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Buzz and Banter



I have had a few interesting conversations with Minyans on the drop in the dollar's effect on exports. The wall-street pundits would have us believe that a decline in the value of the dollar will help the economy: U.S. manufacturers' exports would increase as other countries buy more from us as the dollar's decline make our prices more competitive.

This is correct, but like most of what I have been pointing out lately about what we read and hear, is incomplete and misleading. The bullish case presented is that "the dollar would gradually decline". Based on the comments from my Minyan friends, this implies a small yearly drop equal to the yield (4%) on treasuries. Such a diminutive decline would cause no net losses for foreign holders of our debt (they would earn the same in interest as what they are losing in the value of the dollar) and therefore create no pressure to sell their bonds precipitously. A 4% decline per year for three years in the DXY (basket of trade weighted currencies against the dollar) would take it from its current level of 91 to 80.5.

It seems that the word "gradual" has been interpreted by the public to mean diminutive.

Only about 13% of our economy is now what can be considered based on manufacturing exports. To have a meaningful effect on our whole economy there would have to be a very significant pickup in this sector.

Our work shows that the DXY index would have to drop by a third to have any meaningful impact on our economy. The DXY would have to drop to 61 from its current level of 91.

This number may not even be enough. First of all, China produces goods in general at about a tenth the cost of the U.S. It is likely that they would be willing to reduce margins even further to keep market share. Second, in order to increase our exports to other countries given a drop in the dollar, other countries economies, and therefore their buying patterns, would have to at least remain stable. It is likely that this would not happen since they depend on maintaining their current level of exports to the U.S. for that to be the case.

A drop of this magnitude would likely trigger protectionist legislation, which is already bubbling in Congress (Steve Roach of Morgan Stanley is already warning about this), and cause a ratcheting up of U.S. interest rates.

I am sure most others, especially the pundits, would disagree with these comments. At least publicly.

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