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.