Nations are doing their best to export as much as possible, which allows them to grow their GDP well beyond what would be supported by domestic demand…particularly, China and Germany.
And Treasury Secretary Jack Lew is mad at them. He told Congress in his semi-annual report on international exchange rates that they aren’t playing fair.
Cry me a river.
He should’ve labeled his speech “The Case of the Sour Grapes,” because if the roles were reversed he’d be crowing about U.S. exports and how other nations need to open their borders for more trade with us. Here’s a (non-) news flash — global demand is slow. It’s been that way for six years. It will continue this way for another 5 to 8 years. There’s not much that Lew or anyone else can do about it, which is obvious from the utter failure of most policies enacted since the downturn.
So countries are doing everything to protect themselves, even at the expense of… well, everyone else. Instead of pointing fingers, he should be asking a very important question: “What are nations with slow domestic demand supposed to do?”
Less Than Zero
This is a conundrum that faces just about every nation on the planet. The typical answers from economic textbooks and pundits have already been tried. Lower interest rates so that debt is cheaper. How much below zero can you go?
Remind consumers that with no interest on savings, they are better off spending the money. No one has to tell us that we aren’t making any returns on safe savings, but the money is not meant for spending, it’s earmarked for the future (think retirement and education). The crux of the problem is that as populations age, they face the same issue — older consumers have a greater need for saving and paying down debt, which are not activities that stimulate growth.
So if you cannot get your own people to buy your stuff, should you force austerity on the nation, which is the painful process of deleveraging and cutting wages and benefits, or try to get other countries to buy your stuff? Is that really a choice? The first option is political suicide.
In their quest for growth, countries pursue greater export strategies, which almost always begin and end with one thing — a cheaper currency. If a nation can push down the value of its money, then it can either lower the prices of its goods and services to foreign buyers, or it can leave prices the same and receive more of its own currency for each transaction.
A third option is to do a little of both. No matter how it plays out, all of this leads to increased GDP for the exporting country, which was the point in the first place. Sure, the domestic citizens can’t afford as many imports as before because they cost more, but hey, if domestic buyers turn more to domestic goods at the same time that exports rise, well, that’s an even better outcome.
Not Everyone Is a Winner
The problem in this scenario is that every country can’t pursue the strategy, because in the end there would be no benefit. If global demand is slowing and countries are pursuing greater exports, then some countries will “win” and some will “lose.”
In a world where the U.S. dollar is dominant, countries like Japan keep trying to devalue their own currency against the U.S. dollar. If Japan is successful, then their exporters will earn more yen per dollar of sales in the U.S. (or per euro of sales in the euro zone), which will lead to Japanese GDP growth. It is true that the Japanese people will pay more for imported items such as energy, which leaves them with rising inflation and a lower standard of living, but you know what? At least GDP is moving in the right direction.
Given the state of the Japanese economy and those of the countries that make up the euro zone, it’s hard to see where this situation will turn around anytime soon. Expect the U.S. dollar to remain strong, and even gain ground in the months ahead as other countries do their best to export as much stuff as possible.