimes in a single day. The markets for merchandise and services on the other hand respond very slowly. Previous orders have to be filled, plans have to be made, price tags rewritten, etc.

    Once American industry catches up with the true value of the dollar, there's no more benefit to exports. Sure a Euro might buy another 10 cents, but the price of a ticket to Disneyland Orlando went up by the same amount. It just took a few months longer. It's a short term fix which loads the costs up on dollar holders and exporters while benefiting foreigners.

  4. tatupu70


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    4   3:35pm Thu 10 Dec 2009   Share   Quote   Permalink   Like   Dislike  

    iwog says

    Once American industry catches up with the true value of the dollar, there’s no more benefit to exports. Sure a Euro might buy another 10 cents, but the price of a ticket to Disneyland Orlando went up by the same amount. It just took a few months longer. It’s a short term fix which loads the costs up on dollar holders and exporters while benefiting foreigners.

    That's where I disagree. Why is it short term? As long as the dollar is devalued relative to other currencies, US goods will be cheaper to foreign countries and our exports will rise or at least stay at their higher levels. That's why Japan in the 80s and China now work so hard to keep their currency artificially low. They grow their economy via exports.

    It's really a foregone conclusion--as long as we have a trade deficit, the dollar must devalue.

    And how does a ticket to Disneyland factor into anything? We're talking about exports and the trade deficit...

  5. iwog


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    5   5:37pm Thu 10 Dec 2009   Share   Quote   Permalink   Like   Dislike   Protected  

    tatupu70 says

    iwog says

    Once American industry catches up with the true value of the dollar, there’s no more benefit to exports. Sure a Euro might buy another 10 cents, but the price of a ticket to Disneyland Orlando went up by the same amount. It just took a few months longer. It’s a short term fix which loads the costs up on dollar holders and exporters while benefiting foreigners.

    That’s where I disagree. Why is it short term? As long as the dollar is devalued relative to other currencies, US goods will be cheaper to foreign countries and our exports will rise or at least stay at their higher levels. That’s why Japan in the 80s and China now work so hard to keep their currency artificially low. They grow their economy via exports.
    It’s really a foregone conclusion–as long as we have a trade deficit, the dollar must devalue.
    And how does a ticket to Disneyland factor into anything? We’re talking about exports and the trade deficit…

    Sorry, I guess I didn't do a very good job explaining it. You don't get something for nothing. If an exported American avocado is cheaper to a foreigner, then someone else MUST make up the difference. You can't simply create wealth from nothing by printing money. There's no free lunch and nothing in the world is permanently cheaper without someone losing out.

    China can afford to print massive sums of money because their economy is red hot and growing in double digits. More money chasing more goods doesn't cause inflation. Japan has no international debt, a shrinking population, and citizens who save all their money instead of spending it. Most of their excess money creation is borrowed outside their border in the yen carry trade. Neither of these cases has anything to do with the United States.

    Now back to our devalued dollar. The reason the dollar's value drops against other currencies is that people selling dollars EXPECT THE VALUE TO BE LESS. As I explained before, prices take awhile to adjust upward. Inflation is much slower than the instantaneous electronic Forex exchange. When the dollar drops by 5% in a month, like it did earlier in the year, it's ONLY because currency traders EXPECT the dollar to buy 5% less in the future.

    A 5% increase in the dollar/euro exchange rate and a 5% increase in inflation is a wash. It's ZERO benefit to exports. It does not help our markets, it does not encourage investment in the United States, it does not help us at all. The ONLY REASON you are correct when you say that a falling dollar encourages exports is the LAG TIME between the dollar's drop in value and the inflation that must occur when dollars are printed. That's it.

    I can illustrate this easily with Zimbabwe. At one point, one United States dollar was equal to $1 trillion Zimbabwe dollars. Imagine that!!!! You could be a TRILLIONAIRE in Zimbabwe for one single dollar. So why didn't people rush into Zimbabwe and take advantage of the exchange rate and buy up every scrap of gold in the country? Because the price of gold increased right along with the exchange rate.

    It works EXACTLY the same with United States exports. Why don't people in Europe take advantage of the exchange rate and buy United States exports? They do.........until United States exports INFLATE enough to cover the difference. That's when the benefit ends, at which point the United States must keep printing OR compete some other way.

  6. tatupu70


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    6   5:49pm Thu 10 Dec 2009   Share   Quote   Permalink   Like   Dislike  

    iwog says

    It works EXACTLY the same with United States exports. Why don’t people in Europe take advantage of the exchange rate and buy United States exports? They do………until United States exports INFLATE enough to cover the difference. That’s when the benefit ends, at which point the United States must keep printing OR compete some other way.

    Yes, but that only happens after many years of trade surpluses and many more jobs created in the US. And even then, we're back to even. Which is much better than where we are today.

    It will create inflation in the US as all the imported foreign goods become more expensive, but some inflation is OK.

  7. iwog


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    7   6:08pm Thu 10 Dec 2009   Share   Quote   Permalink   Like   Dislike   Protected  

    tatupu70 says

    iwog says

    It works EXACTLY the same with United States exports. Why don’t people in Europe take advantage of the exchange rate and buy United States exports? They do………until United States exports INFLATE enough to cover the difference. That’s when the benefit ends, at which point the United States must keep printing OR compete some other way.

    Yes, but that only happens after many years of trade surpluses and many more jobs created in the US. And even then, we’re back to even. Which is much better than where we are today.
    It will create inflation in the US as all the imported foreign goods become more expensive, but some inflation is OK.

    You're correct. Inflation and a falling dollar will temporarily create jobs, although the standard of living for Americans will decline.

    It's not nearly the nirvana you make it out to be. The inflation created from all this printing steals money from cash and bond holders. Many of those people are retired. It's basically stealing money from those who hold long term debt (including the Social Security trust fund) and using it to fuel the economy and give discounts to people who buy our exports.

    I actually agree that it's necessary, but it doesn't end well.

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