Global Economic Revival Plan Must Include Realignment of Exchange Rates

There are exchange rates that stop trade. When exchange rates are such that exports from any country can no longer be profitable, exports from such countries will collapse, and their imports will also collapse. The world must do everything to prevent exchange rates from going to such trade-stifling corners.

The surge in the Yen exchange rate is a case in point. I have already argued that a strong Yen played a key role in the plunge of the Japanese economy to an annualized decline of 12.7% in the last quarter of 2008. With exports almost down by half in January, Japan's current account balance fell to a deficit of 172.8 billion yen ($1.8 billion). The Yen's recent weakening is a healthy development, but over the last two days it rose again, causing concern about return of the nightmare.

Japan's problem is not just declining overseas orders. Japan's problem is that with the Yen at the less than 95 Yen to the dollar, even if there are orders most exports will not be profitable. There is simply little incentive to produce and export. The Japanese are trying to avoid massive layoffs by job sharing and other means. But an excessively strong Yen is threatening to shut down trade!

The problem is not just the Yen. The fact is that any currency that is so strong as to eliminate profits from exporters can potentially shut trade off. The world's problems will be much more severe with exchange rates at levels that shut off trade rather than promote trade.

In an ideal world in which exchange rates are determined purely by the demand and supply of currencies for international trade such scenarios would not be possible. Exchange rates would balance exports and imports and there would never be excessively strong currencies. But we live in a world in which capital movements dominate trade. So anything can happen. But the global economy cannot survive without trade. That is why the central banks of all nations need to work together to maintain exchange rates at trade facilitating levels, and avoid those that stifle trade.

Comments

[Tom E.:]

Rigging currency is not free trade.

Mar 12 04:18 PM

[johnbee:]

I agree- but all major currencies competitively devaluating to save their skins, including now the Swiss, and so we will get no trade as Lok Hang So says, and as I see it a deflationary spiral, as no-one will move to stop it.



On Mar 12 04:18 PM Tom E. wrote:

> Rigging currency is not free trade.

Mar 13 08:46 AM

[EUARTE:]

One must remember that fiat currencies are themselves a product.

Mar 13 09:24 AM

[Drew Arnold:]

The main problem IS the decline in overseas orders, not the currency. For example, Taiwan's exports decreased 40% for the month of December year/year even though their currency also weakened against the dollar. Korean exports faced the same phenomenon. Weak currencies aren't helping these other Asian exporters. Global demand, specifically for the "consumer discretionary" electronics products produced in these nations, is simply down in a big way.

Mar 14 02:40 PM

[Lok Sang Ho:]

Presently the main problem with manufacturers anywhere is certainly the decline in orders. However, with a super strong currency, any meagre export that you may achieve will bring you a negative net income. Exports simply becomes not profitable because it costs you more to produce the good than the marginal revenue from selling an additional unit. A strong currency compounds the problem of a shortfall in orders. I am arguing in favor of exchange rates that allows exporters in every country to garner a profit.

Mar 17 08:03 PM