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Mix-Ansicht- Dollar Depreciation and Economic Growth / wieder geht´s um Währungen und EXPORT - RK, 14.10.2003, 16:42
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Dollar Depreciation and Economic Growth / wieder geht´s um Währungen und EXPORT
-->Dr. Neville Bennett
Christchurch, New Zealand
n.bennett@hist.canterbury.ac.nz
October 13, 2003
Dollar Depreciation and Economic Growth
The September meeting of the G7 endorsed, in effect, a lower US$. The dollar fell by 4% against the yen and the Euro, and almost that amount against the NZ$ and $AU. This development is lamented in New Zealand, perhaps misguidedly.
The fallout is continuing. New Zealand and Australian producers are distressed by the rise of their currencies. The wood industry in New Zealand is a noticeable quandry—the huge forest estates of Fletcher Forest were reduced downwards by 33%, and forest workers were laid off. Farmers are also distressed and are calling for lower interest rates and a lower dollar.
There is no doubt that a lower dollar advantages exporters of commodities. Moreover, as farming, forestry, fishing are extremely important activities, it is necessary for the authorities to give due consideration to their interests. Manufacturers also protest against the surging NZ$ and have joined the chorus which insists that a weaker dollar would boost production, profits and employment, and therefore increase rates of economic growth.
These claims are plausible. Most economists believe that the present rate of growth cannot be maintained because a higher dollar depresses export returns and encourages imports. Economists recognise, however, that influencing the exchange rate by lowering interest rates has the downside risk of fuelling the property market.
The nub of popular thought on the exchange rate is that the growth rate is driven by demand for goods and services. Fluctuations in demand are behind rises and falls in the production of goods and services. Overseas demand translates into exports, which, when demand is vigorous, leads to an increase in domestic output. When domestic producers and consumers increase their demand for goods some will be imported (e.g. cars and petrol). Many people think imports are undesirable because they depress local demand or provide substitutes for locally made goods. In sum, exports are considered to be good for economic growth, while imports detract from it.
It follows that if one wants to increase demand for New Zealand wine, it makes sense to make it cheaper and more competitive by lowering the exchange rate of the NZ$. Cheaper New Zealand wine should lead to higher exports and a boost to receipts. It should reduce the competitiveness of, say, Australian wine and lower the country’s import bill. Other things being equal, this will improve the balance of payments and stimulate more growth. It is almost universally believed that a falling exchange rate increases international competitiveness, and that currency depreciation increases economic growth.
This thinking underlies a contemporary deadly struggle between the US and Japan (and China). The US believes it is losing jobs because an artificially low yen permits Japan to export cars very cheaply to the USA. IT demands a yen appreciation. The Japanese authorities believe this is true. They believe a low yen encourages exports and economic growth. The Bank of Japan has spent US$80 billion this year selling yen and buying dollars in order to maintain its advantage. The Japanese taxpayer believes this too, and unquestioningly observes his national debt increase by another $80 billions worth of bonds. His government is the world’s most indebted,
Could the US, Japan and most other treasuries be wrong in their basic analysis of the relationship between exchange rates and economic growth? Their assumptions are deeply challenged by Frank Shostak (see www.mises.org), a member of the Austrian School.
Shostak explains that when a central bank announces the loosening of monetary policy, the financial community responds quickly by depreciating the currency. Producers expect to increase exports, and banks respond by increasing credit at lower interest rates. Thus, there is an increase in credit available for exporting activity, diverting resources from other activities. If other domestic prices remain reasonably stable, exporters will increase their activity and most probably, their profits.
The prosperity engendered by exporting activity is partly illusory and also somewhat short-lived. <font color=#FF0000>Many citizens experience a decline in real income which is expressed in the ability to consume fewer</font> imported goods. Even exporters suffer a little as they import machinery and fuel. Moreover, a depreciated currency has inflationary effects that increases domestic prices. Price rises eventually diminish, even eliminate, the exporters competitive advantage. The exporters then call for another devaluation. Successive devaluation leads to citizens getting less for what they are exporting abroad, and they pay more for what they import from abroad.
An appreciating exchange rate has many benefits. It leads to price falls and reduced producer costs. It increases a nation’s competitive advantage, and it may be more equitable, for devaluations distort prices and favour some sectors of the economy more than others. Frank Shostak concludes his analysis with a passionate justification of the gold standard.
Shostak’s analysis caught my eye because it has resonances with current affairs. For example, the recent Cancun negotiations revealed an almost universal belief that exports are good and imports are bad. This ridiculous dogma underlies the appalling policies of the rich world which generally puts barriers on imports of agricultural goods, subsidises their own production of farm goods, and then subsidises the export of their over-produced goods.
Another current problem centres upon US demands for free floating currencies. It has picked a quarrel with China and Japan. Senators are talking about erecting more barriers to Chinese trade. This kind of forceful diplomacy, much favoured by the Bush Administration, could potentially unleash a series of competitive devaluations and mounting trade barriers. In the 1920’s and 1930’s this economic nationalism greatly diminished world trade and increased poverty.
In New Zealand the debate on economic policy centres upon exchange and interest rates. The impact of different rates on sectors is not comprehensive: the primary producers, manufacturers and tourist interests seem to get the most attention, while importers and consumers are not regarded as crucial. Moreover the affect of the exchange rate may be exaggerated or confused with the effects of credit creation. My articles in 2001 which pointed to the effect of the low dollar also mentioned that M3 increased by 30% in two years—a rate equivalent to Rob Muldoon’s mismanagement.
It is a very curious historical phenomenon that the spurt of growth enjoyed in the last few years is almost universally ascribed to an export boom arising principally from a low dollar. The burgeoning of credit and aggressive lending by the banks has been over looked. It is only in the last few months that the public has noticed the asset inflation that followed the credit boom. Did the government want a housing and land boom/bubble? Maybe not, as the Reserve Bank is now keeping interest rates high to dampen it down. Could it have stopped a housing boom? Perhaps: if it had read some Austrian School economics.
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