One of These Currencies Is Not Like the Other

July 13th, 2011 at 2:48 pm

One of the points I recently stressed as to why the US economy is stuck in neutral is that other countries, through their currency management, are sopping up what little demand we have.  I don’t think this is the whole or even the half of the story relative to the other matters on the list (e.g., our unwillingness to stimulate), but I do think it’s important.

The problem here is that a very useful adjustment mechanism that naturally kicks in, ala econ 101, is blocked.  The weak economy and the Fed’s response leads to lower interest rates.  That takes down the value of the dollar in international markets which gives our exports a boost.  And, in fact, the decline in the dollar has helped manufacturing employment (since that sector does better when our exports are more competitive), at least up until a few months ago.

Source: BLS

Lots of analysis of the Greek debt crisis notes the absence of this mechanism when your country is a member of currency zone.  By dint of their Eurozone membership, so-called “external devaluation” is blocked and you have to do internal devaluation—reduce labor costs to boost your exports—which is a lot less fun.

But the fact is, we suffer from a bit of that problem too.  The figure below shows one currency that floats relative to the dollar (the euro, in this case), bipping and bopping around, and one that doesn’t, the yuan.  It glides along until Chinese monetary authorities decide to let it move for a while, often to appease the complaints of exporters squeezed out by China’s currency peg. 

As the second figure reveals, the yuan rose a bit relative to the dollar in recent months (which moves the trend downward in the graph, since a dollar buys you fewer yuan).  Our exports got a bit of a pop out of that and manufacturing employment is up about 170,000 jobs since its trough last October.  You don’t want to make too big a deal out of such correlations—there are many moving parts.

But that’s why this problem of currency management by our global competitors made the list of why we’re stuck.  We should do something about it.

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3 comments in reply to "One of These Currencies Is Not Like the Other"

  1. Kevin Rica says:


    “I don’t think this is the whole or even the half of the story.”

    China may not be the whole story, but only because Korea, Taiwan, Hong Kong, Singapore are doing the same thing. Taken together, the largely explain our loss of control over aggregate demand. The rest of the problem involves the damage done by the mortgage bubble which was blown up by the influx of Asian reserve purchases. (And before that, they blew up the dot come bubble).

    Remember, the whole stimulus package was less than $800 and that involved an increase in debt. Closing the current account deficit would provide about $500 billion in annual– ANNUAL –stimulus without any increase in US debt.

    American cannot protect its citizens if it is simply the place where surplus Chinese capital employs surplus Mexican labor.

  2. Mary says:

    Interesting observation. Thank you. Speaking of the RMB, I wonder what the Chinese think of all this tomfoolery. I can’t imagine that they are too pleased. And if they are not happy, neither should any corporation wanting their business. Point being: Obama needs to broaden his base of support. Nobody (aside from dingbats like Pawlenty, Ron Paul and Bachmann) wants default — not the financial sector, not corporate America, not the soldiers, not senior citizens…nobody. So why are the Dems compromising again?

  3. Fred List says:

    Great! Bernstein joins the hit parade of US economists who are willing to point out that Chinese policies (& those the E.Asian states that follow Chinese practice) have decimated the US economy.

    The US needs both protectionism AND stimulus.