How Ending Currency Manipulation Will Help Manufacturers

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Many American economists and policymakers believe that currency manipulation by U.S. trading partners such as Japan and Singapore – and especially China – creates a drag on the U.S. economy and depresses the country’s manufacturing sector.

Currency Manipulation

Currency manipulation by U.S. trading partners such as Japan and Singapore – and especially China – creates a drag on the U.S. economy and depresses the country’s manufacturing sector.

Currency manipulation involves artificially reducing the value of a country’s own currency, in effect providing a subsidy for national exports. Currency manipulators often buy U.S. treasury bonds to prevent their own currencies from strengthening. In the case of China, the country’s trade with the U.S. brings in an excess of U.S. dollars and would normally create a shortage of yuans. But to avoid the yuan’s appreciation and prop up its manufacturing sector, China buys up U.S. treasuries to keep the yuan out of currency exchange markets, thus maintaining an artificially low value.

About one out of every six U.S. private-sector jobs is in manufacturing, 17.2 million in total, according to the National Association of Manufacturers(NAM). However, manufacturing dominates when it comes to U.S. trade goods, accounting for 86 percent of exports in 2011, the U.S. International Trade Commission (USITC) says. So a U.S. trade deficit, exacerbated by currency manipulation, has a disproportionately negative effect on the manufacturing sector.

Robert E. Scott, Helen Jorgensen, and Doug Hall of the Economic Policy Institute (EPI) explain that reviving the crucial U.S. manufacturing sector “requires eliminating a jobs-destroying U.S. trade deficit in goods,” in large part by ending currency manipulation. Currency manipulation, the group says, “distorts international trade flows by artificially lowering the cost of U.S. imports and raising the cost of U.S. exports,” thereby displacing American manufacturing jobs.

Eliminating currency manipulation would reduce the U.S. trade goods deficit by at least $190 billion and as much as $400 billion over three years, allowing the U.S. to “reap enormous benefits” without any increase in federal spending or taxation. This would reduce U.S. unemployment by 1 to 2.1 percentage points and create between 2.2 million and 4.7 million jobs; between 620,000 and 1.3 million of those jobs would be in manufacturing. In addition, U.S. GDP would increase between 1.4 percent and 3.1 percent.

The Group of Seven (G7) top industrial nations is concerned that continued currency manipulation is creating dangerous instability in the global economy. The organization, which is comprised of the U.S., Canada, France, Germany, Italy, Japan, and the U.K., recently saidits members are committed to market-determined exchange rates and “will remain oriented towards meeting our respective domestic objectives using domestic instruments.”

The G7 affirmed that they “will not target exchange rates” – meaning they themselves refuse to be involved in currency manipulation. “We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability,” the group declared.

Artificially lowering a country’s exchange rate can make its exports cheaper and promote growth internally, but that only causes problems for other countries because one currency can fall only if another rises. This imbalance, the EPI warns, “could spark a ‘currency war’ – a destabilizing battle where countries compete against one another to get the lowest exchange rate.” This scenario “conjures up images of the 1930s, when countries pursued tit-for-tat devaluations in order to get an edge… the outcome was to decimate global trade, accentuate the depression, and sow the seeds for World War II,” according to the institute.

 

Scott Paul, president of the Alliance for American Manufacturing (AAM), argued that policymakers need to act now to prevent further harm from unfair trade practices.

“Congress is obsessed with the wrong deficit,” Paul said. “To grow jobs and boost the economy, we must eliminate the trade deficit. Ending currency manipulation will get us part of the way there, but we also need a smart manufacturing policy, one that focuses on innovation, public investment, skills, and trade enforcement.”

According to the EPI report, any U.S president could end currency manipulation with a stroke of the pen: “The president could simply declare that the United States will no longer sell Treasury bills and other government assets to China and other countries that refuse to allow the United States to purchase their government assets… Refusing to sell assets to currency manipulators would eliminate the principal tool used by foreign central banks to manipulate their currencies: purchases of Treasury bills and other government securities…”

Olli Rehn, top monetary affairs official for the European Commission (EC), told the Associated Press that joint governmental efforts are needed to fight the adverse effects of “excess volatility and disorderly movements” in exchange rates. “That’s why we need to lean on active international policy coordination in order to prevent a wave of competitive devaluations.”

 

 

Source: http://news.thomasnet.com/IMT/2013/02/26/how-ending-currency-manipulation-will-help-manufacturers/

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General Motors is becoming China Motors. Watch and Listen to the candid comments of GM’s CEO.

Who Owns the U.S.?

Regardless of how much closer Obama’s budget brings our economy into a balance of payments not seen since 2001, we will continue to run deficits for the next decade, and the national debt will keep growing every year that happens.

While most of the country’s $14 trillion debt is held by private banks in the U.S., the Treasury Department and the Federal Reserve Board estimate that, as of December, about $4.4 trillion of it was held by foreign governments that purchase our treasury securities much as an investor buys shares in a company and comes to own his or her little chunk of the organization.

Looking at the list of our top international creditors, a few overall characteristics show some interesting trends: Three of the top 10 spots are held by China and its constituent parts, and while two of our biggest creditors are fellow English-speaking democracies, a considerable share of our debt is held by oil exporters that tend to be decidedly less friendly in other areas of international relations.

Here we break down the top 10 foreign holders of U.S. debt, comparing each creditor’s holdings with the equivalent chunk of the United States they “own,” represented by the latest (2009) state gross domestic product data released by the U.S. Bureau of Economic Analysis. Obviously, these creditors won’t actually take states from us as payment on our debts, but it’s fun to imagine what states and national monuments they could assert a claim to.

1. Mainland China

Amount of U.S. debt: $891.6 billion

Share of total foreign debt: 20.4%

Building on the holdings of its associated territories, China is the undisputed largest holder of U.S. foreign debt in the world. Accounting for 20.4% of the total, mainland China’s $891.6 billion in U.S. treasury securities is almost equal to the combined 2009 GDP of Illinois ($630.4 billion) and Indiana ($262.6 billion) in 2009, a shade higher at a combined $893 billion. As President Obama — who is from Chicago — wrangles over his proposed budget with Congress he may be wise to remember that his home city may be at stake in the deal.

2. Japan

Amount of U.S. debt: $883.6 billion

Share of total foreign debt: 20.2%

The runner-up on the list of our most significant international creditors goes to Japan, which accounts for over a fifth of our foreign debt holdings with $883.6 billion in U.S. treasury securities. That astronomical number is just shy of the combined GDP of a significant chunk of the lower 48: Minnesota ($260.7 billion), Wisconsin ($244.4 billion), Iowa ($142.3 billion) and Missouri ($239.8 billion) produced a combined output of $887.2 billion in 2009.

3. United Kingdom

Amount of U.S. debt: $541.3 billion

Share of total foreign debt: 12.4%

At number three on the list is perhaps our closest ally on the world stage, the United Kingdom (which includes the British provinces of England, Scotland, Wales and Northern Ireland, as well as the Channel Islands and the Isle of Man). The U.K. holds $541.3 billion in U.S. foreign debt, which is 12.4% of our total external debt. That amount is equivalent to the combined GDP of two East Coast manufacturing hubs, Delaware ($60.6 billion) and New Jersey ($483 billion) — which was named, yes, after the island of Jersey in the English Channel. The two states’ combined output in 2009 came to $543.6 billion.

4. Oil Exporters

Amount of U.S. debt: $218 billion

Share of total foreign debt: 5%

Another grouped entry, the oil exporters form another international bloc with money to burn. The group includes 15 countries as diverse as the regions they represent: Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria. As a group they hold 5% of all American foreign debt, with a combined $218 billion of U.S. treasury securities in their own treasuries. That’s roughly equivalent to the combined 2009 GDP of Nebraska ($86.4 billion) and Kansas ($124.9 billion), which seems to be an equal trade: The two states produce a bunch of grain for export, which many of the arid oil producers tend to trade for oil.

5. Brazil

Amount of U.S. debt: $180.8 billion

Share of total foreign debt: 4.1%

Rounding out the top five is the largest economy in South America, Brazil. The country known for its beaches, Carnaval and the unbridled hedonism that goes along with both has made a big investment in the U.S., buying up $180.8 billion in American debt up to December. That’s almost equal to the $180.5 billion combined GDP of Idaho ($54 billion) and Nevada ($126.5 billion), a state that is no stranger to hedonism itself.

6. Caribbean Banking Centers

Amount of U.S. debt: $155.6 billion

Share of total foreign debt: 3.6%

You have to have cash on hand to buy up U.S. government debt, and offshore banking has given six countries the combined capital needed to make the Caribbean Banking Centers our sixth-largest foreign creditor. The Treasury Department counts the Bahamas, Bermuda, the Cayman Islands, the Netherlands Antilles, Panama and the British Virgin Islands in this designation, which as a group holds $155.6 billion in U.S. treasury securities. That’s equivalent to the GDP of landlocked Kentucky ($156.6 billion), whose residents may not actually mind if they were ever to become an extension of some Caribbean island paradise.

7. Hong Kong

Amount of U.S. debt: $138.2 billion

Share of total foreign debt: 3.2%

At No. 7 on the list of our foreign creditors is Hong Kong, a formerly British part of China that maintains a separate government and economic ties than the communist mainland. With $138.2 billion in U.S. treasury securities, the capitalist enclave could lay claim to Yellowstone Park and our nation’s capital: The combined GDP of Wyoming ($37.5 billion) and Washington D.C. ($99.1 billion) totaled $136.6 billion in 2009.

8. Canada

Amount of U.S. debt: $134.6 billion

Share of total foreign debt: 3.1%

They say that a friend in need is a friend indeed, and our neighbor to the north has proven to be a kind and generous creditor in our time of financial need. Canada holds about 3.1% of our foreign debt, or $134.6 billion. If friend were to become enemy and Canada were looking to annex some U.S. land to cover the debt though, the country would have an easy time of it. The combined GDP of Maine ($51.3 billion), New Hampshire ($59.4 billion) and Vermont ($25.4 billion) comes close to Canada’s debt holdings at $136.1 billion.

Residents of the three states in our extreme northeast corner should start practicing their French: They might become Québécois one of these days.

9. Taiwan

Amount of U.S. debt: $131.9 billion

Share of total foreign debt: 3.0%

Taiwan, an island barely 100 miles off the coast of China, is claimed by the People’s Republic of China, despite having its own government and economic relations with the outside world. Part of those economic relations includes the island’s holding of $131.9 billion of U.S. debt, roughly equivalent to the combined GDP of West Virginia ($63.3 billion) and Hawaii ($66.4 billion), which totals $129.7 billion.

Unless we get our spending in check, we risk losing some of our most visually stunning territory (West Virginia, obviously) to our friendly neighbors on the other side of the Pacific Ocean.

10. Russia

Amount of U.S. debt: $106.2 billion

Share of total foreign debt: 2.4%

Starting off the list of our major foreign creditors is Russia, which holds about 2.4% of the U.S. debt pie that sits on the international dinner table. Its $106.2 billion in treasury securities is equivalent to the 2009 GDP of our sparsely populated North: The combined output of North Dakota ($31.9 billion), South Dakota ($38.3 billion) and Montana ($36 billion) matches up nicely with the Russian holdings, at $106.2 billion.

Let’s hope Russian president Dmitry Medvedev doesn’t come to collect.

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