The Impossibility of an Export-Driven Recovery

There was an article in yesterday’s New York Times that caught my eye on the flight of capital to U. S. government bonds:

As the world is seized with anxiety in the face of a spreading financial crisis, the one place having a considerably easier time attracting money is, perversely enough, the same place that started much of the trouble: the United States.

American investors are ditching foreign ventures and bringing their dollars home, entrusting them to the supposed bedrock safety of United States government bonds. And China continues to buy staggering quantities of American debt.

These actions are lifting the value of the dollar and providing the Obama administration with a crucial infusion of financing as it directs trillions of dollars toward rescuing banks and stimulating the economy, enabling the government to pay for these efforts without lifting interest rates.

To his credit the Times reporter points out the disadvantages of this from a world standpoint. U. S. borrowing has a substantial “crowding-out” effect which hurts less credit-worthy countries:

“Virtually all of the low-income countries are in very serious trouble,” said Eswar Prasad, a former official at the International Monetary Fund and a senior fellow at the Brookings Institution, the liberal-leaning research organization in Washington.

He went on: “This is the third wave of the financial crisis. Low-income countries are getting hit very hard. The flow of private capital to the emerging market has dried up.”

However, the effect that the rising dollar has on U. S. exports is only mentioned as a throw-away at the end of the second page of the article and then only in the context of the benefits that buyers clamoring for Treasury securities have for an Obama Administration determined to boost the American economy through borrowing:

In ordinary times, the rise of the dollar would provoke American worries that it would crimp exports by making goods more expensive on world markets. But for American policy makers, what matters now is attracting enough buyers of American debt to finance the rescue plans, and if the dollar must rise along the way, that is a cost worth paying.

Whatever one’s feelings on this strategy it’s clear that as long as Treasury securities are the haven of last resort, Americans continue to borrow, and both domestic and foreign investors continue to let us, we can’t expect exports to lead the way in an economic recovery.

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Dave Schuler
About Dave Schuler
Over the years Dave Schuler has worked as a martial arts instructor, a handyman, a musician, a cook, and a translator. He's owned his own company for the last thirty years and has a post-graduate degree in his field. He comes from a family of politicians, teachers, and vaudeville entertainers. All-in-all a pretty good preparation for blogging. He has contributed to OTB since November 2006 but mostly writes at his own blog, The Glittering Eye, which he started in March 2004.

Comments

  1. odograph says:

    If I were ever going title a blog post with the F-Bomb, it would be for this one:

    The World Bank’s pronouncement over the weekend is sobering:

    The global economy is likely to shrink this year for the first time since World War Two, with growth at least 5 percentage points below potential.

    I won’t grind anyone behind the curve on calling this contraction, but I’ll hope they’ll spend a few moments in introspection.

  2. Dave Schuler says:

    I think it’s important to look at the situation from a global perspective. For us a serious economic downturn may be painful but for countries (and there are a lot of them) teetering on the brink of penury it could be disastrous.

  3. DC Loser says:

    I think this is going to finish globalism as we knew if for at least a generation if not more. All those countries that bought into global trade as their model for development are going to be really gun shy about returning to it without a lot of changes.

  4. odograph says:

    FWIW, there’s more:

    March 9 (Bloomberg) — The value of global financial assets including stocks, bonds and currencies probably fell by more than $50 trillion in 2008, equivalent to a year of world gross domestic product, according to an Asian Development Bank report.

  5. Dave Schuler says:

    I think this is going to finish globalism as we knew if for at least a generation if not more. All those countries that bought into global trade as their model for development are going to be really gun shy about returning to it without a lot of changes.

    I’d certainly be open to entertaining a more complete argument on that scores, DC Loser, but, frankly, I doubt it. For India, China, Singapore, South Korea, and scores of other countries, it’s the only game in town.

  6. odograph says:

    I think some have said that periods in the past (maybe even the 1920s?) were more globalized than today. For all that we think we are globalized, trade as percentages of GDP have long been large.

  7. odograph says:

    OK, I looked it up. Using imports and exports as a percentage of GDP, we only passed the 20’s levels in the late 90’s. Other measures could be created of course, including non-trade financial exchanges.

    It’s kind of a worrisome parallel perhaps.

  8. Dave Schuler says:

    China ended its policy of autarky in 1979, India in 1991. That might have something to do with the increase in trade since the 1990’s.

  9. […] The Impossibility of an Export-Driven Recovery […]

  10. odograph says:

    China ended its policy of autarky in 1979, India in 1991.

    But in both cases (1920’s and now) it coincides with a global debt boom – cue the Drew/Odo “deleveraging” story

  11. Drew says:

    odo –

    Correct: The increase in free capital flows is the key to the current wave (25 years) of “globalization,” not goods. A nice read is The World is Curved.

    Dave – But you didn’t really think export was a US option, right? Wait ’till the Euro’s fix their banking system. Think the Saudis will want to price oil in Euros? The dollar will continue (relatively) strong.

    I think the Financial Times piece by Wolf you posted at Glittering a few weeks ago makes this basic distinction between Japan’s export opportunity in the 90’s vs us.

  12. Dave Schuler says:

    Drew, my title overstated the case for effect. No, I don’t think we’ll have an export-driven recovery. I don’t think that China or Japan will have an export-driven recovery, either, but that’s a slightly different subject.

    However, I do think that it could be possible under the right circumstances for exports to play a role in recovery and I’d like to see our economy diversify away from consumer consumption as its nearly singular driver towards exports and business spending.

    If there is to be a recovery at all it’s got to be based on something. Given a reasonable exchange rate I think that exports is part of a possible basis.

  13. Drew says:

    Dave –

    Hyperbole, eh? I, of course, would never do that. (snicker)

    “However, I do think that it could be possible under the right circumstances for exports to play a role in recovery and I’d like to see our economy diversify away from consumer consumption as its nearly singular driver towards exports and business spending.”

    This is a huge topic in and of itself. Perhaps for exchange over at GE.

    As a first salvo: given the US govt deficit – increasing as far as the eye can see – and China’s internal demographic issues, can changing the relatively low consumption/saving/export economic models of China and Japan be a real option with the US in such great need of financing?

    One wonders what the initial steps in, say, a fifteen year program to wean us off the current situation would entail. Grasping for the obvious, one can muse about a huge US R&D effort to open up new technologies/products. But we don’t seem to have an entrepreneur friendly administration in place……for at least the next 4 years. Not optimistic.

  14. odograph says:

    One wonders what the initial steps in, say, a fifteen year program to wean us off the current situation would entail. Grasping for the obvious, one can muse about a huge US R&D effort to open up new technologies/products. But we don’t seem to have an entrepreneur friendly administration in place……for at least the next 4 years. Not optimistic.

    The 1960s were a time of great innovation, and high tax, quite “unfriendly” by modern (fiscally irresponsible) standards.

    Indeed, despite your earlier reference to deficit, I think the only “friendly” strategy in the post Grover Nordquist era is one that we can’t actually afford.