[net.politics.theory] The dollar and the trade deficit.

dlo@drutx.UUCP (OlsonDL) (10/25/85)

[]

There has been a lot of political posturing the last few years or so
concerning the so called "over valued" American dollar.  Supposedly
this is causing problems with trade.  I realize that the steel, auto,
textile and other industries are hurting.  However, to say that the
dollar has to be devalued to fix these problems is a specious argument.

In the first place, making some foreign item more expensive doesn't
necessarily mean that domestic items will take their place in the market.
First of all, if people do not have the money for them now, the purchase
will either be put off until later, or maybe not at all. Secondly, making
foreign goods more expensive does not mean that prices of domestic items
will be unaffected.  After all, the dollar that purchases a Toyota is no
different than the dollar that purchases a Chevrolet.  If the dollar is
devalued, it will make the Toyota proportionally more expensive, but it
will also make the Chevy *and everything else* that the dollar purchases
proportionally more expensive.  Therefore, a devalued dollar means that
everybody who uses that dollar, loses (Maybe with the exception of
politicians and bureaucrats.  Since more expensive items and higher tax
brackets mean higher tax revenues, and politicians have better hopes of
getting reelected if they are "perceived" as trying to protect us, while
things around us seem to fall apart.).

The only value the dollar has is its spendability.  i.e. the only reason
people accept the dollar is the belief that they will be able to exchange
it for something that they really want or need.  Which, in turn, means
that it will be passed onto somebody else, who has to pass it onto somebody
else, and on, and on ...  Which means that at some point, that dollar has
to come back to us.  There is term for a nation has *more* money coming in
than it has going out; it is called a debtor nation.

Which brings up an interesting question: Can a debtor nation have a trade
deficit?  After all, you cannot have more money coming in than going out
at the same time that more money is  going out than coming in.

Conclusion: A trade deficit can exist in localized areas or industries.
However, the only way we can have an *overall* trade deficit is if those
who receive the dollar make it no longer spendable, say by burning it for
fuel (very expensive) or stashing it away never to be seen again.  Who in
their right mind would trade their shiny brand new automobiles, stereos,
cameras, VCRs etc. for little green pieces of paper that they would
*never* exchange for something else?

As I see it, industries that are pointing the finger at foreign trade for
the cause of their troubles are pointing in the wrong direction.

These opinions are my own, and do not necessarily reflect those of my
employer.

David Olson
..!ihnp4!drutx!dlo

franka@mmintl.UUCP (Frank Adams) (10/30/85)

In article <368@drutx.UUCP> dlo@drutx.UUCP (OlsonDL) writes:
>There has been a lot of political posturing the last few years or so
>concerning the so called "over valued" American dollar.  Supposedly
>this is causing problems with trade.  I realize that the steel, auto,
>textile and other industries are hurting.  However, to say that the
>dollar has to be devalued to fix these problems is a specious argument.
>
>In the first place, making some foreign item more expensive doesn't
>necessarily mean that domestic items will take their place in the market.
>First of all, if people do not have the money for them now, the purchase
>will either be put off until later, or maybe not at all. Secondly, making
>foreign goods more expensive does not mean that prices of domestic items
>will be unaffected.  After all, the dollar that purchases a Toyota is no
>different than the dollar that purchases a Chevrolet.  If the dollar is
>devalued, it will make the Toyota proportionally more expensive, but it
>will also make the Chevy *and everything else* that the dollar purchases
>proportionally more expensive.  Therefore, a devalued dollar means that
>everybody who uses that dollar, loses.

No.  The reason people say the dollar is overvalued is precisely because
the ratio of the prices of goods in the U.S. and in other countries does
not match the exchange rates.  Devaluing the dollar means changing the
exchange rates, not changing its value against everything.

Now the Chevy is likely to get more expensive after a devaluation, but by
less than the Toyota.  There are two reasons for this.  One is that some of
the parts in the Chevy are imported, thus GM's costs will be higher.  The
other is that with importers being less competitive on price, GM can increase
its price and still sell its cars.  This latter effect is likely to small in
this case, since the importers now have very large profit margins, so will
likely accept lower profits instead of raising their prices.

Frank Adams                           ihpn4!philabs!pwa-b!mmintl!franka
Multimate International    52 Oakland Ave North    E. Hartford, CT 06108