Peter Navarro, head of Trump’s National Trade Council, clearly needs a refresher course in economics. Not content with calling China a “currency manipulator,” he's now indicted Germany for this economic crime with its alleged theft of American jobs. On the same day, his boss accused Japan and re-accused China of manipulating their currencies to help their economies and hurt ours.
Not only are these two brilliant economists calling every country they don’t like a currency manipulator. They have also killed two trade deals and are in the process of destroying a third. Yesterday, Navarro pronounced the proposed Trans-Atlantic Trade and Investment Partnership dead. A few days back, Trump killed the Trans-Pacific Partnership agreement. Their next truly inane and insane move is to cripple, if not destroy, the North American Free Trade Agreement.
Let's do something old fashion -- examine the facts and use real economics to process them.
Germany is part of the Eurozone and any intervention in exchange markets is done by The European Central Bank (ECB), not the German central bank, The Bundesbank. Yes, Germany has a big influence on the ECB, but it doesn't dictate ECB exchange-rate policy. That's ultimately decided by Mario Draghi, the ECB's President, together with his board, which is represented by all Eurozone members.
Second, the exchange rate between the U.S. and the Euro is floating. I.e., it's being set by the market – by the supply and demand for currencies. Yes, the ECB prints (supplies) money and the amount it prints impacts the rate at which a euro swaps for a dollar – the exchange rate. But you can’t argue currency manipulation by the ECB based on money supply data.
Why not?
Because our central bank, the Federal Reserve, has been printing (supplying) far more dollars than the ECB has been printing euros over the past decade. In 2007, the U.S. monetary base, which records all the dollars ever printed by Fed, stood at $847 billion. Today, the figure is $3.675 trillion, i.e., the Fed’s supply of money grew by a factor of 4.3. The comparable factor for the ECB is roughly 3.5. For Japan it’s 1.3. And for China, it’s 2.4. So if any of these regions has spent the last decade trying to water down (devalue) and, thus, manipulate its currency to make its goods cheap, it’s the U.S.
As every student learns in their first course in economics, supply alone doesn’t determine prices. Demand can play an equally strong if not stronger role. That’s exactly the case when it comes to the euro-dollar exchange rate over the past decade. The demand for dollars relative to euros has played a stronger role than has the relative supply of the two currencies. Over the period, the dollar appreciated 34 percent against the Euro, appreciated 5 percent against the Japanese yen, and depreciated only 6 percent against the Chinese Yuan.
Demand for the dollar has been strong thanks to our country’s more rapid recovery from the Great Recession, Southern Europe’s near depression-like condition, Japan’s slow growth, China’s slower growth, the perception that the U.S. is a safe haven for parking one’s assets, and, recently, Brexit.
There is one major region/country that’s has printed money at a faster clip than the U.S. It’s the UK. Their post-2007 money-printing factor is 6.3 -- far larger than the U.S.’s 4.3. Moreover, their currency, measured in dollars, is now cheaper than it was.
So why didn’t Trump and Navarro publically ridicule Theresa May for manipulating her currency when she was over last week? My guess is that Trump would like to visit at least one country in Europe during his term of office. And, at least for now, Theresa appears to be the only European leader willing to invite him. Yesterday, the President of the European Council, Donald Tusk, called Trump a "threat" to the European Union. As for other destinations, Trump's phone call over the weekend in which he apparently hung up on the Prime Minister of Australia (or the Prime Minister hung up on him) seems to quash the Aussie option. Mexico? Not likely. In their latest call, Trump apparently offered (threatened?) to invade Mexico to eliminate its drug traffickers.
But back to economics.
There’s another big point that Twiddledee and Twiddledum are missing. When one country prints pieces of paper at a faster rate than another, that country’s prices rise at a faster clip. This undermines any competitive advantage associated with trying to induce a devaluation.
As an example, suppose the Fed were to double the amount of dollars in circulation by flying helicopters over the country that released dollar bills. This would lead our exchange rate to depreciate by 50 percent. But prices would double. Hence, a German buying maple syrup would find she gets twice the number of dollars for each euro, but has to pay twice the number of dollars to buy the syrup. So, measured in euros, the cost of the maple syrup doesn’t change.
Prices don’t adjust overnight. But they do adjust over time, so currency manipulators, like our country, may be able to temporarily, but not permanently lower the relative cost of our goods. Yet, why would a country want to manipulate its currency even if it could? Yes, it may, in the short run, produce more domestic jobs. But until prices in the manipulating country adjust, it forces exporters to sell their products at lower prices. And it forces importers to sell their products at higher prices. Every good Republican knows that government-imposed price controls are a bad idea. The fact that our country is the mother of all currency manipulators in the last decade doesn’t change this fact.
One final point. Twiddledee and Twiddledum don’t have control of the Federal Reserve (Amen to that). But in threatening first Mexico and China and now Japan and the Eurozone with trade wars, they are in the process of manipulating our currency big time. I predict a major drop in dollar demand if actual Republicans (and there are many) and Democrats in Congress don’t intervene and keep our country from heading down its “elected” path to economic isolation and decline.
