Friday, November 13, 2009

Can the Whole World be Export-Driven?

News is all about the falling dollar causing panic across the world, as higher currencies undermine exporting efforts. Said the leader of Brazil's state development bank (source here): “We have to be careful that our exchange rate doesn’t appreciate too much as to deindustrialize the country. The capital goods industry has suffered tremendously.” Brazil's Finance Ministry says Brazil’s currency needs to weaken as much as 19 percent for sustainable economic growth. As another example, France’s Finance Minister also stated that her government favors a strong dollar as an appreciating euro threatens to hurt European exports.

Everyone wants to expor their way to prosperity, which begs the obvious question of how that could even be possible. Implicit is the obvious truth (obvious to everyone but brainwashed free-marketeers) that exports increase a country's wealth. Yet obviously, not everyone can be a net exporter!

The chief beneficiaries are, of course, Americans, for at least as long as the export-at-all-costs party lasts. Americans get access to the cheapest stuff on the planet, because everyone undercuts their own currency to keep their exports to America up.

Unfortunately, it also means that aforementioned and wisely despised deindustrialization occurs in America at the same time! woops

What are the foreigners even getting out of it? Rapidly depreciating dollars. The world is currently being flooded with dollars, pumping up developing economies. "An unprecedented net $47 billion flowed into equities in India, Indonesia, the Philippines, South Korea, Taiwan and Thailand in the last three quarters." and this: "Chile’s peso has strengthened 26 percent this year versus the dollar, the second-biggest gain among Latin American currencies after the 33 percent rise in the Brazilian real."

As long as US rates stay low, money will flow out of the US into other countries, in what is called the carry trade. Cheap imports flow in, dollars flow out.

And we stare years of chronic high-unemployment in the face! It's no wonder, is it??? The whole process is just wacky.

The only sustainable solution is balanced trade based on policies of local development.


John R. said...

Hi Justin.

Well, I hate to harp on the subject, but the truth is that the gold standard, which would be observed internationally if we observed it, basically takes care of trade imbalances. There is no need to try to affect international trade artificially if you have a gold standard.

The reason is that an imbalance will drain gold from the country with a deficit and add gold to the country with a surplus. Since the loss and gain are so easily perceived, the economies of the countries in involved adjust accordingly. No one needs to do anything at the "policy" level.

The fiat money regime short-circuits this feedback loop, which is why unheard of trade imbalances have occurred since 1971, when the dollar began to "float".

In other words, in an economy which is allowed to function naturally, trade imbalances come and go but rarely, maybe never, get out of hand. The loss of wealth to the deficit party is too palpable: their stock of gold diminishes.

And an economy can only function naturally when its money is sound. And that means tied to a commodity, and the commodity of choice is gold.

Justin said...

Interesting idea, John. But what if one country is running short of gold. Wouldn't that just shut down trade, as they wouldn't have the currency to make the transaction? The classic business-slowdown-because-of-currency-shortage problem?