Playing with Our Currency Won't Correct Failure of Energy Policy

Nov. 10, 2010
Questioning the concept of currency valuation based upon the trade deficit

George Haley is adamant [Thought Leader: "We Need a Friend in Washington," Oct. 2010] that the United States needs to have its "currency valuation based upon our trade deficit with the rest of the world, and our trade deficit indicates our currency is overvalued."

When we devalued our currency against the yuan, we devalued the paper assets held as U.S. note. It works for the U.S., but it harms those people overseas who hold U.S. paper assets. Many overseas see this devaluation of currency as a form of defaulting on debt. Such actions can lead to the U.S. having to pay higher interest rates to sell U.S. paper assets abroad.

Since many commodities are traded in U.S. currency as the U.S. devalues its currency, it raises those commodity prices. When our inventory of commodities are used up, they must be replaced at higher cost, thus raising the cost of manufacturing in the U.S. The only advantage is for resources that will retain their price in U.S. currency. In many cases this has been wages. Wages may not rise as the currency drops, but the cost of gas, heating, etc. rise.

The U.S. trade imbalance cannot always be corrected because not all countries that export to the U.S. will purchase enough to offset the trade deficit. The U.S. has surpluses in some categories such as agriculture and deficits in others such as energy. Playing with our currency will not correct for a failure to develop a sound energy policy.

Many economists fail to talk about these points when crying for "currency valuation based upon our trade deficit."

Alex Keenan
Via the Internet

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