Why the weak dollar isn't fixing the economy

Business Insider ^ | 05/06/2011 | Joe Weisenthal

[SeekAndFind]

A disappointment in Q1 was the relatively modest growth of US exports, confounding economists who might have assumed that the weak dollar would rectify that problem.

As explained in his latest FX Focus, Citi's Steven Englander points out that the connection between a weak currency and strong exports is dicey at best.

Here are the three main reasons why:

1) It may be small beer in the big picture. Productivity changes and the regulatory environment among other factors may in practice matter more than measured shifts. EM countries climbing up the quality ladder may matter more for growth in export markets than moves in the exchange rates.

2) How fast your exports grow also depends on how fast your export markets grow and how sensitive your export destinations are to price moves in your exports

3) Causality is uncertain. Sometimes the causal channel is that capital inflows will make a currency stronger and weaken exports. Sometimes the causal channel is that improved competitiveness will increase exports and simultaneously put upward pressure on the currency. Sometimes a combination of both forces is at play.

This chart is the killer. There's just no correlation between US "competitiveness" (blue) and export performance.

[SeekAndFind]

[wastoute]

Export what? Politicians? That is the only ting we seem to make more of than we need...

[kevao]

We used to be a manufacturing economy. Then we became a service economy. Now we are a government service economy.

[Uncle Ike]

” We used to be a manufacturing economy. Then we became a service economy. Now we are a government service economy. “

See??

It’s working!!

/sarc

[Yet_Again]

2) How fast your exports grow also depends on how fast your export markets grow and how sensitive your export destinations are to price moves in your exports

Free traders will soon find that the things exports are most sensitive to are protectionist policies, and that the countries that have been all too eager to take our jobs in a world which had a strong dollar are quite reluctant to send them back in a world which has a weak one. This has been very much a one sided game, supported by the Republicans because it bolstered corporate bottom lines in the short term and by Democrats because it transferred wealth from the first world to the third world.

[Moonman62]

Our current weak dollar started halfway through W's first term.

For some reason politicians love exports and weak currencies. They love them so much that they are willing to destroy the other 95% of their economies that aren't exports.

Perhaps one of the reasons a devalued currency doesn't work is because the countries we want to export to also have politicians who are busy devaluing their own currencies.

Another reason a weak currency doesn't work is economically ignorant politicians will tend to rely on such a simple smoke and mirrors trick, rather than implementing economic policies that result in real economic growth.

[mountainlion]

It will take quite some time to overcome the $3.5T that obama gave to the world banks let alone what he did to the economy.

[Alberta's Child]

I don’t know if there’s any truth to what this guy is saying. In my industry publications I’ve seeing strong growth in volumes at major U.S. ports — driven mainly by dramatic increases in export activity.