How economic mistakes lead to bad policies – Twin Cities
A headline from the New York Times, “The dollar is strong. It’s good for the United States but bad for the world,” was a kick in the stomach of economics professors.
Teach economics at university for 35 years and you feel like Sisyphus, the mythical Greek who was condemned to push a boulder up a mountain only to see it roll to the bottom every time.
And this mistaken nonsense comes at a particularly bad time.
Economics professors know and teach that exchange rates are prices. Whether a higher price is good or bad depends on whether you are buying or selling. You never see the NY Times say, “High toilet paper prices are good for America.
Forget the notions of “strong” and “weak” when they apply to money. A high priced dollar relative to other currencies is good for consumers. Imports such as European and Asian cars, electronics, steel, wine, cheese, ham, etc. are cheaper. And that pushes competing American producers not to raise prices. It helps to curb inflation. Low-priced EU pounds and euros make holidays in Europe cheap. Great for our consumers, and maybe “bad for the world.” But also bad for Minnesota iron miners, farmers and medical technology workers and anyone who proclaims “Made in the USA”.
The expensive dollar, or cheap pound and euro, means that giant local employers like 3M, Medtronic, Boston Scientific, CHS or Cargill, with factories around the world, will get far fewer dollars on their bottom line here even if the profits of their factories abroad remain the same in the currencies of these nations. If you work there, it’s not good for your pension fund.
It’s an old lesson, just a journalist who isn’t studying economics refuses to learn.
So why is this a particularly bad time for such bad economic reports?
This is because the whole world is going through an economic crisis, the most complex and perhaps the most dangerous for 90 years. We are in a kind of hour of eightfold sorcery.
Our nation is one of many emerging from fiscal crises designed (at the time) to prevent COVID from bringing economic activity to a halt. But now those same politicians are threatening to do just that. Our response to COVID has been to double the money supply growth started after the financial market crash of 2007-09. We now face the resulting inflation.
China’s complete shutdowns of major cities to control COVID are rattling its economy, along with huge bad debt overhangs from vacant apartment projects and driverless trains. It therefore strives to increase the price of the yuan instead of suppressing it as has often been the case.
Then there is the war in Ukraine which affects exports of natural gas, oil, grains and oilseeds and fertilizers, with repercussions on Europe’s industrial production and on the safety and comfort of its citizens as winter approaches. And consider the UK and Turkey madly rushing into silly economic policies and choppy political elections here and in Brazil. Then add one of the cyclical epidemics of financial crises in Latin America.
The mix isn’t pretty, people. So just when we need to understand basic economic relationships, we are fed confusion.
The dollar becomes expensive because the Federal Reserve raises interest rates to limit inflation. Why? Because too much growth in the amount of money circulating in the economy drives prices up. You reduce inflation by reducing excess money, but with less money available to lend, interest rates rise. What the Fed is doing is reducing the money supply. Higher interest rates are just one indicator.
But higher U.S. interest rates are telling countries around the world that it’s best to invest money here to get a high return. But to do this, these countries must exchange their local currencies for US dollars. This makes the dollar expensive and the euro, pound, yuan, yen, etc. cheap. This affects the relative prices of imports and exports. This affects consumers and producers.
Cheap books are hurting British consumers but helping their wheat and canola farmers. A cheap euro hurts Dutch and Danish farmers buying feed, but makes their cheese and ham a worthwhile market for the people of North Oaks. And cheap euros are perfect for French and Italian vineyards.
This has a ripple effect: greater import competition means that job growth in the United States will be weaker.
All things being equal, this should help the British. But their Conservative government has gone from one personal conduct scandal to another. New Prime Minister Liz Truss must reduce inflation, largely caused by the fighting in Ukraine. But she does not want production and employment to fall. So while the Bank of England is stepping on the monetary brakes, raising interest rates, the UK Treasury is stepping on the fiscal accelerator pedal with deep tax cuts, mainly for high-income earners, flooding the economic engine with even more money and – guess what – fueling inflation.
Is it stupid? Well, back when we called it Reaganomics, the President and Congress cut taxes and increased spending while Paul Volcker hiked interest rates at the Fed, 30-year Treasuries hitting 14% for a certain time. The high rates sucked money in from around the world, driving up the value of the dollar. The “strong” dollar had the effect of a Louisville puncher on the back of the head of American agriculture and the Rust Belt, American steel and auto producers as well as miners and cities of the iron chain. Adjusting to all of this took decades.
However, it makes even more sense than what is happening in Turkey. There, President Recep Tayyip Erdogan, a dictator in all but name, believes high interest rates are driving up inflation. Cut interest rates and inflation will come down. The Turkish central bank is therefore lowering interest rates. But to do this, it must inflate the money supply. So Turks scramble to get their money out of the country, the value of their currency drops, inflation rises, and production and employment plummet.
We could go on and on. South America is a column in itself at the moment, with the crisis in Argentina to the south to the collapse of the Cuban economy 90 miles from our shores.
St. Paul economist and writer Edward Lotterman can be reached at [email protected]