Currency markets: Which one is not like the others?
One of the points I recently stressed as to why the US economy is in neutral is that other countries, through their currency markets management, are sopping up what little demand we have. I don鈥檛 think this is the whole or even the half of the story relative to the other matters on the list (e.g., our unwillingness to stimulate), but I do think it鈥檚 important.
The problem here is that a very useful adjustment mechanism that naturally kicks in, ala econ 101, is blocked. The weak economy and the Fed鈥檚 response leads to lower interest rates. That takes down the value of the dollar in international markets which gives our exports a boost. And, in fact, the decline in the dollar has helped manufacturing employment (since that sector does better when our exports are more competitive), at least up until a few months ago.
Lots of analysis of the Greek debt crisis notes the absence of this mechanism when your country is a member of currency zone. By dint of their Eurozone membership, so-called 鈥渆xternal devaluation鈥� is blocked and you have to do internal devaluation鈥攔educe labor costs to boost your exports鈥攚hich is a lot less fun.
But the fact is, we suffer from a bit of that problem too. This shows one currency that floats relative to the dollar (the euro, in this case), bipping and bopping around, and one that doesn鈥檛, the yuan. It glides along until Chinese monetary authorities decide to let it move for a while, often to appease the complaints of exporters squeezed out by China鈥檚 currency peg.
As the second figure reveals, the yuan rose a bit relative to the dollar in recent months (which moves the trend downward in the graph, since a dollar buys you fewer yuan). Our exports got a bit of a pop out of that and manufacturing employment is up about 170,000 jobs since its trough last October. You don鈥檛 want to make too big a deal out of such correlations鈥攖here are many moving parts.
But that鈥檚 why this problem of currency management by our global competitors made the list of why we鈥檙e stuck. We should do about it.
