Since Plaza Accord dollar-yen has sunk 70% without decreasing US deficit with Japan
In regards to Paul Krugman’s argument’s on China in the video in the last post, I think this quote from David Rosenberg’s latest daily market commentary is spot on:
Since 1985, dollar-yen has sunk nearly 70% and yet the US has the same bilateral deficit with Japan today as it had then. So why does everyone think that a Chinese revaluation will necessarily clear out any perceived imbalances? Maybe if U.S. policy encouraged thrift over asset-based consumption growth, these trade imbalances would dissipate more quickly.
It’s not all about currencies. The U.S. should focus on maintaining an adequate savings rate instead of trying to pump up asset prices to do its saving artificially.
That’s really interesting. Why does a 70% devaluation not do the trick?
A lot of this has to do with the fact that a 1985 dollar is not the same as a 2010 dollar. So in real terms, the gap has closed since 1985. But trade barriers are also not all currency based. In Japan’s case, there are structural issues which have impeded foreign competition. In addition, subsidies (like the US Ag subsidies) accomplish the same trick.
But I would also point out that the Germans and the Japanese have become more productive as their export sectors have been subject to an appreciated currency. A devalued currency is a hidden subsidy for less productive export-oriented enterprises and therefore retards productivity growth.
> The U.S. should focus on maintaining an adequate savings rate instead of trying to pump up asset prices to do its saving artificially.
I wouldn’t want to place odds on that one happening.