Experts tell us that one way to solve trade problems is to let the value of your currency fall. When the value of your currency declines relative to other currencies, your exports will rise and your imports will fall. This seems to be the accepted theory.
This seems to be what the Federal Reserve is trying to do. “U. S. officials are determined to push the dollar lower” we read in the Wall Street Journal Wednesday commenting on the minutes from the September meeting of the Fed’s Open Market Committee. (See “Fed Viewed as Trying to Devalue Dollar”: http://professional.wsj.com/article/SB10001424052748703440004575547553908304106.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj.)
Maybe, however, there is another part of this theory that is not being considered. Remember, in economic theory there is a “ceteris paribus” assumption attached to all models: thus we assume “all other things the same.”
One of the other assumptions made when discussing the value of a country’s currency is that the relative productive power of all the countries considered remains the same.
My question is, can we assume that the United States, over the past fifty years, has maintained its relative position in the world with respect to its productive power?
I ask this question because it appears as if the continued decline in the value of the dollar has not improved the trade balance of the United States, especially against many of the emerging nations.
The value of the dollar goes down…the trade balance…if anything…worsens.
This is not the way it is supposed to be. Thus, something else must be at work.
The United States has been on the top of the world since the late 1940s. It continues to act as if nothing has changed.
I will respond with just two broad comments on this situation.
First, the economies of the emerging nations are developing: they are developing rapidly; and they are developing in a very competitive way.
Second, the United States has followed an economic philosophy in terms of policy over the past fifty years that has weakened it in many ways. I have presented this case on many occasions in recent weeks.
“Other things” have not remained the same, yet leadership in the United States continues to assume that they have.
As a consequence, to the leaders of the United States, the problem is “out there.” The problem is China!
One of my favorite Stephen Covey quotes is this: “If you believe the problem is ‘out there’; that’s the problem.”
My belief is that as long as the leadership of the United States believes that the problem is ‘out there’, that will be the problem.