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Richmans' Trade and Taxes Blog
Why weaker dollar won't help exports very much
Most economists think that the weaker dollar will revive American exports. The sequence of events they hypothesize is the following: weaker dollar -> higher profits -> investment in new factories -> greater exports. There is no way to get much greater exports without increased investment in new highly-efficient modern factories.
The weaker dollar does indeed lead to higher profits, but the higher profits don't lead to much investment in new factories. That's because investments are based upon long-term considerations, and manufacturers don't see the weak dollar as being a long-term change. They expect that the exchange rate will bounce up again as it has been doing. The chart below, shows how the dollar's price has yo-yo'd up and down versus the euro for the past five years:
Currently the dollar is testing .67 of a euro, a magic even number where $1 buys $1.50 euro. From April through July 2008, the dollar got as low as .63 of a euro, but then it bounced up again due to the flight to safety during the fall 2008 financial crunch. In December 2009, the dollar reached .67 of a euro, but then bounced up due to huge purchases of dollars by energing market central banks.
It is likely that the dollar will bounce up again once QE2 ends, but maybe not. Emerging market central banks, including China's, are dealing with inflation which is aggravated by dollar purchases. Bernanke's QE2 has chased many private savers out of US Treasury Bonds and into foreign government bonds that pay higher interest rates. Although the central banks of Europe, Canada and Japan could intervene to keep the dollar from crashing, it is not yet clear whether or not they will do so.
Ironically, a dollar crash would actually be good for the long-term health of the American economy. It would result in the building of highly-efficient modern factories in the United States by international corporations. The new exports would balance trade, which currently subtracts about $550 billion per year from the demand for American products. But the short-term result of the dollar crash would be quite painful -- a huge cut in standard of living combined with high interest rates and inflation. Whoever is president when the crash takes place will be toast.
There is a painless way to cause investment in new untra-modern factories, and thus get the U.S. economy growing -- a WTO-legal scaled tariff to balance trade. At the moment, Donald Trump is the only potential presidential candidate who is even considering the painless solution.
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