{"id":808,"date":"2017-09-09T11:12:23","date_gmt":"2017-09-09T18:12:23","guid":{"rendered":"http:\/\/savingusmanufacturing.com\/blog\/?p=808"},"modified":"2017-09-09T11:34:30","modified_gmt":"2017-09-09T18:34:30","slug":"how-to-fix-the-dollars-overvaluation-exchange-rate-misalignment","status":"publish","type":"post","link":"https:\/\/savingusmanufacturing.com\/blog\/economy\/how-to-fix-the-dollars-overvaluation-exchange-rate-misalignment\/","title":{"rendered":"How to Fix the Dollar\u2019s Overvaluation & Exchange Rate Misalignment"},"content":{"rendered":"

On July 11, 2017, the Coalition for a Prosperous America released a paper<\/a> titled, \u201cThe Threat of U.S. Dollar Overvaluation: How to Calculate True Exchange Rate Misalignment & How to Fix It\u201d by Michael Stumo (CEO), Jeff Ferry (Research Director) and Dr. John R. Hansen, a 30-year veteran of the World Bank and Advisory Board member.<\/p>\n

The purpose of the paper is to explain the problem of the dollar overvaluation, to show how to accurately calculate the dollar\u2019s misalignment against trading partner currencies, and to propose a solution this serious threat to America\u2019s future.<\/p>\n

The authors point out that \u201cIn past centuries, the only reason that people would choose to hold a foreign currency would be to trade with it\u2026 But in the last few decades, and especially since the early 1990s, international speculators and traders have invested in dollars, including stocks, bonds, and cash, at the rate of hundreds of billions of dollars a year. The dollar investments of private investors now far outweigh the investments of government investors.\u201d<\/p>\n

These private investments shrunk from $1 trillion in 2007 down to $200 billion in 2010 during the recession and have grown back up to about $400 billion.<\/p>\n

The authors explain that private investors buy dollars for many reasons: to purchase goods that are priced in dollars (like oil), \u201cas a hedge against depreciation of their own local currencies,\u201d to invest in the U.S. economy, to make a speculative investment, and \u201cin many cases simply because in an uncertain world, the U.S. dollar is viewed as a rock of reliability and stability.\u201d<\/p>\n

In economic terms, the authors explain that the current account deficit is \u201cthe trade deficit with overseas remittances and other small items added in.\u201d In the past when currency markets still maintained a link between exchange rates and balanced trade, the value of the dollar and the account deficit affect each other; i.e., \u201cWhen the dollar rises, the current account worsens (larger negative figure as a percent of GDP), and when the dollar falls, the current account improves.\u201d<\/p>\n

However, the authors point out this hasn\u2019t been happening for years. For example, \u201cThe current account deficit has been strongly negative throughout the last ten years, yet the dollar has not fallen to bring trade back into balance.\u00a0 On the contrary, in mid-2014, despite a trade balance close to -3% of\u00a0\u00a0 GDP, the dollar suddenly rose more than 15%, and stabilized in 2016, only to rise yet again after the November election.\u201d<\/p>\n

They add, \u201cThese exchange rate increases are likely to worsen the trade deficit in the next two to four years. The ability of the U.S. dollar to defy gravity despite huge and persistent trade deficits has played an important role in the persistence of those deficits.\u201d<\/p>\n

The consequences are: \u201cA dollar that is too high keeps our exports too expensive and makes imports too cheap, prompting Americans to consume more imports and to export less. The impact of an overvalued dollar is hard to overstate.\u201d<\/p>\n

Why this is critical is that, \u201cAccording to Fred Bergsten and William Cline, both of the Peterson Institute, \u201cevery 10 percent rise in the dollar adds about $350 billion to the trade deficit and reduces the level of\u00a0 U.S. economic activity by about 1.65%, with a corresponding loss of about 1.5 million jobs.\u201d Since the U.S. has had a more than $500 billion trade deficit<\/a> since 2003, except for 2009, this helps explain why we lost 5.8 million manufacturing jobs between 2000 \u2013 2010.<\/p>\n

Calculating the Currency Misalignment<\/strong><\/p>\n

\u00a0<\/strong>In 2008, Fred Bergsten and his Peterson Institute for International Economics colleagues developed a methodology to calculate a Fundamental Equilibrium Exchange Rate (FEER) of a currency that will enable a country\u2019s trade to balance (i.e. exports and imports equal) in a reasonably short timeframe. The authors state, \u201cThe traditional FEER methodology generally targets getting a nation\u2019s current account to within plus or minus 3 percent of balance\u2026In 2015, Peterson suggested targeting absolute, true-zero trade balances and recalculated FEER levels based on targets of balanced trade. Moving from a target of +\/-3% of GDP to a true-zero balance is very important for the United States. Our present current account deficits equal to 3% of GDP cost us the needless unemployment of about three million American workers, according to most estimates of the job cost of imports.\u201d<\/p>\n

After \u201cthe Peterson Institute issued new global FEER estimates in May using the traditional +\/- 3% balance target methodology,\u201d Dr. John Hansen \u201cconverted these FEER estimates into true-zero FEER estimates using a methodology agreed with Peterson.\u201d<\/p>\n

According to his calculations, \u201cThe U.S. dollar is currently 25.5% overvalued compared to its FEER<\/strong>,\u201d which makes it \u201cmore seriously misaligned than the currency of any other major trading partner country. \u201c<\/p>\n

In contrast, \u201cGermany and Japan \u2013 are misaligned in the opposite direction. They are undervalued while the U.S. dollar is overvalued.\u201d Japan\u2019s currency is undervalued by 25% and Germany\u2019s by 23.6%.<\/p>\n

\"\"<\/p>\n

What was surprising to me was that according to Dr. Hansen\u2019s FEER calculations, China only had a 4.7% undervaluation. For the last ten years, I have read article after article about China\u2019s undervaluation of their currency, estimated to be anywhere from 25% \u2013 40%.\u00a0 I didn\u2019t realize this had changed until I searched and found an article<\/a> from November 18, 2016 by Fred Bergsten of the Peterson Institute, in which he \u00a0wrote, \u201cChina was the champion currency manipulator of all time from 2003 through 2014. During this \u201cdecade of manipulation,\u201d China bought more than $300 billion annually to resist upward movement of its currency by artificially keeping the exchange rate of the dollar strong and the renminbi\u2019s exchange rate weak. China\u2019s competitive position was thus strengthened by as much as 30 to 40 percent at the peak of the intervention. Currency manipulation explained most of China\u2019s large trade surpluses, which reached a staggering 10 percent of its entire GDP in 2007.\u201d<\/p>\n

According to Bergstrom, China is no longer undervaluing their currency because they have \u201cexperienced large outflows of private capital that have driven its exchange rate down and indeed sparked market fears of disorderly renminbi devaluations. To their credit, the Chinese have intervened heavily on the opposite side of the market: Instead of buying dollars to keep the renminbi weak, they have sold large amounts of dollars to prevent it from sliding further.\u201d<\/p>\n

As a consequence of the misalignment of the dollar against the currency of two of our major trading partners and to a lesser degree with other countries, \u201cThe dollar\u2019s gross overvaluation imposes a tax on the selling price of all U.S. products that can be traded internationally \u2013 even if they are not actually traded. It is a tax on U.S. producers trying to export. On U.S. producers competing with imported goods. And it is even a tax on U.S. producers who face the threat of imports. For example, the threat of imported shirts from China can force a New England shirt manufacturer to sell his shirt for 25 percent less than he would otherwise be able to charge if the dollar were not so overvalued.\u201d<\/p>\n

Because this tax is a tax on the selling price and not on profits like the income tax, \u201c\u2026the dollar\u2019s overvaluation is such a serious threat to the survival of manufacturing and farming in the United States. The dollar\u2019s overvaluation threatens not only the existence of these two critical sectors. It also threatens the entire economy because these two sectors are by far the most important sources of the exports we need to pay for our imports.\u201d<\/p>\n

Contrary to popular opinion, the overvaluation of the dollar is not caused by government currency manipulation\u00a0 The authors assert that \u201cThe dollar\u2019s misalignment is primarily caused by the buying and selling decisions of private traders\u2026the dollar is overvalued because private investor decisions are unrelated to the fundamental performance of trade or production in the U.S. or any other economy, and the global monetary system no longer has a mechanism to bring exchange rates back to levels consistent with balanced trade.\u201d<\/p>\n

What is the solution?<\/strong><\/p>\n

Dr. John Hansen has developed a Market Access Charge (MAC) \u201cas a system to discourage overseas private investors and return-sensitive official investors such as sovereign wealth fund managers from excessive speculation and trading in U.S. dollar assets.\u201d (For further details, go to his website<\/a>.)<\/p>\n

He believes that \u201cBy reducing the incentive for foreigners to invest in dollars, we can gradually and safely reduce its overvaluation, benefiting the U.S. economy and restoring control over our own currency.\u201d<\/p>\n

His proposal is to initiate the MAC with a 0.5% charge \u201con any purchase of U.S. dollar financial assets by a foreign entity or individual\u2026As a one-time charge, the MAC will discourage would-be short-term investors, many of whom hold dollars or dollar-denominated securities overnight or even for minutes for the sake of a tiny profit.<\/p>\n

The MAC rate would operate on a sliding scale, geared to the value of the trade deficit as a percentage of GDP. The MAC tax would rise if the trade deficit rose, and fall as the trade deficit falls\u2026 Most importantly, the MAC would have a substantial impact on the dollar\u2019s value, moving it gradually and safely to a trade-balancing exchange rate and keeping it there, regardless of what other countries do. If the trade deficit goes to zero, so would the MAC.\u201d<\/p>\n

Dr. Hansen and the Coalition for a Prosperous America believe that this small charge \u201cwould be sufficient to discourage foreign inflows of hot money, with no material impact on foreign direct investment in factories and other directly productive activities.\u201d<\/p>\n

They agree that, \u201cif properly implemented, the MAC could eliminate the full 25% overvaluation of the dollar, and this could lead to the complete elimination of the trade deficit over the subsequent three to four years.\u201d<\/p>\n

How could it be implemented?<\/strong><\/p>\n

The authors believe the MAC could be implemented unilaterally by the U.S. federal government. because \u201cit does not violate IMF rules, which explicitly allow member nations to implement policies needed to rectify international financial imbalances [and] It does not violate WTO rules either.\u201d<\/p>\n

However, they \u201crecommend a period of international consultation with G20 members to reduce the risk of misunderstandings and, hopefully, to get them to implement their own versions of the MAC\u2026[which] would benefit the U.S. and the world by restoring a stable foundation for balanced, sustainable global growth.\u201d<\/p>\n

They envision that, \u201cThe MAC would be a self-financing system since it would generate revenue. We expect the MAC would generate at least $1 billion in annual revenues, and probably more, depending largely upon how much foreign exchange trading in the dollar declines due to increased transaction costs from the MAC.<\/p>\n

Because the goal of the MAC is \u201cto reduce and ultimately eliminate the trade deficit,\u201d the revenue would be temporary and would go to zero when the goal is achieved. They propose that at \u201cMAC revenue be earmarked for a \u201cU.S. Competitiveness Fund\u201d supporting short-term spending projects such as infrastructure investment.\u201d<\/p>\n

They also clarify that \u201cno Americans would pay the MAC charge. Only foreign-based individuals and entities are liable to pay the MAC.\u201d Until the MAC achieves its goal, the Government will enjoy increased tax revenue because the MAC will greatly stimulate U.S. competitiveness and thus overall output, profits, wages \u2013 and thus the tax base.\u201d<\/p>\n

They \u201cbelieve the MAC could eliminate the trade deficit entirely over a period of several years,\u201d but emphasize that \u201cthere is still a clear need for other U.S. trade policies focused on eliminating unfair trade practices and non-tariff barriers. The MAC should be seen as complementary to, not competitive with, such trade policies. Though in remission now, currency intervention and manipulation by governments is likely to resume, and the U.S. government should not hesitate to act to stop or counteract such activities.\u201d<\/p>\n

The Coalition for a Prosperous America \u201cfavors actions to strengthen the monitoring, definition, and enforcement of remedies to counteract currency manipulation, dumping, and other unfair trading practices.\u201d \u00a0I strongly agree with their recommendation to implement a Market Access Charge to reduce dollar overvaluation, discourage unwanted investment in the dollar, bring down the dollar\u2019s value, significantly reduce America\u2019s trade deficit and stimulate economic growth, employment and personal income.<\/p>\n","protected":false},"excerpt":{"rendered":"

On July 11, 2017, the Coalition for a Prosperous America released a paper titled, \u201cThe Threat of U.S. Dollar Overvaluation: How to Calculate True Exchange Rate Misalignment & How to Fix It\u201d by Michael Stumo (CEO), Jeff Ferry (Research Director) and Dr. John R. Hansen, a 30-year veteran of the World Bank and Advisory Board […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[256,17],"tags":[258,257,64],"class_list":["post-808","post","type-post","status-publish","format-standard","hentry","category-currency-misalignmentmunipulation","category-economy","tag-account-deficit","tag-currency-manipulaton","tag-trade-deficit"],"_links":{"self":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/808","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/comments?post=808"}],"version-history":[{"count":3,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/808\/revisions"}],"predecessor-version":[{"id":813,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/808\/revisions\/813"}],"wp:attachment":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/media?parent=808"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/categories?post=808"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/tags?post=808"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}