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Making Sense of the Dollar
Exposing Dangerous Myths About Trade and Foreign Exchange
Marc Chandler
In the midst of the financial doom and gloom, an optimistic analysis of the U.S. dollar
click the video for FUNDAMENTAL FORCES
Format: hardcover
ISBN: 9781576603215
Publisher: Bloomberg Press
Pub. Date: 8/2009
240 pages, 6" 9"
Retail Price: $27.95
Your Price: $23.76
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Has the greenback really lost its preeminent place in the world? Not according to currency expert Marc Chandler, who explains why so many are—wrongly—pessimistic about both the dollar and the U.S. economy.
Making Sense of the Dollar explores the many factors—trade deficits, the dollar’s role in the world, globalization, capitalism, and more—that affect the dollar and the U.S. economy and lead to the inescapable conclusion that both are much stronger than many people suppose.
Marc Chandler has been covering the global capital markets for twenty years as a foreign exchange strategist for several Wall Street firms. He is one of the most widely respected and quoted currency experts today.
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Marc Chandler joined Brown Brothers Harriman in October 2005 as the global head of currency strategy. Previously he was the chief currency strategist for HSBC Bank USA and Mellon Bank.
Marc is a prolific writer and speaker. In addition to being frequently called upon by newspapers and news wires to provide insight into the developments of the day, Chandler’s essays have been published in the Financial Times, Barron’s, Euromoney, Corporate Finance, and Foreign Affairs. He is also the contributing economic editor for Active Trader Magazine and to TheStreet.com. Marc appears often on business television and is a regular guest on CNBC. He frequently presents to business groups and investors.
His current research projects include global imbalances, Islamic finance, and the relationship between savings, investment and growth.
Marc has been analyzing, writing and talking about the foreign exchange market for more than 20 years. He holds a Master’s degree in American history (1982) from Northern Illinois University and a Master’s in International Political Economy from the University of Pittsburgh (1984). He has taught classes on International Political Economy at New York University since the early 1990s, where Marc is an associate professor.
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Introduction
1 Myth 1: The Trade Deficit Reflects U.S. Competitiveness
2 Myth 2: The Current Account Deficit Drives the Dollar
3 Myth 3: You Can’t Have Too Much Money
4 Myth 4: Labor Market Flexibility Is the Key to U.S. Economic Prowess
5 Myth 5: There Is One Type of Capitalism
6 Myth 6: The Dollar’s Privileged Place in the World Is Lost
7 Myth 7: Globalization Destroyed American Industry
8 Myth 8: U.S. Capitalist Development Prevents Socialism
9 Myth 9: The Weak U.S. Dollar Boosts Exports and Drives Stock Markets
10 Myth 10: The Foreign Exchange Market Is Strange and Speculative
11 Summary and Some Thoughts on the Way Forward
Bibliography
Index
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From Chapter 1
Myth 1: The Trade Deficit Reflects U.S. Competitiveness
A car begins with a design. An engineer imagines what it should look like and how all the pieces should fit together. Someone else mines the iron ore that will become the steel; another person mines the platinum that will go into the catalytic converter; and still another person slaughters the cow for the leather interior. The manufacturer brings all the pieces together for assembly according to the design. The car’s buyer, of course, has to fill it up with gas before going anywhere. Every step is important, but some add more value than others. The slaughterhouse worker, for example, needs few skills beyond strength, and the leather that his work generates isn’t integral to the finished product; it could be replaced by cloth or vinyl. The engineer, on the other hand, is key because without his basic design, there is no car. If he develops a great new body shape or an engine that uses less gasoline, then he can add a lot of value to the finished product. He can directly influence how much the car costs and how well it sells.
Although different processes add different amounts of value, the system of accounting for international trade looks at the movement of goods and services over national borders and has no appreciation for ownership. Setting aside the huge problems that the General Motors Corporation (GM) has experienced in its U.S. operations—brought on by bad choices in product design and labor decisions, etc., but that’s another issue—GM’s basic business strategy perfectly exemplifies how a U.S. multinational company’s structure interacts with the trade deficit and the dollar. When GM makes parts in the United States, sends them to Canada to put into Chevy Impalas, and then ships those Impalas back to the United States for sale, the company has engaged in two international transactions: it exported the parts and imported the car. The parts cost less than the finished car, so GM’s imports exceeded its exports, adding to the U.S. trade deficit, as if all the transactions took place within the virtual walls of the same U.S. corporation. Essentially, GM is moving goods from one side of the corporate factory to the other; it’s just that the forty-ninth parallel weaves in and out across the floor. (Amazingly, the movement of goods and services within the same company accounts for half the U.S. trade deficit.)
We’ve all heard the worries: America has turned its global supremacy over to the Chinese. Our jobs are going to China, and the Chinese are practically buying the U.S. government because they buy all our Treasury bonds. The main piece of evidence cited for this is the U.S. trade deficit. In 2008, the United States recorded an average monthly trade deficit of slightly more than $57 billion. It shows how miserable the United States has become. As Americans consume more than they produce, or invest more than they save, China is quickly moving into ascendancy.
Right?
Wrong. But that’s the way too many people think of foreign trade. Too often the focus is strictly on this number called a deficit. It is simply understood that deficits are bad, and what’s happening behind the numbers is frequently left unexamined. Americans produce ideas, and ideas can generate a spectacular amount of money. Microsoft, for example, doesn’t produce much that anyone can touch or feel, but its software has changed the way that we all live, work, and play. How do we account for that? Software, drug patents, product designs, secret formulas, and desirable brand names generate huge profits from all over the world for American companies. When those companies move goods and services between their own offices, it can contribute to the U.S. trade deficit.
Trade accounting is misunderstood. It was designed for a world that no longer exists, one in which dominant nations exported and weak ones imported. Now, goods, services, and ideas flow across borders, as does investment capital. Companies can parcel out business operations not only around the globe but also within the same corporate entity. The trade deficit is large, but it is not a sign of national weakness, nor is it a twin of a budget deficit as is often portrayed. American workers and American companies are still the envy of the world, even if it’s not apparent looking at the trade deficit.
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