Dollar, Euro, Exports

Dean Baker criticizes The Wall Street Journal in his blog, The American Prospect here for its “economic incompetence” in discussing the Obama administration’s effort to boost the economy with increased exports and never once mention the value of the dollar as a determining factor.

Indeed:
“The value of the dollar is the main determinant of the price of U.S. exports in other countries. If the dollar falls in value, the price of U.S. exports declines measured in the currency of other countries.”

Since Baker suggests that the WSJ be nominated for a “Pulitzer for journalistic incompetence” due to that omission, I suggest that most European economists and all of the European political class share this Pulitzer award for never mentioning that the value of the Euro vis-à-vis the dollar, and the implicit value of the “notional” French Franc, Lira, and Peseta vis-à-vis the notional Deutsche Mark are responsible for substantial export difficulties and for the resulting contraction in activity.

Congratulations to the laureates.

Warren Buffett, the Railroads, and the Renminbi

Is there a link between Warren Buffet’s recent big investment in railroads, the U.S. current account deficit and Chinese surplus? Yes according to Simon Johnson in The Baseline scenario (November 7) here . The Omaha billionaire and owner of the Berkshire Hathaway holding would be betting on a renminbi appreciation that would boost Chinese commodity imports, which are, by the way, transported by U.S. railways and are a major U.S. export to China. Hence the reference to the G-20 meeting in the title of the post, since exchanges rates and current account imbalances are central to the G-20 discussions.

The Buffett move could also be interpreted as a bet on the rise of oil prices, because in that case transport by trains becomes much cheaper than transport by trucks, notes a reader of The Baseline Scenario.

Moreover both effects could happen simultaneously ...

Carry Trade and the Next Assets Tsunami

You should read Roubini here.

Economics Bashing Wrong, Lucas

Does the financial crisis represent a failure of economics, both of macroeconomics and of financial economics? This criticism is widespread and fashionable nowadays, but wrong. Nobel laureate and Chicago economist Robert Lucas explains very convincingly why in an article published by The Economist here . The efficient market hypothesis is not disproved, on the one hand, and mainstream macroeconomic modelling has been mostly useful and not off the mark, on the other hand, contrary to what critics and journalists have claimed. A must read.

The Dollar Carry Trade and the Next Bubble

Nouriel Roubini, the New York University professor that correctly predicted the recent banking crisis, notes that investors worldwide are borrowing dollars to buy assets including equities and commodities, and he fears that they are again at it, fueling “huge” bubbles that may spark another financial crisis, reports Bloomerg’s Michael Patterson here.

Goodhart vs. Kay

“Narrow banking is not the answer to systemic fragility” writes Charles Goodhart who develops some good arguments against the narrow banking proposal in his October 28 Financial Times column here .

He is wrong however on one point at least: being in favor of smaller, more specialized banks, as an objective for the future, after a reform of the system, is not the same thing as claiming that financial authorities should not have helped large diversified banks avoid bankruptcy in the recent past. The impact on the economy would have been devastating given their sheer size, and it is precisely for that reason that banks should be compelled to downsize and re-specialize in the future. The failure of one or a few smaller investment banks would then not jeopardize the whole economy, which is the main point of the "too big to fail" reform proposal.

He then argues that in a narrow banking system, depositors would shift their funds towards risky financial institutions during relatively safe periods, only to return to safer institutions when risks increase, and thus would exacerbate the cyclical instability of the economy. But that would not be the case if investment banks were not allowed to manage current payments for depositors, just as corporations in general are not allowed to manage the payments needs of their shareholders.

Soros vs Markets

George Soros launches a $50 million onslaught on free market economics. Read the Newsweek story here .