Obama is Failing Us All by Ignoring the Need for Currency Rules in TPP | E-Axes

Not a member yet? Click here.
Forgot your Password?
Archives - Categories
On Inequality
On the Eurozone Debt Crisis
On Monetary Policy and Central Banking
On Global Economic Growth
On the Greek Debt Crisis
On the Banking and Financial Sectors
On Brexit
On China
On India
On Global Inflation
On Currencies
On the US Debt
On the "Economics" of the Arab Spring
Working Papers
Books suggested by members

Obama is Failing Us All by Ignoring the Need for Currency Rules in TPP

Author(s): Dean Baker

If we recognize the need to address the trade deficit, and the centrality of the value of the dollar, then it is mind-boggling that the Obama administration would not have sought to include rules on currency in the TPP.


From CEPR:

The Obama administration is doing its full court press, pulling out all the stops to get Congress to approve the fast-track authority that is almost certainly necessary to get the Trans-Pacific Partnership (TPP) through Congress. One of the biggest remaining stumbling blocks is that the deal will almost certainly not include provisions on currency. This means that parties to the agreement will still be able to depress the value of their currency against the dollar in order to gain a competitive advantage. This is a really big deal, which everyone thinking about the merits of the TPP should understand.

The value of the dollar relative to other currencies is by far the main determinant of our balance of trade. We can talk about better education and training for our workforce, improving our infrastructure and better research, all of which are important for the economy.

But anyone who claims that improvements in these areas can offset the impact of a dollar that is overvalued against another currency by 15 to 20 percent is out of touch with reality. If the dollar is overvalued by 20 percent against another country’s currency, it has the same effect as imposing a 20 percent tariff on US exports and giving a government subsidy of 20 percent to imports.

This is the direct effect when other countries deliberately buy up U.S. assets to prop up the dollar against their currency. This is the main reason the United States is currently running a trade deficit of more than $500 billion a year.

This trade deficit creates a huge gap in demand. It has the same impact as if households were taking $500 billion a year out of their paychecks and stuffing the money under their mattress. There is no obvious way to make up this gap in demand. In principle we could fill the gap with large budget deficits, but this is a political non-starter. Based on a dubious reading of the data from the second half of last year, some analysts had thought the economy was booming again, despite the large trade deficit.

More recently, reality and arithmetic have reasserted themselves and most economists now recognize that the economy is not growing fast enough to fill the demand gap. In fact, the only way we know to fill the sort of gap in demand created by the trade deficit is with an asset bubble like the stock bubble in the 1990s or the housing bubble in the last decade. Not many would advocate going down that path again, which means that we can look forward to the persistence of high unemployment and a weak labor market, unless we address the trade deficit.


© 2011–2017 e-axes. All rights reserved. | Credits | Contact Us | Privacy Statement | Sat 20 Jan, 2018 01:23:38 AM
e-axes is proudly powered by Norder - Creative Solutions