Lower dollar = higher exports is fallacy ?

[rp0x]

Can someone explain this please ? I am NOT looking for basics of Austrian economics and gold standard, I understand all that..

I am trying to understand specifically this issue : when Ron Paul said lower dollar will lead to higher exports is a fallacy . I don't understand that. Asian countries, especially China has been pegging their currencies to the USD just so that they are competitive in international markets. Which is also the reason US and Europeran countries has been pressuring China to float their currency. Why is this then a fallacy ?

Thank you.

 

[a_european]

What could America export, thats the question. Computers and other electronics come to my mind, but thats it. America has a big import-export deficit, a weak currency is bad, very bad.

 

[theseus51]

You can export more, but realize that you have to buy goods to make those products. But we don't want a weak dollar, since we import WAAAY more things than we export. We stopped being a manufacturing based economy a long time ago. Our strength isn't in the amount of things we export. America doesn't want to be "cheap labor" for the rest of the world, or an agricultural based economy where our strength comes from how much we export.

 

[hard@work]

We have no industrial base to export, and services we offer are obtainable at comparable quality elsewhere.

 

[fj45lvr]

we'll take advantage of all those manufacturing plants we have here.

 

[Ridiculous]

It isn't a fallacy it will just only be temporary, exports move like a sine wave just like the business cycle. Exports historically follow an uptrend like the business cycle, but but export expansion is never consistent. There is an equilibrium model for equilibrium exchange rate, but it is even more complected than the IS-LM (Keynesian Cross) model. Not easy to explain though, as there is a ridiculous amount of algebra involved, just look at this web site as an example: http://www.adbi.org/research-paper/.../the.general.equilibrium.exchange.rate.model/

Plus, the exporters need to buy raw materials for the products that they make, many of these raw goods are imported. So, they may not have to pay higher prices right away and will do really well short term. But once they have to renegotiate contracts with their foreign raw materials vendors, their prices will go up.

 

[murrayrothbard]

There is a short run benefit for some exporters due to a weak dollar. However you have to purchase raw materials to make your exports and the prices of these will be bid up due to the weak currency. This is already happening.

 

[rp0x]

But we don't want a weak dollar, since we import WAAAY more things than we export.

This is a consequence of a strong dollar, not the other way around. In other words, a strong dollar is the reason why we import way more, (because it is cheaper to produce things abroad)

As the dollar becomes weaker and assuming there is a fundamental reason for it to stay lower, the manufacturing industry will come back to US, increasing the US exports, eventually leading to a balance in trade.

America doesn't want to be "cheap labor" for the rest of the world, or an agricultural based economy

What we want or not want is another issue. My question is not tied to US, but is purely economic. Weaker currency should lead to higher exports for any country. Trying to understand why that statement is a fallacy.

 

[rp0x]

However you have to purchase raw materials to make your exports and the prices of these will be bid up due to the weak currency.

That should be also true for China and other Asian countries, who is trying to artificially trying to keep their currency weaker.

 

[AlienLanes82]

Please remember I'm not formally schooled in economics, but here's my take:

Even if it *did* create more manufacturing exports, at what cost? The transformation of the US into a 3rd world economy?

Advanced economies with educated populations who have high quality of life demands are never going to be the kings of manufacturing. Manufacturing of most things can be done cheaper and equivalently by 'developping' nations (the exception being sectors which require sophisticated machinery and political stability). Advanced economies will specialize in design, engineering, technology, marketing, and financial management - not to mention the service sector. To wish for us to be anything else is folly.

You just don't pay an American $10 an hour to sew garments when you can pay an Indonesian $2 an hour - and that be one of the best jobs in Indonesia. Otherwise your shirts cost $40 instead of $10, and either no one buys them, or (if somehow we ban imports), we all have a lot lower standard of living (remember when microwaves started at $250?).

Instead of being the buyer of goods from around the world, where people can obtain a high standard of living with relatively low income, we'd become the China to Europe.

China has *tons* of exports, but I don't hear anyone saying "wow, can we please be just like China" (economically speaking - let's leave human rights violations aside).

Of course, the ultimate problem is that our education system fails so miserably that it's not clear that we have sufficient numbers of people capable of doing the jobs that an advanced economy requires.

 

[PredatorOC]

Essentially, the window of opportunity for improved exports is between the drop of the dollar and the rise in prices. Exports benefit momentarily from a low dollar against, say, the euro. But eventually the prices will start to rise and that is when the shit really hits the fan. This will apply to consumer prices as well the prices industries pay for their goods. So you can end up with life savings that are worth more as a substitute for firewood than as an actual currency. Which was the case in Germany during the Weimar Republic and hyperinflation.

 

[rp0x]

Even if it *did* create more manufacturing exports, at what cost? The transformation of the US into a 3rd world economy?

Thanks AlienLanes.

I am not trying to understand the *consequences* of a weak dollar.

I am trying to understand what Ron Paul said about a weak dollar, that it will lead to higher exports is a fallacy. He didn't say a weaker dollar will transform US into a 3rd world economy.

 

[Malakai0]

The immediate primary effect is that IMPORTS cost more US dollars. We don't export much but dollars, so as the dollar weakens we have to export way more dollars to get the same amount of goods.

Then the foreigners with massive supplies of US dollars come to America and buy up our businesses and property, because the cost of stuff in America hasn't caught up to USDX on the mainland because of relatively little awareness of the overall situation by Americans (many Americans have great confidence in the dollar and know little about economics, like most of congress).

So your money is fated to eventually become worthless here too as more foreign US dollars are added to the US economy, and the foreigners get to buy a bunch of stuff over here with money worthless elsewhere for great prices.

It's a very bad situation.

 

[theseus51]

Thanks AlienLanes.

I am not trying to understand the *consequences* of a weak dollar.

I am trying to understand what Ron Paul said about a weak dollar, that it will lead to higher exports is a fallacy. He didn't say a weaker dollar will transform US into a 3rd world economy.

Try imagine if the dollar lost 95% of its value overnight. We would sell off all our goods and assets and export tons. But that's about it. We can't sustain that because we can't buy anything from other countries like raw materials. Once we sell off all our stuff, we're done. That's why Ron Paul said temporarily it'll increase exports, but long term, it won't. We can sell the stuff we already made, but making new stuff is going to be too expensive.

 

[AceNZ]

I am trying to understand what Ron Paul said about a weak dollar, that it will lead to higher exports is a fallacy.

What he said on CNBC is that the increase in exports would only be "for a while".

As others have said, one reason is that as the cost of raw materials go up (commodities and imports like oil), the prices of manufactured goods will also go up.

Look at China as an example. They have a widely-quoted 10%+ annual growth rate, and a weak currency. Lots of exports. What's not so widely reported is that they also have something like a 40% default rate on loans -- it's all a house of cards. Growth is easy when borrowing is cheap and easy, but they're suffering now because of the increasing prices of imports used for raw materials.

 

[rp0x]

Try imagine if the dollar lost 95% of its value overnight.

Possible, but unlikely. What's more likely is a gradual depreciation of dollar spanning several years.. maybe several decades. If corporations realize that the weaker dollar is here to stay, there will revive manufacturing in US leading to higher exports.
I understand that a weaker currency will make imports cost more. But. remember, that's not true just for US, that's true for any country.

I have two follow-up questions .

1) If a weaker currency (I say currency, not dollar) will not increase exports, why does China and other Asian countries continue to keep their currencies suppressed relative to dollar ?

2) If weaker currency doesn't matter, why does US and Europeans pressure China to float their currency ?

 

[AceNZ]

1) If a weaker currency (I say currency, not dollar) will not increase exports, why does China and other Asian countries continue to keep their currencies suppressed relative to dollar ?

2) If weaker currency doesn't matter, why does US and Europeans pressure China to float their currency ?

1) A weaker currency does increase exports. Temporarily. China keeps their currency suppressed because they need the inflow of cash to keep their banking system from collapsing (due to the 40% loan default rate I mentioned earlier). They are in a deep hole that's going to be very difficult to climb out of.

2) A weak currency does matter -- and an artificially weak one matters even more. The reason the Chinese are being pressured to float their currency is because its artificial weakness substantially distorts the market, and causes people to make decisions that they wouldn't otherwise make.

 

[freelance]

I cannot afford to work for 3¢ per hour, and that's about what you've got to make to compete with sweatshops that have kidnapped their "employees" and beat them to keep them productive.

Is that what it's gonna take to make us competitive?

 

[torchbearer]

What could America export, thats the question.

Exactly. QFT.

 

[theseus51]

When you think of exports, don't just think "stuff" like toys or clothes or cars. You can also export labor costs (aka more jobs for the country with the weaker currency . . . but really crappy low paying ones).