Nov. 17 (Bloomberg) -- ``The history of efforts to impose non- market valuations on currencies is at best unrewarding and checkered,'' was U.S. Treasury Secretary John Snow's response today to a question about whether the U.S. might join with other countries in a bid to arrest the dollar's decline.
The currency market quickly parsed Snow's comment, made in London at a briefing on global economies, and came up with its own translation: ``Sell the dollar.''
Down it went, dropping to a record $1.3048 against the euro and slumping to 104.29 against the yen. When Bloomberg reporter Edie Lush told him his comments were driving the dollar lower and his alleged ``strong dollar'' policy wasn't working, Snow chuckled. ``The policy is the policy,'' he said.
Snow, looking scarily like Jack Nicholson in his role as the Joker in the ``Batman'' movie, is laughing all the way to narrower deficits. His lips said, ``No-one ever devalued their way to prosperity.'' His eyes seemed to be saying, ``There's no way I'm bailing out a bunch of cheese-eating surrender monkeys who can't even lick their trade unions into shape.''
The U.S. currency continues to disregard every piece of good news that would typically drive it higher. It ignored yesterday's figures showing U.S. producer prices jumped 1.7 percent last month, their biggest surge in 14 years. It ignored U.S. Treasury figures showing international investors bought a net $63.4 billion of U.S. assets in September, the most since June.
Moving to Higher Ground
And it ignored the latest comment from the Federal Reserve flagging its intention to keep pushing the benchmark U.S. interest rate higher. ``There is certainly more ground to cover,'' Chicago Fed President Michael Moskow told his local chamber of commerce yesterday.
Economists believe that decline in the dollar's exchange value will correct the US trade deficit by reducing imports and increasing exports. Once upon a time a case could be argued for this logic. But that was a time before US corporations took to outsourcing jobs and locating production for US markets offshore.
US imports of goods and services rise each time a US factory moves offshore or a US job is outsourced. Goods and services produced offshore by US corporations for US customers count as imports and worsen the trade deficit. The US cannot reduce its trade deficit by increasing sales to China of goods made by US firms in China. As Charles McMillion, president of MBG Information Services, concisely summarizes: "Outsourcing is export substitution."
It is amazing that US policymakers and economists do not understand that dollar devaluation is meaningless as long as China keeps its currency pegged to the dollar.
America's greatest trade imbalance is with China. In 2000 the US merchandise trade deficit with China became larger than the chronic US trade deficit with Japan. By 2003 the US trade deficit with China was almost twice as large as the US deficit with Japan: $124 billion versus $66 billion. This year the US trade deficit with China is expected to be $160, a 29% increase from last year.
This imbalance cannot be corrected as long as China maintains the peg. As the dollar falls against the Euro and other currencies, the Chinese currency falls with it, thus maintaining China's advantage over US goods in world markets.
Both the Clinton and Bush administrations are guilty of permitting China to maintain a grossly undervalued currency that sucks productive capacity out of the US. The combination of cheap Chinese labor and an undervalued currency are destroying US middle class living standards.
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