Strong Currency

Something real economists understand that poseurs bought and paid for by Pete Peterson and ilk do not is that overvaluing your Money benefits only those rich enough to buy commodities overseas.

For the average person Money is like water, fish (ahem…) breathe in it. You are only concerned with it’s value relative to the goods you purchase which, if you buy domestically, is a wash. Who cares if Widgets are $10 or $100 provided that amount represents the same amount of work from you (this is also why inflation is a chimera)?

If on the other hand you want to go vacationing abroad or purchase 100,000 pounds of steel from a Chinese or German mill it can make a measurable difference, but measurable doesn’t mean more than marginal in most cases.

And so we have the anti-Brexit Hennie Pennies running around like, like… like chickens with their heads cut off (I dunno, too soon?) screaming as best they can through their suddenly trachealess necks- “The sky is falling! The sky is falling!) because the Pound has dropped in value.

Against who? Not against the Euro which is the vast majority of their international trading volume. No, against the U.S. Dollar which is hardly anything to them as much as our exceptional nation likes its delusions of grandeur.

Dean Baker isn’t buying it-

The Value of the Pound Is Not a Measure of the Success or Failure of Brexit
Dean Baker, Center for Economic and Policy Research
08 October 2016

The Brexit vote was a case where the elites were clearly aligned against the U.K. leaving the European Union. While they had many good arguments on their side, and much of what the pro-Brexit crew was saying was nonsense, some of the elite gloating now also falls into the nonsense category.

In particular, the fall in the British pound is being taken as evidence that Brexit was a mistake. Actually, this is not really evidence of anything. The pound had become seriously over-valued in recent years causing the U.K. to run a current account deficit that is projected to be almost 6.0 percent of GDP for 2016. This is almost certainly not sustainable. The current account deficit also leads to a large gap in demand, which at the moment appears to be filled primarily by demand generated by a housing bubble.

Note that this is an economic quagmire created by the British elite: the establishment folks running the Bank of England and the Treasury Department. The Brexiters had nothing to do with it.

The correction for an excessive current account deficit is a fall in the value of the currency, which the U.K. is seeing now. Rather than being a negative for the economy, this is a positive development. It is the only plausible mechanism through which the U.K. can get closer to balanced trade. While the decline has undoubtedly been hastened by fears over Brexit, the bigger problem was letting the pound get so over-valued in the first place.

It is also worth noting that if the value of the pound is measured relative to the euro rather than the dollar, which is arguably the more appropriate yardstick, the pound has not fallen that sharply. It is still well above the lows it hit relative to the euro in 2008 and 2009.

As the U.K. loses part of its financial industry in the fallout from Brexit, it will need increased output in other areas to fill the gap created. A lower-valued pound would be an important part of this story. A lower-valued pound will make a wide range of U.K. produced goods and services more competitive internationally, reducing the size of the country’s trade deficit.

The same is true in the United States-

Having the World’s Reserve Currency Does Not Mean the U.S. Has to Run Huge Trade Deficits
Dean Baker, Center for Economic and Policy Research
10 October 2016

First, there are multiple reserve currencies, not just dollars. And, they trade frequently against each other, so there is a limit to how much the dollar will rise relative to the euro, yen, or pound because it is the main reserve currency. So, that is not the biggest part of the story of the trade deficit.

The more important part of the story is that countries are holding much larger reserves relative to their GDP now than they did in the years prior to the East Asian financial crisis in 1997. This is due to the harsh terms of the bailout imposed by the Clinton administration through the I.M.F. As a result of these terms, virtually every country in the developing world in a position to do so began accumulating massive amounts of foreign reserves. This was to avoid ever having to be in the same situation as the East Asian countries and have to rely on the I.M.F. for help.

The result was that instead of being net importers of capital from rich countries and running trade deficits, as standard economic theory would predict, developing countries became large exporters of capital running trade surpluses with rich countries. This was the origin of the “global savings glut” and secular stagnation that many prominent economists have complained about in recent years.
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This is all worth mentioning in the context of the rest of Samuelson’s piece since he seems obsessed with the idea that we face inadequate supply when the economy’s problem is quite obviously one of inadequate demand. In other words, he is recommending that someone on the edge of starvation go on a diet.

His complaint about Hillary Clinton’s proposals to expand Social Security and pay for college tuition for poor and middle-class children is that we don’t have enough money. The whole story of secular stagnation is that we aren’t spending enough money.
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(He) is wrong at just about every level. First, there are multiple reserve currencies, not just dollars. And, they trade frequently against each other, so there is a limit to how much the dollar will rise relative to the euro, yen, or pound because it is the main reserve currency. So, that is not the biggest part of the story of the trade deficit.

The more important part of the story is that countries are holding much larger reserves relative to their GDP now than they did in the years prior to the East Asian financial crisis in 1997. This is due to the harsh terms of the bailout imposed by the Clinton administration through the I.M.F. As a result of these terms, virtually every country in the developing world in a position to do so began accumulating massive amounts of foreign reserves. This was to avoid ever having to be in the same situation as the East Asian countries and have to rely on the I.M.F. for help.

The result was that instead of being net importers of capital from rich countries and running trade deficits, as standard economic theory would predict, developing countries became large exporters of capital running trade surpluses with rich countries. This was the origin of the “global savings glut” and secular stagnation that many prominent economists have complained about in recent years.

This is all worth mentioning in the context of the rest of Samuelson’s piece since he seems obsessed with the idea that we face inadequate supply when the economy’s problem is quite obviously one of inadequate demand. In other words, he is recommending that someone on the edge of starvation go on a diet.
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Economics really is not very hard unless people are determined not to understand it.

Hmm…