Some members of the financial press continue to flub international economic issues. Consider an Associated Press article published in this newspaper on Tuesday.
Under the headline of “Dollar still lags against euro, yen,” it states: “The dollar continued to languish Monday at its lowest levels against the euro and yen since around the end of last year. The dollar and U.S. equities sustained a blow from the Conference Board’s composite Index of Leading Indicators.”
Later, it notes, “Much of the foreign exchange market’s focus was on the dollar’s fragility against the Japanese currency.”
This same wire service reported three days earlier that “the U.S. trade deficit improved slightly in March as growth in exports … outpaced the growth in imports.”
Associated Press writers and editors apparently don’t see any irony in reporting a trade deficit as bad news, then three days later describing an infinitesimally weaker dollar in negative terms, such as lags and languish.
This could be compared to a weather forecaster who cheerily reports we had another beautiful day with no rain to interrupt anyone’s activities. Then, after a commercial, he notes that “the devastating drought continues.”
Our imports exceed our exports precisely because the dollar is strong, just as a drought occurs when there are many sunny, rainless days. It is as idiotic to cheer a narrowing trade gap and decry a weaker dollar, as it is to cheer a bright, clear day and moan about the lack of rain.
The U.S. dollar is overvalued by any number of measures. This helps consumers, but hurts producers, especially those firms that export goods or compete with imports.
A “strong” dollar clearly equals “expensive” American products abroad.
The irony of Tuesday’s article is that it ended with the following observation: “Japanese pension funds have been getting pressure to buy foreign assets to generate capital outflow that is necessary to keep the yen from appreciating.”
If a “strong” currency were good for an economy, why would the Japanese government initiate actions to keep the yen weak? Does the Japanese economy function in a fundamentally different way from that of the United States? No, it doesn’t.
Japanese businesses and government know that an expensive yen is bad for Japanese output and production, just as an expensive dollar is bad for U.S. producers and employment.
History tells us that when nations incur long-running deficits in their current account sections of balance-of-payments tabulations — which include imports and exports — currencies inevitably decline in value.
When the dollar gets cheaper, American consumers will buy fewer newly expensive imports, and U.S. producers will sell more newly inexpensive exports.
This can occur gradually, giving consumers and businesses time to adjust strategies, or it can occur abruptly in a few months or quarters. Again, history tells us that gradual adjustments usually are less disruptive than harsh ones.
Thoughtful U.S. citizens should welcome gradual weakening of the dollar over a sustained period. There’s no reason other than misguided xenophobia for Americans to cling to a strong dollar.
But the media continue to report any decline in the value of the dollar as bad news and any increase as good news.
The media play a vital role in a democracy. Articles that enlighten the public foster better economic policies and a better level of living. Articles that confuse do the opposite.
On the whole, U.S. newspapers do a credible job of economic reporting. But there’s no area where they fail more miserably than in dealing with relationships between exchange rates and balances of payments.
The longer this ineptitude continues, the more U.S. voters will call for counterproductive palliatives, such as import restrictions, and the worse the U.S. economy will bump its economic nose when natural adjustments inevitably occur.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.