Falling US dollars and exports

Reading time: 3 – 5 minutes

According to the Federal Reserve flow of funds accounts (Release Z.1), the long-term rise in US exports was reversed decisively in the first half of 2009.

Despite the falling dollar, US exports failed to rise — largely due to the global recession.

The graph shows the US export trend in the context of rising and falling values of the dollar against the currencies of major US trading partners.

Dollar falls after nine-eleven ...

War, hard times, and deficit spending

The forces that  influence the volume of US exports and the relative value of the dollar compared to currencies of US trading partners seem to be as follows:

1. The US fiscal deficit: The relative value of the US dollar seems to be influenced primarily by the size of the US fiscal deficit. During the Clinton years, a Republican Congress combined with a moderate Democrat President, and falling defense spending, resulted in a fiscal surplus and a dollar rising in value against the currencies of trading partners. In the Bush years, following September 11, 2001, sharply rising defense expenditures — the result of two wars and the burden of continuing to act as the “World’s Policeman” — led to a return of rising fiscal deficits. In the first year of the Obama administration, all pretense of budgetary discipline was thrown to the winds, leading to even more rapid decline in the US dollar versus trading currencies.
2. Economic recessions/good times: The final year of the Clinton administration saw the collapse of the “dot.com” bubble and a mild recession which was reflected in a lower level of US exports. As good times returned during the Bush years, exports picked up substantially, spurred by a falling dollar. From the last quarter of the Bush term until today, the world entered a period of financial crisis, resulting in a sharp drop in US exports.
3. Anti-free-trade policies: Traditionally, the Democrat Party has been a close ally to trade unions and an opponent to free trade.  Measures pandering to trade unions that tended to restrict US imports were favored during the Clinton years, as again is the case with the Obama administration. This,  in part, explains the slow rise of US exports during the Clinton years and the sharp fall during Obama’s first year in office.

Of course,  the principal force effecting US exports is the value of the US dollar, which was rising during the Clinton years, and falling ever since the War on Terror started after the attacks of September 11, 2001.

The rise in US exports during most of the Bush years was undoubtedly due to the fall in the US dollar, which, in turn, seems to have reflected the rise of fiscal deficits driven by wartime budgets and, in the last years, pork-barrel spending under the Pelosi-Reid Congress.

The current fall in dollar exports is often attributed to a world-wide recession, but distrust of the US dollar arising from the administration’s “spending is stimulus” policy and from restrictions on imports meant to please the trade unions certainly has had some influence.

A narrowing trade deficit

The counterpart to US exports is the value of the US dollar. A falling US dollar makes US products cheaper to foreign buyers, but also leads to US dollars being less attractive as a means of exchange for trade with the United States.

The combination of world wide recession and a falling dollar, so far, has led to a narrowing of the US trade deficit with the rest of the world. This means that there will be a diminishing supply of dollars in the hands of foreigners to buy US Treasury bonds to sop up Obama’s extraordinary deficit spending.

This decline in the value of the dollar, in turn, will make it more difficult to control the coming US inflation.

Would you say that a rapidly expanding fiscal deficit (more money to be sopped up by selling Treasury bonds) combined with a contracting trade deficit (less dollars in foreign hands to buy government bonds) makes inflation more likely?