Be wary of snake oil salesmen

If dollar depreciation would work to reduce the global imbalances, it would arguably be acceptable. However, the problem is the actual empirical record, rather than sophomoric economic theory, indicates there is little evidence a decline in the dollar will achieve this goal.

The U.S. dollar peaked against the Canadian dollar in 2002. The Canadian dollar has appreciated by about 50 percent in the past four years, which is what some of the more extreme estimates suggest the Chinese currency (yuan, or renminbi) is undervalued by. The average monthly U.S. trade deficit with Canada has risen from about $4 billion in 2002 to approximately $6.7 billion. The four years that have passed should be enough to offset the “J-curve” effect economists use to account for a lag between changes in the price of financial variables and changes in the prices of goods.

This experience is not limited to Canada, the U.S.’s biggest trading partner. Consider Europe. In 2000 the euro recorded its historic low against the dollar near $0.8230. It, too, has appreciated by more than 50 percent against the U.S. dollar. The U.S. recorded an average monthly trade deficit with Europe of roughly $5 billion in 2000 and 2001. It stands near $10.5 billion now.

Japan is not an exception to this general pattern. The dollar has been recording lower highs vs. the yen for nearly 20 years. The last major high was in 1998 near 147.50 yen. The peak in 2002 was near 135 yen. In 1998, the average U.S. monthly bilateral trade deficit was less than $5.5 billion. Now the monthly average is closer to $7.0 billion.