International trading system turned on its head

 

THERE is a reason export surpluses have been so vigorously sought after by nations for centuries. Exports cause a temporary boom.

As exports increase, money comes into a nation and into the coffers of the businesses and industries that do the exporting. This leads to increased profits in all businesses connected to the export industry and spreads throughout the economy creating a temporary burst of economic activity as business profits spill over to increase employment, raise stock prices, and the benefits spread throughout the general population.

But this also induces inflation which eventually cuts off purchases as higher prices dissuade consumers from buying. The result is a mild reduction of economic growth—unless, the exporting nation depreciates its currency further, making its exports attractive again. This was the standard operating procedure of most nations who pursued export surpluses for the last 60 years.

The recent fall in the dollar, which was somewhat predictable – and necessary – is for the first time not being met with other nations devaluing their currencies against the dollar.

Competitive devaluations typical of years past have become more difficult as interest rates in competitor’s countries have increased and as US rates remain low and unchanged.

US competitors have little choice but to raise interest rates and fight inflation. And where that choice has not been made by governments, the market has made it for them. That choice has not yet been thrust on the United States.

For the first time in a very long time other currencies around the world have been going up while the dollar falls to historic lows against them. The dollar is in the position of encouraging exports and discouraging imports, while other nations are forced to tolerate a rise in their currencies. This has turned the international trading system on its head.

However, currency depreciation only yields temporary gains. No one has ever devalued their way into permanent prosperity. The US export boom might last for a while longer, but in the end it will be trumped by debt reduction and austerity measures, higher inflation rates, and higher interest rates. Eventually we can potentially find the US in a situation similar to Europe.

And then yesterday, a speech by the Chairman of the ECB turned the market into a spin. The Dollar soared for the first time in months, the Euro was pressured, stock markets fell apart and the price of commodities plummeted.

That is how fickle these markets have become. The hint of slightly increased interest rates in the US sent everyone running for cover. The price of crude oil fell away by over $10 a barrel – and the Dow plummeted 200 points. I have written before about stocks being a poor investment short term, and yesterday’s events proved it. I wonder if this quick move down in oil will reflect at the pumps. I doubt it – that is one bet that seems certain.

 

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