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Javier David has an article today about some recent research from Citigroup that raises questions - as David puts it - about the link between a weaker dollar and the trade deficit:
The formula is so universally accepted it borders on the simplistic: a weak currency plus exports equals trade boom.
A weaker dollar, which recently fell to near three-year lows, helped send U.S. exports soaring last year by 21% to a cumulative $1.28 trillion, the sharpest rise since 1988. However, the current account "” the broad measure of trade plus goods and services "” remains in deficit, largely because the U.S. still imports much of its oil.
To the extent that a weak dollar has improved American trade competitiveness, recent research from Citibank raises questions about exactly how much of a trade bang the U.S. "” or for that matter any other country "” can expect to get from a weaker buck.
"Borders on the simplistic". No kidding. How about borders on insanity - doing the same thing over and over expecting a different result. You didn't need to wait on Citi to discover this little gem of information. Anyone with the ability to read a graph and access to FRED could have done this analysis on a coffee break. In fact, I have done exactly that in the past at my other blog.
In that post, I used the recent period of dollar weakness as an example but one could just as easily have gone back to the late 80s and found exactly the same thing. Back then, instead of China it was the trade deficit with Japan everyone was worried about. We forced them to sign on to the Plaza Accord, a deliberate devaluation of the dollar versus the Yen (and the D-Mark) that would supposedly cure the deficit. Of course it didn't work. We got the crash of '87, the Japanese got a bubble and then a deflation that they still haven't cured and oh by the way, we've still got a trade deficit with Japan. It might not even be coincidence that we got a little thing called the S&L crisis which turned into the 1990 recession. It was only during that recession that we finally achieved a trade balance (or very nearly). If that's how economists define success, I sure don't want to find out how they define failure.
So, with that little experience in the economist's collective unconscious, a series of Treasury Secretaries decided during the Bush II administration that it worked so well the first time, we ought to try it again. And you know what? It worked every bit as well then as it did the first time. Stock market crash - check. Banking crisis - check. Trade deficit unaffected - check.
Even now, the current administration - and plenty of idiots in Congress - are trying to push the 21st century version of the Plaza Accord on the Chinese because they think it will "solve" the trade deficit. The Chinese, who apparently do have access to FRED, aren't playing ball and can you blame them? They see what happened to Japan and aren't about to head down that path. They might not like their current inflation problem but apparently it is preferable to popping the bubble and doing a Japan.
So why do the politicians keep trying to do something that obviously doesn't work? The answer is simple. The real cause of the current account deficit is a lack of national savings in the US and that is primarily now a function of the federal deficit. It is the politicians unwillingness to balance the budget that is causing the current account deficit. The trade deficit is not the problem and devaluing the dollar isn't the answer.
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