tag:blogger.com,1999:blog-28190833066393056492024-02-19T04:00:47.513-05:00 Making America Competitive Again - MACARestore America's Jobs and Factories by Restoring America's International Competitiveness with a Competitive Dollar - It's as Easy as MAC.John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.comBlogger84125tag:blogger.com,1999:blog-2819083306639305649.post-82031005465312753002024-02-09T22:04:00.000-05:002024-02-09T22:04:09.725-05:00Why America Urgently Needs the Market Access Charge Implementing the Market Access Charge (MAC) has become urgent. No other policy tool is capable of solving or significantly reducing critical problems facing America today: trade deficits, budget deficits, job losses, income inequality, socio-political polarization, boom-bust financial sector cycles, and the twin risks of inflation and recession.<div> <br />What is the MAC?<br /><br /></div><div>It would be a small charge of probably 1-3% that would be collected on all foreign-source money entering America. This fee, which would be less than half of the recent Fed Funds Rate increase and a tiny fraction of tariffs on China, would reduce or eliminate the profits of the “carry traders” who borrow money at low interest rates abroad and invest it at higher rates here. <br /><br /></div><div>How would the MAC Work? <br /><br /></div><div>By reducing speculative interest rate and currency appreciation gains, the MAC would sharply reduce the currency speculation that, for the past 50 years, has been making foreign goods artificially cheap and American goods artificially expensive. Although the MAC would obviously not be a “magic bullet” that ends all of our problems forever, it is vitally needed to help assure the success in the following important areas. See my blog for more details (address below).</div><div><br />Reduce Trade Deficits: The MAC would gradually move foreign currency values per dollar to trade-balancing levels in a non-disruptive manner. This would eliminate America’s serious trade deficits and reduce our net debt to foreigners – which are arguably the worst in the world.</div><div> <br />Increase Good Jobs, Income Distribution, and Socio-Political Unity/Tolerance. Trade deficits are not just a number in a table. They reflect the loss over the past 50 years of millions of good jobs, largely in manufacturing, of family incomes and security, of communities, and of entire “rustbelt” regions of America. </div><div><br /></div><div>These losses contribute directly to the income inequality and socio-political polarization that are tearing apart our country today. By eliminating US trade deficits, the MAC would help eliminate all of these problems as well.</div><div> <br />Eliminate Budget Deficits. Another symptom of America’s severe polarization is the inability of Congress to pass the legislation needed to keep the government open, pay our bills, and to put our country back on the path to the American dream of putting America back on the path to the American Dream of sustained economic growth based on rising productivity, not rising debt, with benefits shared widely by all Americans.</div><div> <br />A key reason for this dangerous situation is that Government revenues are not sufficient to pay for the programs needed to ensure a more equitable society. (America ranks near the top of the developed OECD countries ranked by income inequality). </div><div>Some would argue that Americans are already too heavily taxed to solve our budget deficit and inequality problems by raising taxes, However, if one ranks the 34 relatively developed countries in OECD (including countries like Mexico and Chile) by taxes as a share of GDP, we are only three positions from the bottom.</div><div><br />The MAC offers an excellent solution to this thorny problem: Even at a very low rate of 1.5%, the MAC could generate up to $1.35 trillion of direct revenues per year – all out of the pockets of foreigners. Thanks to increased GDP growth, another $0.15 trillion would come from existing taxes – a total of about $1.5 trillion. As last year’s budget deficit was $1.4 trillion, the MAC might well generate enough revenue to eliminate the deficit and to start reducing the public debt.</div><div><br />Reduce Financial Sector Instability. Swings in interest rates driven by the need to fight inflation contribute to wide swings in asset prices and to the risk of market crashes that hurt all Americans, directly or indirectly. The MAC would sharply reduce such swings.</div><div><br />Reduce Inflation and Recession Risk. (See blog of 2024.01.22 for more on this point.) <br />Summary. The MAC is a sensible, flexible, easy way to fix some of our most pressing political, social, and economic problems. We need to act now to help all Americans.<br />
</div><div><br /></div>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-39469929349583837242024-01-22T16:34:00.011-05:002024-02-09T22:03:26.405-05:00<div><h2 style="text-align: left;"><div style="text-align: center;"><span style="font-size: large;">To Fight Inflation, Avoid a Recession, and Stop the Coming Budget Crisis, Implement the MAC - Now</span></div><span style="font-size: small;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: medium;"> </span><span style="font-size: x-small;">John
R. Hansen</span></h2><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><b>Question</b>: Why has implementing the Market Access Charge (MAC) become so urgent?<o:p></o:p></p>
<p class="MsoNormal"><b>Short Answer</b>: The MAC, a small charge that would be collected on all money entering
America's financial markets from abroad, was originally designed to reduce the excess currency speculation and manipulation. For decades, this has been reducing the
value of foreign currencies against the US dollar, making US goods
artificially expensive compared to foreign-made goods. Consequently, Made-in-America goods have found it increasingly hard to compete domestically against imports or as exports. In
fact, currency misalignment since the 1970s has been the major factor causing
America’s rising trade deficits and debts to foreigners, lost
jobs, slowing growth, increased budget deficits, and socio-economic
polarization.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">Even
at a low introductory rate, the MAC would initially generate $1-2 trillion of
additional US Government revenues per year, making a major contribution to
balancing the US budget, thus reducing the risk that Congress may fail to reach a
budget agreement in time to avoid another disastrous Government shutdown.
Furthermore, reducing the inflow of over $90 trillion of foreign-source money
into America would also make it far easier for the Fed to kill inflation
without killing the economy. <o:p></o:p></p>
<p class="MsoNormal"><b>How would the Market Access Charge (MAC) work?</b><o:p></o:p></p>
<p class="MsoNormal">The
MAC rate, which would probably start at about 1.5 percent (less than half the Fed Funds
Rate at the beginning of 2024), would be collected by US banks receiving foreign
money transfer orders via systems such as SWIFT. The fee, which would apply at the same
rate to all inflows of foreign-source money, would be adjusted periodically to
reduce or eliminate the spread between (a) higher US interest rates and (b) the lower
foreign interest rates that attract foreign money. Reducing the interest rate
spread would sharply reduce the speculative gains that currently attract tens
of trillions of foreign-source money into America each year.*1 With the MAC in place, the Fed could set
domestic interest rates high enough to control inflation without causing a
recession.*2<o:p></o:p></p>
<p class="MsoNormal"><b>America
needs the MAC more than ever today because it would:</b><o:p></o:p></p>
<p class="MsoNormal"><b>1</b>.
<b><i>Fight Currency Misalignment</i></b>: By reducing the incentives for foreign countries
like China and Japan to buy US dollars and dollar-based assets, the MAC would
control the currency inflows that destroy the competitiveness of
Made-in-America goods both here and abroad. <o:p></o:p></p>
<p class="MsoNormal"><b>2.</b>
<b><i>Potentially eliminate US budget deficits</i></b>, thus reducing America’s outstanding national
debt, and its interest payments on debt. Today, interest payments alone drain nearly two billion dollars per day out of our national budget. Of these
payments, about a third goes to relatively wealthy foreigners; the rest goes to
relatively wealthy Americans.</p><p class="MsoNormal">Contrary
to popular opinion, America’s public debt is not just money we owe ourselves.
Before the Fed began “printing money” by incurring the enormous amounts of
domestic debt needed to finance COVID stimulus payments, about forty percent of
America’s total public debt was owed to foreigners. In 2022, the average total federal debt
burden per U.S. household was $240,000 compared to a median family income of
only about $75,000. <span style="font-size: xx-small;">*3</span></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><b>3.</b>
<b><i>Support urgently needed programs</i></b> from the national to the local level -- such as improving our national security,
infrastructure, environmental protection, and social programs. The MAC could
help support existing programs more adequately and to fund new programs
without raising taxes or increasing the public debt.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><b>4.</b>
<b><i>Fight inflation with less risk of causing a recession</i></b>. When the Fed raises
interest rates to fight inflation, the spread between average interest rates
here and abroad widens, creating an irresistible incentive for foreign
speculators to bring their money into America’s financial markets and purchase
dollars and dollar-based assets. <o:p></o:p></p>
</div><div><p class="MsoNormal" style="text-align: left;">These higher interest rates -- the Fed's most visible tool for decreasing inflation -- trigger inflows of foreign money that increase domestic stocks of credit just when the Fed is trying to
tighten credit. Consequently, the Fed is forced to raise
interest rates even higher, greatly increasing the risk of even larger inflows -- and a recession. In fact, all of the Fed’s
major inflation-fighting episodes during the past sixty years have caused a
recession.<span style="font-size: xx-small;">*4</span> Implementing the MAC would
reduce this risk sharply. <span style="font-size: xx-small;">*5</span></p></div><div><p class="MsoNormal"><b>5.
Increase domestic and foreign demand for Made-in-America goods:</b> A more
competitive dollar would create at least 3-5 million well-paying middle-class
jobs, not only in manufacturing and associated sectors, but also in sectors
producing internationally traded products such as agricultural and other
natural resource products, as well as services such as movies and other
intellectual property. <br /><br />Some argue that we should not worry about America's manufacturing or agricultural sectors because they are naturally dying sectors -- that we should focus instead on services like hi-tech engineering. However, several real-world realities blow holes in that argument. First, "services" are much harder to ship across oceans than are "goods" and constitute a small share of total global exports. Second, services tend to be highly labor intensive, and developing countries like China and India have a comparative advantage in services because of low wage rates compared to those in America. Third, modern manufacturing, which has been held back in the US by the overvalued dollar's need to compete with undervalued foreign currencies, is actually highly capital intensive and highly productive. Fourth, wealthy developed countries like Germany with a strong current account surplus support their GDP growth and exports with strong manufacturing sectors. </p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">Creating
jobs in manufacturing and other potentially high-tech sectors will become increasingly important as the hundreds of thousands of people who
dropped out of the labor force during the pandemic continue looking for
jobs again. <o:p></o:p></p>
<p class="MsoNormal"><b>6.
Trigger real domestic and foreign investments in American manufacturing.</b> Some
people wrongly think that imposing the MAC on inflows of foreign-source money
would cause a shortage of funds needed to finance critically needed
investments in our economy. However, most of the foreign direct investment (FDI) flows
into the US last year went into portfolio investments – the purchase of
existing financial assets such as stocks, bonds, and derivatives. <o:p></o:p></p>
<p class="MsoNormal">Only
3 percent of FDI went into the creation and
expansion of real physical capacity that improves America’s productivity,
reduces costs and inflation, increases US competitiveness, and triggers more rapid
economic growth, higher living standards, increased revenues, and balanced
budgets. By restoring the profitability of “Made-in-America” products, the MAC
would sharply increase private investments in America, both foreign and domestic. This could even reduce the cost of capital. However, profitability is
essential for growth and prosperity, and the MAC is essential for profitability. <o:p></o:p></p>
<p class="MsoNormal"><b>7. Far more effective than tariffs in reducing US trade deficits with
countries like China.</b> Tariffs can be evaded rather easily with widely known
tricks like shipping through third countries, rebranding, and under-invoicing.
In contrast, evading an exchange rate is virtually impossible. Furthermore, the
MAC would generate about ten times as much Government revenue per year as
import duties currently do. In fact, the MAC would generate enough revenue to
eliminate budget deficits initially and to begin paying down our national debt with no
increase in taxes on Americans. <o:p></o:p></p>
<p class="MsoNormal"><b>8.
Reduce America’s debt service burden.</b> Implementing the MAC would increase the
Government's ability to invest in high priority programs such as skills
training, childcare, green energy, and other initiatives that would improve the
quality of life for the average American family and increase America's
productivity without increasing the public debt. <o:p></o:p></p>
<p class="MsoNormal"><b>9.
Increase economic growth.</b> The MAC would stimulate domestic production and
exports while reducing our excessive dependence on imports. With the MAC in
place, America could roughly double its current rate of economic growth. <o:p></o:p></p>
<p class="MsoNormal"><b>10.
Put America back onto the path to the American Dream</b> – the dream of sustained
economic growth based on rising productivity, not rising debt, with benefits
shared more equitably by all Americans. The MAC could rebuild a country where
people are no longer economically, socially, and politically polarized – a
United States of America where Americans are truly <i>united</i>.<o:p></o:p></p>
<p class="MsoNormal">The
MAC, which is fully legal under US and IMF rules, could be implemented in a
matter of weeks by legislative action or by the President under the
International Emergency Economic Powers Act (IEEPA). No new administrative
structures would be needed. Existing US correspondent banks would simply be directed to (a) collect the MAC as a routine part of processing SWIFT and similar
international payment orders and (b) immediately send the proceeds minus a
modest processing fee for the bank to the US Treasury. As a single MAC rate
would apply to all inflows, no additional time or skill would be required for
processing at the border.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><b>The Urgency of the MAC Today</b></p><p class="MsoNormal">Congress has recently kicked the budget deficit can down the road -- again. Solving the problem would have been far superior, but delaying government shutdowns is at least better than causing shutdowns and causing the Governments' borrowing costs to rise. </p><p class="MsoNormal">This delay gives Congress time to approve, implement and begin running a fully functional Market Access Charge. In addition to helping to prevent another recession and to restoring economic growth based not on rising debts but on rising competitiveness with benefits widely shared throughout America, a Market Access Charge would lay the foundations for eliminating the US budget deficit <u>without raising taxes on American residents</u>. This should allow a
good compromise to be reached across the aisle in time to avoid a truly destructive crisis.</p><p class="MsoNormal"><u>Th</u><a href="https://abcdnow.blogspot.com/2024/01/Urgency of MAC Now.html">e time to act is NOW</a>.</p><p class="MsoNormal"><o:p></o:p></p>
<div style="margin-bottom: 0in; text-align: left;">John R. Hansen, PhD<br />Founding Editor, Make America Competitive Again<br />January 22, 2024
</div><p class="MsoNormal" style="margin-bottom: 0in;"><o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><span style="font-size: 9pt;">______________<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><span style="font-size: 9pt;">Notes:<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><span style="font-size: 9pt;">1. To simplify administration, to
maintain a level playing field, and to help prevent tax evasion, a single MAC
rate would apply to all inflows at any point in time regardless of the source,
origin, destination, purpose, or of the currency involved. <o:p></o:p></span></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><span style="font-size: 9pt;">However, the MAC tax would be
refunded upon proof that the incoming funds had directly and traceably been
used to pay for US exports or to complete construction of productive physical
investment projects in the United States – much as VAT countries refund VAT
paid on exported goods, for example.</span></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><span style="font-size: 9pt;">2. By making it possible to maintain a domestic
monetary policy including the Fed policy rate, the MAC would make it possible
to break what has for been known for decades as the “impossible trilemma.” The
MAC would make it possible for America to maintain an independent monetary
policy, balanced trade, and free cross-border foreign currency flows unfettered
by quantitative restrictions.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><span style="font-size: 9pt;"> </span><span style="font-size: 9pt;">3.</span><span style="font-size: 9pt;"> </span><span style="font-size: 9pt;">At the margin, the US Government was covering
up to 100 percent of its net annual borrowing needs from foreign rather than
domestic sources.</span></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><span style="font-size: 9pt;"> </span><span style="font-size: 9pt;">4.</span><span style="font-size: 9pt;"> </span><span style="font-size: 9pt;">It is worth noting that, on average since the
late 1960s, recessions have started about five months after the Fed starts
reducing interest rates and on average have then run for 11 months with the
shortest lasting 2 months and the longest three lasting 16-18 months.</span></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><span style="font-size: 9pt;">5. Note that only two or three percent of
foreign-source money coming into America today is used for investments that
create new productive assets. The remainder is used for various forms of
financial speculation. The concern expressed by some that the MAC would reduce
the money available to finance new productive investments in America is nothing
but a myth.</span></p><p class="MsoNormal" style="margin-bottom: 0in;"><span style="font-size: 9pt;">In fact, if made-in-America
products once again became internationally competitive thanks to the MAC’s
establishment of a current account balancing exchange rates for the dollar,
much of the foreign-source money now entering America’s financial markets would
be used for real capital investments rather than for speculative casino
capitalism. This would probably lower the cost of capital for real investments
in America. By extension, the growth that the MAC would stimulate would
generate more tax revenues with no increase in tax rates on American residents.</span></p></div><div><br /></div><h1 style="text-align: left;"><span style="font-size: medium;">America Needs a Competitive Dollar - Now!</span></h1>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0Washington, DC, USA38.9071923 -77.036870710.596958463821153 -112.1931207 67.217426136178844 -41.880620699999994tag:blogger.com,1999:blog-2819083306639305649.post-51527677841024682162023-04-05T21:14:00.052-04:002023-07-19T14:55:26.093-04:00Fight Inflation and Recession More Effectively with the MAC and Balance the Budget Why is it so hard for the Fed to kill inflation without killing the economy? Could the Fed improve the efficiency of its inflation fighting and avoid causing recessions? Could it do so in a way that balances the budget, helping us avoid a major default? Yes. This may sound like Mission Impossible, but with a small policy tweak, the Fed could do all of this plus fulfill its mandate of economic growth with stable prices more successfully, and brighten the future for all Americans.<br /> <br />Each of America’s ten recessions since the late 1950s has been preceded by inflation and significant increases in the Fed Funds Rate (FFR). The obvious cause of the recessions is that higher interest rates and tighter credit increase costs and thus reduce demand for Made-in-America goods. This reduces output from US producers and thus growth. By increasing the cost of doing business, higher interest rates force businesses to reduce output and fire workers, leading to recessions.<br /><br />True, but recent research indicates that these explanations ignore some key challenges facing the Fed in today’s highly financialized world. In particular, when the Fed raises the Fed Funds Rate, this increases the spread between American interest rates and those abroad, triggering massive flows of foreign-source money into America via speculative carry-trade. <br /><br />Some $90 trillion worth of foreign-source money came into America’s capital markets last year – about four times GDP! Most of this money was used to buy dollars and existing dollar-based financial assets -- not to finance new real investments in productive projects that will increase our nation’s well-being. Furthermore, increased spreads make inflation and recession risks worse for the following reasons.<div> <br /><b>Inflation:</b> By increasing the stock of capital in the United States, inflows of foreign-source money dilute the Fed’s efforts to reduce the availability and increase the cost of capital. This makes it harder for the Fed to control inflation. Also, excessive stocks of domestic credit tend to reduce the Fed’s ability to get banks to raise their on-lending rates by normal margins. <br /><br /><b>Recession:</b> Excess capital inflows increase the risk of recessions. Because these inflows undermine the Fed’s policies, the Fed must raise interest rates repeatedly to kill inflation. As noted above, however, higher rates reduce the demand for Made-in-America goods and increase production costs. As demand shrinks, productivity drops, and recession risks rise.</div><div> <br /> Furthermore, when foreign speculators bring excess money into America to buy dollars, <u>they raise the dollar’s exchange rate</u>. This makes foreign goods cheaper than those produced in America, thereby destroying demand for American products both here and abroad. US producers find it increasingly difficult to compete with foreign-made goods and may well have to go out of business. Ironically, some US officials support shifting demand from American products to cheaper foreign products because that might reduce inflation. Never mind the Americans impoverished in the process or the added debt. <br /><br /><b>Solution</b>: The Fed’s traditional inflation-fighting tools can be made more effective by moderating inflows of foreign money. This can easily be done by collecting an entrance fee in the form of a market access charge (MAC) on capital inflows. Taxing away away the spread that is driving inflows of foreign-source money will moderate the inflows to levels consistent with America's need for real as opposed to speculative capital. </div><div><br /></div><div>If we assume an average spread of 2% and take the $90 trillion used to purchase “long-term” securities in America last year as a very conservative estimate of total gross inflows, the MAC would have generated $1.8 trillion of new net government revenues last year – all out of the pockets of foreign speculators. <br /><br /><b>Budget Balance:</b> Such revenues would have fully covered the $1.4 trillion deficit for FY2022 with $400 billion left over to support important services, cut taxes, and pay down the national debt. The ability to reduce the number of Fed interest rate increases would lower the cost of borrowing for the Government. Implementing the MAC tomorrow might not save America from defaulting on its debt this year, but doing so would greatly improve America’s fiscal position, sharply reduce the risk of a recession, stimulate economies of scale, reduce inflation, and reduce America’s growing debt.<br /><div style="text-align: center;"><br /></div><div style="text-align: center;"><span style="text-align: start;"><b><span style="background-color: #2b00fe; color: white;">America Needs a Competitive Dollar - Now!</span><br /><div style="text-align: right;"><b><span style="background-color: white;"><span style="font-size: xx-small;">646</span></span></b></div></b></span></div><div style="text-align: right;"><br /></div></div>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-70511418936348490652023-03-02T12:54:00.014-05:002023-07-19T16:27:36.055-04:00<div><div><b>Fighting Inflation and Recession Efficiently with a Market Access Charge (MAC): </b><b>Administrative Details</b></div><div><br /></div><div><b>Lessons Learned from America's Ongoing Crisis</b>: The Fed has been raising interest rates to control inflation, but it also needs to moderate the inflows of foreign capital because these inflows tend to make the Fed's efforts to control inflation less effective. Without inflow moderation, the Fed's policies will continue to increase the inflation it seeks to reduce. This forces the Fed to raise rates even higher, increasing the risk of another recession. </div><div><br /></div><div>Widening cross-border spreads between foreign and US interest rates plus anticipated appreciation of the dollar are the primary factors that stimulate excessive inflows of foreign-source money, all other things being equal. The solution therefore lies in breaking the link between rising interest rates in US markets (which are driven up by increases in the Fed Funds Rates) and the interest rates that foreign speculators can earn in America’s financial markets. In short, the Fed needs stop increasing the spread between US and foreign interest rates. </div><div><br /></div><div>If the Fed can break this link, it will simultaneously put an end to foreign speculators' anticipation of further dollar appreciation, another major factor that drives excessive inflows of foreign money. Breaking the link would greatly reduce the risk of a recession in the short term, and in the longer term, enhance US competitiveness, output growth, and job creation while reducing government budget deficits and the public debt.</div><div><br /></div><div><b>The Need for Immediate Action</b></div><div><b><br /></b></div><div>Given current trade deficits, budget deficits, inflation, and employment issues, the urgency of moderating foreign capital inflows could not be more clear.</div><div><br /></div><div>Incidentally, almost none of the incoming foreign capital is used for "real" investment in real factories, roads, and other infrastructure; virtually all of it is used to purchase existing financial assets.</div><div><br /></div><div>To moderate these excessive inflows, the Fed should introduce an "entrance fee" or market access charge (MAC) on all foreign capital inflows. The charge would act like an import tax on the unwanted foreign capital inflows that damage and distort the American economy. </div><div><br /></div><div>The charge would initially be set at a rate equal to today’s spread between the Fed Funds Rate and the average policy rate of the central banks of countries contributing most heavily to the current flows of capital into the United States (e.g. Great Britain, the Eurozone, and Japan). This would eliminate the cross-border interest rate spread that currently draws tens of trillions of dollars of largely speculative capital into America from abroad each year.</div><div><br /></div><div><b>Administration</b>: When the FOMC decides that domestic inflation is getting out of hand and needs to be controlled, the Fed staff would do the same analysis that they currently do to support decisions of the Federal Open Market Committee (FOMC), and the FOMC would continue to use its traditional interest rate and QT tools in the traditional manner.</div><div><br /></div><div>However, once the FOMC decided to increase the lower and upper bounds of the Fed Funds Rate, it would simultaneously announce that the MAC rate has been raised by the same number of basis points. This simple announcement, with no additional analytical work by Fed staff, would prevent creating or increasing a cross-country spread that would otherwise attract more foreign money into America’s already sated capital markets. </div><div><br /></div><div>By doing so, the MAC would greatly reduce upward pressures on the dollar’s exchange rate, thereby increasing the competitiveness of American industry and all the benefits that will flow therefrom.</div><div><br /></div><div><b>Collection</b>: How would the MAC be collected, you may ask. Very simple. Virtually all significant foreign capital flowing into the United States enters via an international payments system such as SWIFT and is received by a correspondent bank located in the United States. Such banks, which must already file reports with the US Treasury, would simply deduct the amount of the MAC from the incoming payment order, and send it electronically to the US Treasury as part of the transaction process. The remaining funds would be deposited as always in the US bank account of the designated recipient. </div><div><br /></div><div><b>Summary</b>: By eliminating today’s incentives to dump unwanted, damaging foreign capital into America’s financial markets, the MAC would make the Federal Reserve’s Fed Funds Rate (FFR) and Quantitative Tightening (QT) far more effective. It would also reduce or eliminate the overvaluation of the dollar that (a) destroys US growth, jobs, and factories, (b) increases government deficits, public debt, trade deficits, and debt to foreigners, and (c) increases the risk that controlling inflation will cause a recession and will make it harder for America to recover from a recession.</div><div><br /></div><div>Greater effectiveness of the FFR and QT would reduce the need for the Fed to keep raising the Fed Funds Rate or to sell even more of the Fed’s balance sheet assets to soak up money from America's financial markets. By helping move the dollar to a more fully competitive, trade-balancing rate, the MAC would gradually allow made-in-America goods to become fully competitive domestically against imports and as exports to foreign markets. With less monetary tightening, US businesses would be able to obtain the operating capital they need to respond to the demand created by a more competitive dollar. This would gradually eliminate US trade deficits, and and it would trigger new investments that increase US productivity and efficiency, thus lowering inflationary pressures.</div><div><br /></div><div>In short, the "entrance fee" or excise tax on foreign capital inflows established by the FED would require no additional analysis by Fed staff and would significantly increase the Fed’s ability to fulfill its dual mandate from Congress – to keep prices stable by fighting inflation, and to assure maximum feasible domestic employment. At the same time, the MAC would greatly reduce the risk of recessions or worse, allow America to recover more quickly from the pandemic, and help our nation attain the American Dream of steady, sustainable growth with benefits widely shared by all.</div><div><br /></div><div>And as a side benefit, the billions of dollars that would be collected with the MAC charge could be used to reduce or eliminate US budget deficits, reduce inflation-generating borrowing to finance these deficits, reduce our national debt, and help finance important investments in the future of our country – all with no increase in taxes on Americans.</div><div> </div><div><br /></div><div><br /></div></div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><span style="background-color: #2b00fe;"><span style="color: white;">America Needs a Competitive Dollar - Now!</span></span></blockquote></blockquote></blockquote>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-8598661189231170022022-12-28T16:09:00.022-05:002023-07-19T14:58:30.074-04:00The Fed is about to Trigger a RecessionThis can be Avoided with a FIRE Prevention Policy <span style="font-family: helvetica;"><br /><br />Question: What can be done to increase the effectiveness of the Fed’s inflation-fighting tools and to reduce the risk of causing yet another recession?</span><div><span style="font-family: helvetica;"><br />Summary Answer: The effectiveness of the Fed’s key inflation fighting tools – higher interest rates and quantitative tightening (QT) – has suffered because raising US interest rates with the Fed Funds Rate plus quantitative tightening increase the difference or “spread” between yields in America and those in foreign markets. The increased spread annually attracts billions if not trillions of additional dollars of foreign capital flows into the United States. These inflows increase the stock of credit in America’s financial sector, offsetting some of the Fed’s quantitative tightening efforts. Also, the inflows make banks hesitant to raise their interest rates because, given the glut of capital available, finding customers willing to pay the higher interest rates is difficult.<br /><br />Consequently, the Fed must raise interest rates repeatedly. Each time it does, it increases the risk of cutting off economic growth and triggering a recession. <br /><br />But the story gets worse: The exceptional foreign demand for dollars and dollar-based assets driven by the rising spread between interest rates here and abroad pushes the dollar’s exchange rate so high that American goods find it increasingly hard to compete domestically against imports or as exports to foreign markets. This seriously suppresses economic activity in America, increasing the risk that constantly rising Fed Funds Rates will drive the country into a recession. <br /><br />The solution is to introduce a Fed Inflation Reduction Excise (FIRE) charge that is linked to increases in the Fed Funds Rate. Such a charge would keep increases in the Fed Funds Rate from widening spreads between foreign and US financial markets, would reinforce Fed efforts to tighten and raise the cost of credit in US markets, and would limit the collateral damage to the real economy caused by excessive dollar appreciation.<br /><br /><b>Background</b>: The US dollar first rose above its trade balancing level during the OPEC Oil Crises of the 1970s and early 1980s. To varying degrees, the dollar has remained overvalued ever since. As a share of GDP, our trade deficits in some years have exceeded those in some of the world’s most mismanaged developing countries like Sudan, and these deficits have accumulated so fast that America’s foreign debt (as measured by our net international investment position or <a href="https://fred.stlouisfed.org/series/IIPUSNETIQ">NIIP</a>) is eighteen times larger than that of Great Britain, the second largest foreign debtor in the world.<a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftn1">[1]</a><br /><br />Over the past 50 years, America’s trade deficits have accounted for up to 75 percent of all trade deficits in the world. Servicing the stock of debt accumulated because of these annual deficits already puts a heavy burden on Americans, and at the rate our foreign debt -- and our govenrment debt -- continue to grow, the burden on future generations could become unbearable. Our children and grandchildren could end up with a standard of living worse rather than better than our own. <br /><br />The US dollar’s overvaluation relative to an exchange rate that would allow Americans to earn as much producing exports as they spend on imports was estimated by <a href="https://prosperousamerica.org/new-study-global-currency-misalignment-challenges-us-reindustrialization-efforts-u-s-dollar-17-overvalued-while-chinese-yuan-japanese-yen-euro-22-40-and-27-undervalued-against-dollar-respective/">Ferry</a> of CPA at nearly 17 percent based on data ending in 2021. Between January and September of 2022, the dollar appreciated by another 10 percent, bringing total dollar overvaluation to somewhere between 25 and 30 percent.<a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftn2">[2]</a><br /><br />The dollar has become seriously overvalued because the global demand for dollars and dollar-based assets such as stocks, bonds, and real estate exceeds the supply for many reasons. For example: </span></div><div><span style="font-family: helvetica;">the dollar is by far the most widely used currency for international trade and for holding international reserves;America’s dollar-based financial markets are among the deepest, broadest, and safest in the world;dollars and dollar-based assets are regarded as a “safe-haven” where foreign investors like to hold their money during the world's frequent crises. While the Fed has been raising interest rates rapidly to fight inflation, other central banks have been keeping their interest rates low or even negative to stimulate economic growth. Consequently, the spreads between returns in America and those abroad have widened to levels that generate trillions of dollars per year of inbound carry trade by speculators seeking to exploit America’s higher interest rates.Investors and speculators assume that the Fed and Treasury will continue to allow the dollar to appreciate. Unfortunately, this assumption is rational given America’s long-standing belief in a so-called “strong dollar" -- a belief that continues despite the common anger of Americans about the "undervaluation" of foreign currencies like the Chinese renminbi and the Japanese yen. (The dollar's overvaluation is simply the inverse of the collective undervaluation of the currencies of its trading partners.)Anticipation of continued dollar appreciation reinforces incentives such as the widening yield gap for foreign speculators to bring even more foreign capital into the US. Unless the urgently needed countermeasures proposed below are implemented, the dollar will continue to appreciate, making made-in-America goods even less competitive than they are today, and this will definitely increase the risk of a recession.<a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftn3">[3]</a>Today’s massive inflows of foreign capital are destroying the effectiveness of Fed measures designed to raise interest rates. For example, raising the FFR will not raise other domestic interest rates such as the prime rate by as much as they normally would because banks are hesitant to raise rates when they are having trouble “selling” the excessive volumes of credit already on hand because of such large foreign capital inflows – a major problem during the housing bubble of the mid-aughties for example.By increasing the availability of credit in the banking system, the foreign inflows are partially or largely offsetting the Fed’s quantitative tightening efforts. Despite the ruinous impact of excessive inflows of speculative foreign capital on Americas’ international competitiveness, economic growth, jobs, budget deficits, and the national debt, the Fed and the Treasury have made no effort to moderate inflows of foreign capital or to keep them at levels consistent with a value for the US dollar that would balance America’s international trade, or to keep them consistent with a supply of credit in America that would be consistent with stable prices. Because of the negative impacts of excessive inflows of foreign capital triggered by rising spreads between foreign and US financial markets, the Fed must keep raising interest rates and keep selling the bonds it holds on its balance sheet to pull money out of the economy. This makes the situation even worse on all fronts.For example, the more the Fed raises interest rates and tightens credit availability, the greater will be the risk of a recession. As we saw during the Great Financial Crisis of 2007-2009, for example, such recessions can cause far more harm to Americans -- from the very rich to the very poor -- than a percent or two of additional inflation would have caused.Most recessions in the past fifty years have been triggered by increases in the FFR totaling only 200-400 basis points from the previous trough. The Fed has already raised the upper limit of the Fed Funds Rate this year from 0.25 percent in March to 4.5 percent in December– a 425 basis point increase in barely six months. Thus we are already into the range where FFR increases are very likely to cause another recession.Proposed Policy Action<br /><br /><br />Recent actions by the Federal Reserve to fight inflation have aggravated the dollar’s sharp overvaluation:<br /><br /><br /><br /><br />Lessons Learned: The Fed clearly needs to raise interest rates to control inflation, but it also needs to moderate the inflows of foreign capital that make its efforts to control inflation less effective and that increase the risk of causing another recession. Otherwise, the Fed will continue to cause the inflation it seeks to reduce. <br /><br />Widening cross-border spreads between foreign and US interest rates plus anticipated appreciation of the dollar are the primary factors stimulating excessive inflows of foreign-source money. Therefore the solution lies in breaking the link between rising interest rates in US markets (which are driven by increases in the Fed Funds Rates), and the interest rates that foreign investors can earn in America’s financial markets. <br /><br />In short, the Fed needs to break the link between increases in the Fed Funds Rate and increases in cross-border interest rate spreads.<br /><br />If the Fed can break this link, it will simultaneously put an end to foreign speculators' anticipation of further dollar appreciation, which is the other factor that drives excessive inflows of foreign money. The end result would be a much-reduced risks of a recession in the short term, and much-enhanced prospects for excellent competitiveness, output growth, job creation, reduced government deficits, and reduced public debt in the longer term.<br /><br />The Need for Immediate Action<br /><br />The urgency of reducing excess foreign capital inflows could not be clearer:<br /><br />Corrective action is urgently needed. The Fed should introduce a Fed Inflation Reduction Excise (FIRE) charge that would act like an import tax on the unwanted foreign capital inflows that damage and distort the American economy. The charge would initially be set at a rate equal to today’s interest rate spread between the Fed Funds Rate and the average policy rate of the central banks of countries contributing most to the current flows of capital into the United States (e.g. Great Britain, the Eurozone, and Japan). This would eliminate the cross-border interest rate spread that currently draws trillions of dollars of largely speculative capital into America from abroad each year.<a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftn4">[4]</a><br /><br />Administration: When the FOMC decides that domestic inflation is getting out of hand and needs to be controlled, the Fed staff would do the same analysis that they currently do to support decisions of the Federal Open Market Committee (FOMC), and the FOMC would continue to use its traditional interest rate and QT tools in the traditional manner.<br /><br />However, once the FOMC has decided to increase the lower and upper bounds of the Fed Funds Rate, it would simultaneously announce that the FIRE rate has been raised by the amount of the increase in the Fed Funds Rate. This simple announcement, with no additional analytical work by Fed staff, would prevent creating or increasing a cross-country spread that would otherwise attract more foreign money into America’s already sated capital markets. And by doing so, the FIRE would greatly reduce upward pressures on the dollar’s exchange rate, thereby increasing the competitiveness of American industry and all the benefits that will flow therefrom.<br /><br />Collection: How would the FIRE be collected, you may ask. Very simple. Virtually all foreign capital flowing into the United States comes via an international payments system such as SWIFT and is received by a correspondent bank located in the United States. Such banks, which must already file certain reports to the US Treasury, would simply deduct the amount of the FIRE from the incoming payment order, send it electronically to the US Treasury as part of the transaction process, and deposit the remainder of the funds received in a US bank account of the designated recipient.<a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftn5">[5]</a> <br /><br />Summary: By eliminating today’s incentives to dump unwanted, damaging foreign capital into America’s financial markets, FCL would make the Federal Reserve’s Fed Funds Rate (FFR) and Quantitative Tightening (QT) far more effective and would reduce or eliminate the overvaluation of the dollar that (a) destroys US growth, jobs, and factories, (b) increases government deficits, public debt, trade deficits, and debt to foreigners, and (c) increases the risk that controlling inflation will both cause a recession and make it harder for America to recover from a recession.<br /><br />Greater effectiveness of the FFR and QT would reduce the need to keep raising the Fed Funds Rate or to sell even more of the Fed’s balance sheet assets to soak up more of the excess money in America's financial markets. By helping move the dollar to a more fully competitive, trade-balancing rate, the FIRE would gradually allow made-in-America goods to become fully competitive domestically against imports and as exports to foreign markets, thereby helping to eliminate US trade deficits and triggering new investments that increase US productivity, <br /><br />In short, the Fed Inflation Reduction Excise charge, which would require no additional analysis by Fed staff, would significantly increase the Fed’s ability to fulfill its Dual Mandate from Congress – keeping prices stable by fighting inflation, and assuring maximum feasible domestic employment. At the same time, FIRE would greatly reduce the risk of recessions or worse, allow America to recover more quickly in the event of a recession, and help it attain the American Dream of steady, sustainable growth with benefits shared by all.<br /><br />And as a side benefit, the billions of dollars that would be collected with the FIRE charge could be used to reduce or eliminate US budget deficits, reduce inflation-generating borrowing to finance these deficits, reduce our national debt, and help finance important investments in the future of our country – all with no increase in taxes on Americans.<br /><br />In short, with this proposal in place, the Fed could Fight Inflation and Recessions Efficiently with the Fed Inflation Reduction Excise -- otherwise known as fighting fire with fire to save America.<br /><br /><br />Note: The Fed Inflation Reduction Excise (FIRE) system was designed on the basis of solid statistical data that help explain why the Fed’s current tools for fighting inflation involve a serious risk of causing recessions. These data will soon be available in chart form with interpretive commentary.<br /><br /> America Needs a Competitive Dollar - Now!<br /><br /><br /><br /><br /><a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftnref1">[1]</a> It is no coincidence that America and Britain also have the largest financial sectors in the world. Both have developed a “comparative advantage” in financial trade that seriously disadvantages their real sectors – those that produce exports. This is a special form of the infamous “Dutch Disease” that developed when the Netherlands began exporting so much oil that its traditional industries could no longer compete internationally.<br /><br /><br /><a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftnref2">[2]</a> Note that the estimates here of the dollar’s overvaluation reflect average “trade-weighted” movements in the exchange rates of the dollar against the currencies of America’s major trading partners. Under- and over-valuation by individual trading partners can vary widely from these averages.<br /><br /><br /><br /><br /><a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftnref3">[3]</a> The focus of foreign speculators on cross-border spreads and on expectations of further dollar appreciation are explained in more detail by literature on “uncovered interest rate parity.” (See, for example, Mishkin, 2006)<br /><br /><br /><a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftnref4">[4]</a> Some may worry that discouraging inflows of foreign capital will reduce the availability and increase the cost of the capital needed to increase the productivity of American manufacturing. However, most carry trade flows are strictly financial, largely speculative, and usually short-term. Such money is generally not used to enhance America’s physical production capacity or to increase its real productivity. Furthermore, once the dollar has moved to levels that restore the international competitiveness of the US dollar, America will be able to mobilize more than enough capital domestically to finance a major expansion in America’s productive capacity by shifting funds from speculative activities to real investments in real projects. Also, as the Foreign Capital Levy is very small compared to the profits that that they will make because making goods in America is once again profitable, <a href="http://abcdnow.blogspot.com/2017/01/foreign-direct-investors-will-love.html">foreign direct investment in America will surge</a>. <br /><br /><br /><a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftnref5">[5]</a> The Fed’s right to establish the FIRE needs to be confirmed. Consistent with international best practice, the Fed is an independent central bank, but it is ultimately accountable to the public and to Congress. For reasons noted in this paper, the FIRE is essential to the Fed’s ability to carry out its dual mandate from Congress and thus the FIRE should be within the Fed’s power to implement. However, should any question arise, the President, under powers granted by the International Economic Emergency Powers Act (IEEPA) could issue an executive order allowing the Federal Reserve to establish the FIRE system, and instructing the US Treasury to collect the levies as part of its ordinary business.<br />America Needs a Competitive Dollar - Now!</span></div>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-36398414448099225602022-10-13T12:48:00.063-04:002022-12-28T16:28:10.076-05:00Controlling Inflation without Causing a Recession: Enhance the Fed’s Effectiveness with a Fed Inflation Reduction Excise (FIRE) charge<div><p style="margin: 0.25in 0in 6pt; text-align: left;"><a name="_Hlk28871857"><i><span style="font-family: inherit; line-height: 150%;"><b>Question</b>: What can be done to increase the
effectiveness of the Fed’s inflation-fighting tools and to reduce the risk of causing yet another recession?</span></i></a></p><h2 style="margin-bottom: 6.0pt; margin-left: 0in; margin-right: 0in; margin-top: .25in; margin: 0.25in 0in 6pt;"><a name="_Hlk116548501"></a></h2></div><div>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit;"><span><i><span style="line-height: 150%;"><b>Summary Answer</b>:</span></i><span style="line-height: 150%;"> </span></span><span face="Arial, sans-serif">The
effectiveness of the Fed’s key inflation fighting tools – higher interest rates
and quantitative tightening (QT) – has suffered because raising US interest
rates with the Fed Funds Rate plus quantitative tightening increase
the difference or “spread” between yields in America and those in foreign
markets. The increased spread annually attracts billions if not trillions of
additional dollars of foreign capital flows into the United States. These
inflows increase the stock of credit in America’s financial sector,
offsetting some of the Fed’s quantitative tightening efforts. Also, the inflows make banks
hesitant to raise their interest rates because, </span><span face="Arial, sans-serif">given the glut of capital available, finding customers
willing to pay the higher interest rates is difficult.</span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit; line-height: 150%;"><span>Consequently,
the Fed must raise interest rates repeatedly. Each time it does this, it increases </span><span>the risk of cutting
off economic growth and triggering a recession.
<o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit; line-height: 150%; mso-bidi-font-family: Arial;">But the story gets worse: The exceptional
foreign demand for dollars and dollar-based assets driven by the rising spread
between interest rates here and abroad pushes the dollar’s exchange rate so
high that American goods find it increasingly hard to compete domestically
against imports or as exports to foreign markets. This seriously suppresses
economic activity in America, increasing the risk that constantly rising Fed
Funds Rates will drive the country into a recession. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit; line-height: 150%; mso-bidi-font-family: Arial;">The solution is to introduce a<span style="font-size: x-small;"> </span></span><a name="_Hlk116548502"><span style="mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit; font-size: x-small;">Fed Inflation Reduction Excise (FIRE)</span> charge that is </span></a><span style="font-family: inherit;">linked to increases in the Fed Funds Rate. Such a charge
would keep increases in the Fed Funds Rate from widening spreads between
foreign and US financial markets, would reinforce Fed efforts to tighten and
raise the cost of credit in US markets, and would limit the collateral damage
to the real economy caused by excessive dollar appreciation.</span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit;"><i><span style="line-height: 150%;"><b>Background</b>:</span></i><span style="line-height: 150%;"> </span><span style="line-height: 150%;">The US dollar first rose above its
trade balancing level during the OPEC Oil Crises of the 1970s and early 1980s.
To varying degrees, the dollar has remained overvalued ever since. As a share of
GDP, our trade deficits in some years have exceeded those in some of the world’s
most mismanaged developing countries like Sudan, and these deficits have
accumulated so fast that America’s foreign debt (as measured by our net
international investment position or </span><a href="https://fred.stlouisfed.org/series/IIPUSNETIQ"><span style="line-height: 150%;">NIIP</span></a><span style="line-height: 150%;">) is
eighteen times larger than that of Great Britain, the second largest foreign
debtor in the world.<a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&amp;A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftn1" name="_ftnref1" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference">[1]</span><!--[endif]--></span></a>
<o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit; line-height: 150%; mso-bidi-font-family: Arial;">Over the past 50 years, America’s
trade deficits have accounted for up to 75 percent of all trade deficits in the
world. Servicing the stock of debt accumulated because of these annual deficits
already puts a heavy burden on Americans, and at the rate our foreign debt -- and our govenrment debt -- continue to grow, the burden on future generations could become unbearable. Our children and
grandchildren could end up with a standard of living worse rather than better
than our own. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span><span style="font-family: inherit; line-height: 150%;"><span face="Arial, sans-serif">The
US dollar’s overvaluation relative to an exchange rate that would allow
Americans to earn as much producing exports as they spend on imports was
estimated by </span><span face="Arial, sans-serif"><a href="https://prosperousamerica.org/new-study-global-currency-misalignment-challenges-us-reindustrialization-efforts-u-s-dollar-17-overvalued-while-chinese-yuan-japanese-yen-euro-22-40-and-27-undervalued-against-dollar-respective/">Ferry</a></span><span face="Arial, sans-serif"> of CPA at nearly 17 percent
based on data ending in 2021. Between January and September of 2022, the dollar
appreciated by another 10 percent, bringing total dollar overvaluation to
somewhere between 25 and 30 percent</span>.<a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&amp;A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftn2" name="_ftnref2" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference">[2]</span><!--[endif]--></span></a>
<o:p></o:p></span></span></p>
<div style="line-height: 150%; text-align: left;"><span style="line-height: 150%;"><span style="font-family: inherit;">The dollar has become seriously
overvalued because the global demand for dollars and dollar-based assets such
as stocks, bonds, and real estate exceeds the supply for many reasons. For
example:</span></span></div>
<p class="MsoListParagraph" style="line-height: 150%; margin-right: 0.3in; mso-list: l2 level1 lfo1; text-indent: -0.25in;"></p><ul style="text-align: left;"><li><span><span style="font-family: inherit; line-height: 150%;">the
dollar is by far the most widely used currency for international trade and for
holding international reserves; <o:p></o:p></span></span></li><li><span><span style="font-family: inherit; line-height: 150%;">America’s
dollar-based financial markets are among the deepest, broadest, and safest in
the world; <o:p></o:p></span></span></li><li><span><span style="font-family: inherit; line-height: 150%;">dollars
and dollar-based assets are regarded as a “safe-haven” where foreign investors
like to hold their money during the world's frequent crises.<o:p></o:p></span></span></li></ul><span style="font-family: inherit;"><!--[if !supportLists]--></span><p></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit; line-height: 150%; mso-bidi-font-family: Arial;">Recent actions by the Federal
Reserve to fight inflation have aggravated the dollar’s sharp overvaluation:<o:p></o:p></span></p>
<p class="MsoListParagraph" style="line-height: 150%; margin-left: 9.2pt; text-indent: -0.25in;"></p><ul style="text-align: left;"><li><span><span style="font-family: inherit; line-height: 150%;"> While
the Fed has been raising interest rates rapidly to fight inflation, other
central banks have been keeping their interest rates low or even negative to
stimulate economic growth. Consequently, the spreads between returns in America
and those abroad have widened to levels that generate trillions of dollars per
year of inbound carry trade by speculators seeking to exploit America’s higher
interest rates.<o:p></o:p></span></span></li><li><span><span style="font-family: inherit; line-height: 150%;">Investors
and speculators assume that the Fed and Treasury will continue to allow the dollar
to appreciate. Unfortunately, this assumption is rational given America’s long-standing
belief in a so-called “strong dollar" -- a belief that continues despite the common anger of Americans about the "undervaluation" of foreign currencies like the Chinese renminbi and the Japanese yen. (The dollar's overvaluation is simply the inverse of the collective undervaluation of the currencies of its trading partners.)</span></span></li><li><span><span style="font-family: inherit; line-height: 150%;">Anticipation of continued dollar appreciation reinforces incentives such as the widening yield gap for foreign
speculators to bring even more foreign capital into the US. Unless the urgently
needed countermeasures proposed below are implemented, the dollar will continue
to appreciate, making made-in-America goods even less competitive than they are
today, and this will definitely increase the risk of a recession.<a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&amp;A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftn3" name="_ftnref3" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference">[3]</span><!--[endif]--></span></a><o:p></o:p></span></span></li><li><span><span style="font-family: inherit; line-height: 150%;">Today’s
massive inflows of foreign capital are destroying the effectiveness of Fed
measures designed to raise interest rates. For example, raising the FFR
will <u>not</u> raise other domestic interest rates such as the prime rate by as much
as they normally would because banks are hesitant to raise rates when they are
having trouble “selling” the excessive volumes of credit already on hand because of such
large foreign capital inflows – a major problem during the housing bubble of
the mid-aughties for example. <o:p></o:p></span></span></li><li><span><span style="font-family: inherit; line-height: 150%;">By
increasing the availability of credit in the banking system, the foreign
inflows are partially or largely offsetting the Fed’s quantitative tightening
efforts.<o:p></o:p></span></span></li><li><span style="font-family: inherit;"><span style="line-height: 150%;"><span style="font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><span style="line-height: 150%;">Despite
the ruinous impact of excessive inflows of speculative foreign capital on
Americas’ international competitiveness, economic growth, jobs, budget
deficits, and the national debt, the Fed and the Treasury have made <u>no effort</u>
to moderate inflows of foreign capital or to keep them at levels consistent
with a value for the US dollar that would balance America’s international trade, or to keep them consistent with a supply of credit in
America that would be consistent with stable prices.<o:p></o:p></span></span></li><li><span style="font-family: inherit;"><span style="line-height: 150%;"><span style="font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><span style="line-height: 150%;">Because
of the negative impacts of excessive inflows of foreign capital triggered by
rising spreads between foreign and US financial markets, the Fed must keep
raising interest rates and keep selling the bonds it holds on its balance
sheet to pull money out of the economy. This makes the situation even worse on
all fronts.<o:p></o:p></span></span></li><li><span><span style="font-family: inherit; line-height: 150%;">For
example, the more the Fed raises interest rates and tightens credit
availability, the greater will be the risk of a recession. As we saw during the
Great Financial Crisis of 2007-2009, for example, such recessions can cause far
more harm to Americans -- from the very rich to the very poor -- than a
percent or two of additional inflation would have caused.<o:p></o:p></span></span></li></ul><span style="font-family: inherit;"><!--[if !supportLists]--></span><p></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit;"><u><span style="line-height: 150%;"><b>Lessons Learned</b></span></u><span style="line-height: 150%;">: The Fed
clearly needs to raise interest rates to control inflation, but it also needs
to moderate the inflows of foreign capital that make its efforts to control
inflation less effective and that increase the risk of causing another recession. Otherwise, the Fed will continue to cause the inflation it seeks to reduce. </span></span></p><p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit;"><span style="line-height: 150%;">Widening cross-border spreads between foreign and US interest rates plus
anticipated appreciation of the dollar are the primary factors stimulating excessive inflows of foreign-source money. Therefore the solution lies in breaking the link between rising
interest rates in US markets (which are driven by increases in the Fed Funds Rates), and the
interest rates that foreign investors can earn in America’s financial markets. </span></span></p><p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit;"><span style="line-height: 150%;">In short, the Fed needs to break the link between increases in the Fed Funds
Rate and increases in cross-border interest rate spreads. <o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="line-height: 150%;"><span style="font-family: inherit;">If the Fed can break this link, it
will simultaneously put an end to foreign speculators' anticipation of further dollar appreciation, which is the other factor that drives excessive inflows of foreign money. The end result
would be a much-reduced risks of a recession in the short term, and
much-enhanced prospects for excellent competitiveness, output growth, job
creation, reduced government deficits, and reduced public debt in the longer
term.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="line-height: 150%;"><span style="font-family: inherit;"><b>The Need
for Immediate Action</b><o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="line-height: 150%;"><span style="font-family: inherit;">The urgency of reducing excess
foreign capital inflows could not be clearer:</span></span></p><ul style="text-align: left;"><li><span><span style="font-family: inherit; line-height: 150%;">Most recessions in the past
fifty years have been triggered by increases in the FFR totaling only
200-400 basis points from the previous trough. The Fed has already raised the
upper limit of the Fed Funds Rate this year from 0.25 percent in March to 4.5 percent in
December– a 425 basis point
increase in barely six months. Thus we are already into the range where FFR
increases are very likely to cause another recession.<o:p></o:p></span></span></li></ul><b style="font-family: inherit;">Proposed Policy Action</b><br />
<p class="MsoListParagraph" style="line-height: 150%; margin-bottom: 6.0pt; margin-left: 0in; margin-right: .3in; margin-top: 0in; margin: 0in 0.3in 6pt 0in;"><span style="line-height: 150%;"><span style="font-family: inherit;">Corrective action is urgently
needed. The Fed should introduce a Fed Inflation Reduction Excise (FIRE) charge that </span></span><span style="font-family: inherit;">would act
like an import tax on the unwanted foreign capital inflows that damage and distort the American economy. The charge would initially
be set at a rate equal to today’s interest rate spread between the Fed Funds
Rate and the average policy rate of the central banks of countries contributing
most to the current flows of capital into the United States (e.g. Great
Britain, the Eurozone, and Japan). This would eliminate the cross-border
interest rate spread that currently draws trillions of dollars of largely
speculative capital into America from abroad each year.</span><a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&amp;A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftn4" name="_ftnref4" style="font-family: inherit;" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference">[4]</span></span></a></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit;"><i><span style="line-height: 150%;"><b>Administration</b>: </span></i><span style="line-height: 150%;">When the FOMC
decides that domestic inflation is getting out of hand and needs to be
controlled, the Fed staff would do the same analysis that they currently do to
support decisions of the Federal Open Market Committee (FOMC), and the FOMC
would continue to use its traditional interest rate and QT tools in the
traditional manner.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="line-height: 150%;"><span style="font-family: inherit;">However, once the FOMC has decided
to increase the lower and upper bounds of the Fed Funds Rate, it would
simultaneously announce that the FIRE rate has been raised
by the amount of the increase in the Fed Funds Rate. This simple announcement,
with no additional analytical work by Fed staff, would prevent creating or increasing a
cross-country spread that would otherwise attract more foreign money into
America’s already sated capital markets. And by doing so, the FIRE would greatly
reduce upward pressures on the dollar’s exchange rate, thereby increasing the
competitiveness of American industry and all the benefits that will flow therefrom.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit;"><i><span style="line-height: 150%;"><b>Collection</b></span></i><span style="line-height: 150%;">: How
would the FIRE be collected, you may ask. Very simple. Virtually all foreign
capital flowing into the United States comes via an international payments
system such as SWIFT and is received by a correspondent bank located in the
United States. Such banks, which must already file certain reports to the US
Treasury, would simply deduct the amount of the FIRE from the
incoming payment order, send it electronically to the US Treasury as part of
the transaction process, and deposit the remainder of the funds received in a
US bank account of the designated recipient.<a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&amp;A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftn5" name="_ftnref5" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference">[5]</span><!--[endif]--></span></a>
<o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit;"><i><span style="line-height: 150%;"><b>Summary</b></span></i><span style="line-height: 150%;">: </span><span style="line-height: 150%;">By eliminating today’s incentives to dump unwanted, damaging foreign capital into
America’s financial markets, FCL would make the Federal Reserve’s Fed Funds
Rate (FFR) and Quantitative Tightening (QT) far more effective and would reduce
or eliminate the overvaluation of the dollar that (a) destroys US growth, jobs,
and factories, (b) increases government deficits, public debt, trade deficits,
and debt to foreigners, and (c) increases the risk that controlling inflation
will both cause a recession and make it harder for America to recover from a
recession. <o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="line-height: 150%;"><span style="font-family: inherit;">Greater effectiveness of the FFR
and QT would reduce the need to keep raising the Fed Funds Rate or to sell even
more of the Fed’s balance sheet assets to soak
up more of the excess money in America's financial markets. By helping move the dollar to a more fully competitive,
trade-balancing rate, the FIRE would gradually allow made-in-America goods to become
fully competitive domestically against imports and as exports to foreign
markets, thereby helping to eliminate US trade deficits and triggering new
investments that increase US productivity,
<o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="line-height: 150%;"><span style="font-family: inherit;">In short, the Fed Inflation Reduction Excise charge, which would require no additional analysis by Fed staff, would significantly increase
the Fed’s ability to fulfill its Dual Mandate from Congress – keeping prices
stable by fighting inflation, and assuring maximum feasible domestic employment. At the
same time, FIRE would greatly reduce the risk of recessions or worse, allow
America to recover more quickly in the event of a recession, and help it attain
the American Dream of steady, sustainable growth with benefits shared by all. <o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit;"><span style="line-height: 150%;"><span>And as a side benefit, the
billions of dollars that would be collected with the FIRE charge could be used to
reduce or eliminate US budget deficits, reduce inflation-generating borrowing to finance these deficits, reduce our national debt, and help finance important
investments in the future of our country </span></span>– all with <u>no</u><b> </b>increase in taxes on Americans<span>.</span></span></p><p class="MsoNormal" style="line-height: 150%;"><span style="font-family: inherit;"><span>In short, with this proposal in place, </span></span><a name="_Hlk116548502"><span style="mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 14.0pt;">the Fed could Fight Inflation and Recessions Efficiently with the </span></a>Fed Inflation Reduction Excise -- otherwise known as fighting fire with fire to save America.</p>
<div style="margin-bottom: 0in; text-align: left;"><span style="font-family: inherit;">John R. Hansen<br /><span style="mso-bidi-font-family: Arial;">December 28, 2022</span></span></div><div style="margin-bottom: 0in; text-align: left;"><span style="font-family: inherit; mso-bidi-font-family: Arial;"><br /></span></div><div style="margin-bottom: 0in; text-align: left;"><span style="mso-bidi-font-family: Arial;"><p class="MsoNormal" style="line-height: 150%;"><span style="line-height: 150%; mso-bidi-font-family: Arial;"><span style="font-family: inherit;"><span style="font-family: inherit;">Note: The <a name="_Hlk116548502"><span style="mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 14.0pt;">Fed Inflation Reduction Excise (FIRE)</span></a> </span>system was designed on the basis of solid statistical data that help explain why
the Fed’s current tools for fighting inflation involve a serious risk of
causing recessions. These data will soon be available in chart form with interpretive
commentary.</span><o:p style="font-size: 12pt;"></o:p></span></p><p class="MsoNormal" style="font-size: 12pt; line-height: 150%; text-align: left;"><span style="font-size: 12pt; line-height: 150%; mso-bidi-font-family: Arial;"><span style="background-color: white; color: white; font-size: medium; text-align: center;"> </span><span style="background-color: #2b00fe; color: white; font-size: medium; text-align: center;">America Needs a Competitive Dollar - Now!</span></span></p></span></div>
<div><!--[if !supportFootnotes]--><span style="font-size: xx-small;"><br clear="all" />
</span><hr align="left" size="1" width="33%" />
<!--[endif]-->
<div id="ftn1">
<p class="MsoFootnoteText"><span style="font-size: xx-small;"><a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&amp;A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftnref1" name="_ftn1" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span face="Arial, sans-serif">[1]</span></span><!--[endif]--></span></a>
It is no coincidence that America and Britain also have the largest financial
sectors in the world. Both have developed a “comparative advantage” in
financial trade that seriously disadvantages their real sectors – those that
produce exports. This is a special form of the infamous “Dutch Disease” that
developed when the Netherlands began exporting so much oil that its traditional
industries could no longer compete internationally.<o:p></o:p></span></p>
</div>
<div id="ftn2">
<p class="MsoFootnoteText"><span style="font-size: xx-small;"><a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&amp;A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftnref2" name="_ftn2" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span face="Arial, sans-serif">[2]</span></span><!--[endif]--></span></a> </span><span style="font-family: inherit; font-size: xx-small;">Note that the
estimates here of the dollar’s overvaluation reflect average “trade-weighted” movements
in the exchange rates of the dollar against the currencies of America’s major
trading partners. Under- and over-valuation by individual trading partners can
vary widely from these averages.</span></p><p class="MsoNormal"><span style="font-size: 7.5pt;"><o:p></o:p></span></p>
</div>
<div id="ftn3">
<p class="MsoFootnoteText"><span style="font-size: xx-small;"><a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&amp;A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftnref3" name="_ftn3" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span face="Arial, sans-serif">[3]</span></span><!--[endif]--></span></a>
T<span style="font-family: inherit;">he focus of foreign speculators on cross-border spreads and on expectations of
further dollar appreciation are explained in more detail by literature on
“uncovered interest rate parity.” (See, for example, Mishkin, 2006)</span></span><span style="font-family: inherit; font-size: xx-small;"><o:p></o:p></span></p>
</div>
<div id="ftn4">
<p class="MsoFootnoteText"><span style="font-family: inherit; font-size: xx-small;"><a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&amp;A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftnref4" name="_ftn4" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span face="Arial, sans-serif">[4]</span></span><!--[endif]--></span></a>
</span><span style="font-family: inherit; font-size: xx-small;"><span>Some may worry that discouraging inflows of
foreign capital will reduce the availability and increase the cost of the capital
needed to increase the productivity of American manufacturing. However, most
carry trade flows are strictly financial, largely speculative, and usually
short-term. Such money is generally not used to enhance America’s physical
production capacity or to increase its real productivity. Furthermore, once the
dollar has moved to levels that restore the international competitiveness of
the US dollar, America will be able to mobilize more than enough capital
domestically to finance a major expansion in America’s productive capacity by
shifting funds from speculative activities to real investments in real projects. Also, as the Foreign Capital Levy is very small compared to the profits
that that they will make because making goods in America is once again profitable, </span><b><a href="http://abcdnow.blogspot.com/2017/01/foreign-direct-investors-will-love.html"><span>foreign direct investment in America
will surge</span></a><span>. </span></b><o:p></o:p></span></p>
</div>
<div id="ftn5">
<p class="MsoFootnoteText"><span style="font-family: inherit; font-size: xx-small;"><a href="file:///C:/OneDriveOffLine/__Action%20Writing/MAC%20FAQs/Notes/653;%20Q&amp;A;%20JRH;%20Foreign%20Capital%20Levy%20(FOCAL).docx#_ftnref5" name="_ftn5" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span face="Arial, sans-serif">[5</span><span face="Arial, sans-serif"><span>]</span></span></span><!--[endif]--></span></a><span>
The Fed’s right to establish the FIRE needs to be confirmed. Consistent with
international best practice, the Fed is an independent central bank, but it is ultimately accountable to the public and to Congress. For reasons noted in
this paper, the FIRE is essential to the Fed’s ability to carry out its dual
mandate from Congress and thus the FIRE should be within the Fed’s power to
implement. However, should any question arise, the President, under powers
granted by the International Economic Emergency Powers Act (IEEPA) could issue
an executive order allowing the Federal Reserve to establish the FIRE system, and instructing the US Treasury to collect the levies as
part of its ordinary business.</span></span><o:p></o:p></p>
</div>
</div></div><div style="text-align: center;"><span style="background-color: #2b00fe;"><span style="color: white;">America Needs a Competitive Dollar - Now</span>!</span></div>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0Alexandria, VA, USA38.8048355 -77.0469214-40.045491869055176 142.3280786 90 63.5780786tag:blogger.com,1999:blog-2819083306639305649.post-74950856672109932332022-04-06T22:47:00.090-04:002022-04-07T16:49:55.252-04:00ABBA - American Built & Buy America: Why the MAC is Required for Success<p class="MsoNormal" style="margin-bottom: 3pt;"><span><a name="_Hlk18525084"></a><a name="_Hlk28871857"><i><span>Question:</span></i></a><span> Why have decades of "Buy American" campaigns
failed to eliminate our trade deficits and restore the dynamism of American
manufacturing?</span><o:p></o:p></span></p>
<p class="MsoNormal" style="margin-bottom: 3pt;"><span><i><u><span>Causes</span></u></i><i><span> of Buy American's Failure to End US Trade Deficits</span></i><span> <o:p></o:p></span></span></p>
<p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .4in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.4in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i><span style="mso-bidi-font-weight: bold;">Americans tend not to</span></i><span> <i>Buy American</i>
unless Made-in- American products exist at prices that are reasonably competitive with
imports. <o:p></o:p></span></span></p>
<p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .4in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.4in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i><span style="mso-bidi-font-weight: bold;">American producers generally won't</span></i><span> "<i>Make in America" </i>if Americans won't "<i>Buy American</i>."</span><span><o:p></o:p></span></span></p>
<p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .4in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.4in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i><span>Artificially cheap
imports and over-priced </span></i><i><span style="mso-bidi-font-weight: bold;">American products</span></i><span> undermine
Buy-American campaigns -- even for very patriotic Americans. </span><span><o:p></o:p></span></span></p>
<p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .4in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.4in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i style="text-indent: -19.2px;"><span>Distorted exchange rates</span></i><span style="text-indent: -19.2px;"> between the American dollar and foreign currencies make foreign currencies too cheap and the dollar too expensive</span><span style="text-indent: -19.2px;">.</span></span></p><p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .4in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.4in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[endif]--></span></p>
<p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .4in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.4in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i style="text-indent: -0.2in;"><span>Excessive global demand for dollars</span></i><span style="text-indent: -0.2in;"> is the main cause of exchange rate distortions</span></span></p>
<p class="MsoNormal" style="margin-bottom: 3pt;"><span><i><u><span>Costs</span></u></i><i><span> of Trade Deficits</span></i><span> <o:p></o:p></span></span></p>
<p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .4in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.4in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i><span>Ballooning trade
deficits. </span></i><span>US
merchandise trade deficits increased by </span><a href="https://apps.bea.fov/iTable/iTable.cfm?reqid=19&step=2#panel-3"><span style="mso-bidi-font-family: "Times New Roman";">43 percent</span></a><span>
between 2016 and 2021 – clear proof of seriously distorted exchange rates.<i><o:p></o:p></i></span></span></p>
<p class="MsoNormal" style="margin-bottom: 0in; margin-left: .4in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 0.4in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i><span>"Hidden
costs" of imports are very large:<o:p></o:p></span></i></span></p>
<p class="MsoNormal" style="margin-bottom: 0in; margin-left: .6in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 0.6in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i><span>Financial </span></i><span>(firms)<i><o:p></o:p></i></span></span></p>
<p class="MsoNormal" style="margin-bottom: 0in; margin-left: 58.5pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 58.5pt; mso-list: l0 level1 lfo1; text-indent: -13.5pt;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><span>Capacity underutilization, higher unit costs,
lower profits, less investment & productivity.<i><o:p></o:p></i></span></span></p>
<p class="MsoNormal" style="margin-bottom: 0in; margin-left: 58.5pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 58.5pt; mso-list: l0 level1 lfo1; text-indent: -13.5pt;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><a href="https://reshorenow.org/why-reshore/"><span style="color: #0070c0; mso-bidi-font-family: "Times New Roman";">Supply
chain costs</span></a><span>
(transportation, interruptions and delays, IP theft, etc.).<i><o:p></o:p></i></span></span></p>
<p class="MsoNormal" style="margin-bottom: 0in; margin-left: .6in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 0.6in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i><span>Economic </span></i><span>(economy)<i><o:p></o:p></i></span></span></p>
<p class="MsoNormal" style="margin-bottom: 0in; margin-left: 58.5pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 58.5pt; mso-list: l0 level1 lfo1; text-indent: -13.5pt;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><span>Lost factories, supply chain dependency, slower
growth.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="margin-bottom: 0in; margin-left: 58.5pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 58.5pt; mso-list: l0 level1 lfo1; text-indent: -13.5pt;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><span>Financial instability & crashes, government
budget deficits, inflation, interest costs.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="margin-bottom: 0in; margin-left: 58.5pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 58.5pt; mso-list: l0 level1 lfo1; text-indent: -13.5pt;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><span>Debt & asset losses = theft from future generations
(</span><a href="https://apps.bea.gov/iTable/iTable.cfm?reqid=62&step=6&isuri=1&tablelist=143&product=5&filter_--5=&filter_--4=&filter_--3=0&thetableflexibleiipita=1&filter_--2=0&filter_--1=1,2,3,4"><span style="mso-bidi-font-family: "Times New Roman";">net foreign debt up 90% in 5 yrs</span></a><span>). <o:p></o:p></span></span></p>
<p class="MsoNormal" style="margin-bottom: 0in; margin-left: .6in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 0.6in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i><span>Socio-Political<o:p></o:p></span></i></span></p>
<p class="MsoNormal" style="margin-bottom: 0in; margin-left: 58.5pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 58.5pt; mso-list: l0 level1 lfo1; text-indent: -13.5pt;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><span>Lost jobs, family income, self-respect, and hope.
Addiction and "</span><a href="https://deathsofdespair.princeton.edu/"><span style="mso-bidi-font-family: "Times New Roman";">Deaths of
Despair</span></a><span>;"<o:p></o:p></span></span></p>
<p class="MsoNormal" style="margin-bottom: 0in; margin-left: 58.5pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 58.5pt; mso-list: l0 level1 lfo1; text-indent: -13.5pt;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><a href="https://www.brookings.edu/bpea-articles/on-the-persistence-of-the-china-shock/"><span style="mso-bidi-font-family: "Times New Roman";">Destroyed communities</span></a><span> in Rust Belt and rural areas; loss of </span><a href="https://media.defense.gov/2022/Feb/24/2002944158/-1/-1/1/DOD-EO-14017-REPORT-SECURING-DEFENSE-CRITICAL-SUPPLY-CHAINS.PDF"><span style="mso-bidi-font-family: "Times New Roman";">national security</span></a><span>;</span></span></p><p class="MsoNormal" style="margin-bottom: 0in; margin-left: 58.5pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 58.5pt; mso-list: l0 level1 lfo1; text-indent: -13.5pt;"><span><span style="font-family: Symbol; text-indent: -13.5pt;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><span style="text-indent: -13.5pt;">Increased economic and political polarization (</span><a href="https://eml.berkeley.edu/~saez/piketty-saezOUP04US.pdf" style="text-indent: -13.5pt;"><span style="mso-bidi-font-family: "Times New Roman";">income distribution</span></a><span style="text-indent: -13.5pt;">, class wars).</span></span></p>
<p class="MsoNormal" style="margin-bottom: 4pt;"><span><i><u><span>Cures</span></u></i><i><span> for US Trade Deficits </span></i><span style="mso-bidi-font-weight: bold;">– Role of the MAC</span><span><o:p></o:p></span></span></p>
<p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .4in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.4in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i><span>Exchange rates</span></i><span> between the dollar and foreign currencies must
be moved to levels that will make our goods strongly competitive with those
from China and other countries. <o:p></o:p></span></span></p>
<p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .4in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.4in; mso-list: l0 level1 lfo1; text-indent: -0.2in;"><span><!--[if !supportLists]--><span style="font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><span>The <i>Market
Access Charge (MAC)</i> is the best way to do this. It is a small charge
<i>paid only by those from abroad seeking
to exploit America's financial markets</i>. It will:<o:p></o:p></span></span></p>
<p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .6in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.6in; mso-list: l0 level1 lfo1; text-indent: -16.2pt;"><span><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-bidi-font-style: italic; mso-bidi-font-weight: bold; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i><span>Gradually reduce
excessive global demand for US dollars, </span></i><span>allowing the dollar's exchange
rates with foreign currencies to move towards trade-balancing exchange rates and,
being linked to the US trade deficit's size, <i>will keep US trade balanced indefinitely</i>.</span><i><span style="mso-bidi-font-weight: bold;"><o:p></o:p></span></i></span></p>
<p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .6in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.6in; mso-list: l0 level1 lfo1; text-indent: -16.2pt;"><span><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-bidi-font-style: italic; mso-bidi-font-weight: bold; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i><span style="mso-bidi-font-weight: bold;">Generate $300-500 billion of new government revenues per year</span></i><span>, paid by foreigners. This money can be used for
priority programs such as <i>improving
infrastructure, strengthening national defense, and reducing the budget deficit.<o:p></o:p></i></span></span></p>
<p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .6in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.6in; mso-list: l0 level1 lfo1; text-indent: -16.2pt;"><span><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-bidi-font-style: italic; mso-bidi-font-weight: bold; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><i><span style="mso-bidi-font-weight: bold;">Apply equally to all monetary inflows, </span></i><span>thereby minimizing the risk of evasion, retaliation, and distortions
while maximizing the MAC's contribution to America's competitiveness.<i><o:p></o:p></i></span></span></p>
<p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .2in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.2in;"><span><span>Success</span><span> of <u>American Built</u> & <u>Buy American</u> initiatives depends on establishing
fair, trade-balancing exchange rates between the American dollar and foreign
currencies.</span></span></p><p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .2in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.2in;"><span>With the MAC, Americans will Buy American and Make in America because it makes sense -- financially as well as patriotically.</span></p><p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .2in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.2in;"><span style="font-size: medium;"><br /></span></p><p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .2in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.2in;"><span style="font-size: medium;"><span></span></span></p><p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .2in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.2in; text-align: center;"><span style="background-color: #2b00fe; color: white; font-size: medium;">America Needs a Competitive Dollar - Now!</span></p><p class="MsoNormal" style="margin-bottom: 3.0pt; margin-left: .2in; margin-right: 0in; margin-top: 0in; margin: 0in 0in 3pt 0.2in;"><br /></p>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0Washington, DC, USA38.9071923 -77.036870719.990062051166507 -112.19312069999998 57.824322548833493 -41.8806207tag:blogger.com,1999:blog-2819083306639305649.post-10454624167205429712022-03-19T12:44:00.009-04:002022-03-19T12:53:33.172-04:00Can the Market Access Charge (MAC) Make the Fed Funds Rate (FFR) More Effective? <div style="text-align: center;"><p class="MsoNormal" style="background: white; margin-bottom: 3.75pt; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 1pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">eet</span><i style="text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Background</span></i></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">When
inflation threatens America’s stability and economic growth, the Fed
raises the Federal Funds Rate (FFR). This reduces domestic
demand for borrowed funds, and that reduces the growth of domestic
money in circulation and thus the rate of inflation.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">This
approach worked reasonably well from the 1930s when the FFR became an
official policy tool of the Fed until the Crash of 2008 when FFR
targeting had to be augmented by quantitative easing (QE) because it would
be difficult if not impossible to move the FFR below zero.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">Why
just “reasonably well“? Although few analysts have focused on the fact,
the Achilles Heel of the Fed Funds Rate system became exposed in the
1970s during the OPEC Oil Crises. During the 1970s and early 1980’s,
oil prices rose from about $3/bbl to well over $30/bbl,
forcing Americans to pay billions of additional dollars to Gulf
State oil exporters. At the time, the Gulf States were relatively small, poor,
and served by rather primitive domestic financial systems.
The tiny upper crust that controlled the oil revenues could
not or would not spend all this new money. Interest rates
were near zero because of limited demand, excessive supply, and
Islamic limits on charging interest.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">No
surprise, then, that the Gulf States sent billions of their excess
petro-dollars back to America where AAA corporate bonds were paying 8-10
percent. This massive infusion of dollars back into the American economy
immediately triggered inflation, which rose from a minimum of about 1
percent in the early 1970s to nearly10 percent by the end of the decade.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">Paul
Volcker became Chair of the Federal Reserve in August 1979 under President
Jimmy Carter and, desperate to control America’s run-away
inflation, accelerated the increases in the FFR.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">The
Achilles Heel of using the Fed Funds Rate to control inflation suddenly became
obvious – at least in retrospect. The FFR, which today is effectively
zero, jumped from about 5 percent in 1976 to over 16
percent in 1980 – and peaked at over 20 percent on several occasions
in late 1980 and early 1981. The close-to-zero rates in the dollar-flush
Gulf States, and the overnight Fed Funds Rate that sometimes exceeded 20
percent created a massive opportunity for interest rate arbitrage.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">At this
point, the real problem of trying to control inflation with nothing but the Fed
Funds Rate became obvious – at least in hindsight. Even though a major share of
the money returning was in dollars, the flood of carry-trade
money coming into the US economy created a tremendous demand for
dollar-based assets by pushing up the prices of stocks and other US
assets. As a result, the trade-weighted exchange rate for the dollar
(TWEXBMTH) as calculated by the Federal Reserve roughly doubled between
1980 and 1985. This drove the US current account as a share of GDP to
plunge from a balanced position in 1980 to a deficit exceeding 3 percent of GDP
by 1985.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">A three
percent deficit, commonly regarded by the IMF and the World Bank
as the red line between sustainability and ultimate disaster, shook
the US administration so deeply that in 1985 it used
the still-hegemonic power America enjoyed at the time as the
world’s defense against the Red Threat to force Japan and Germany to
agree, in the “Plaza Accord,” to drive their currencies up by
about 50 percent against the dollar by using their dollar reserves (from
trade surpluses and Marshall Plan grants). In effect, the US forced a 50
percent devaluation of the dollar against the yen and the deutschmark.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Lesson for Today</span></i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">The Fed
Funds Rate worked reasonably well when international trade in financial assets
was a mere footnote to trade in real goods and services, Today, however, using
the Fed Funds Rate to fight inflation can cause serious problems because
resulting increases in interest rate differentials encourage
investors from abroad to bring their money into the US where
interest rates are higher and rising. This extra demand for dollars and
dollar-based assets overvalues the dollar, driving US trade
deficits – a process summarized in Annex A.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">MAC as the Solution</span></i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">All of
these problems associated with raising the Fed Funds Rate to control inflation
could be avoided by introducing a policy that would moderate the flow of
foreign-source money into US financial markets when carry-trade is triggered by
raising US interest rates relative to those abroad.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">The
market access charge (MAC) is the needed policy instrument. The MAC,
a small variable tax on incoming capital flows, would rise when US trade deficits
rise and fall when trade deficits fall. This would keep the inflow of
foreign capital and upward pressure on the dollar‘s value consistent
with a dollar exchange rate that is consistent with
balanced trade.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">If a
rising Fed Funds Rate began to trigger excessive inflows of foreign
money and an overvalued exchange rate, the rising trade
deficits would trigger the MAC. By reducing the spread
between US and foreign market yields, the MAC would make carry
trade and interest rate arbitrage less attractive. Inflows would
shrink, allowing the dollar to return to trade-balancing levels.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Farewell Squanderville</span></i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">In his
classic article in Fortune entitled <a href="http://www.berkshirehathaway.com/letters/growing.pdf%5d"><span style="color: #1359a0;">America’s Growing Trade Deficit Is Selling The Nation Out
From Under Us</span></a>, Warren Buffett used a parable of two islands,
Thriftville and Squanderville, to highlight the dangers of constantly spending
more on imports that we earn with exports. As you have probably guessed, the
people of Squanderville mortgaged and then sold all of
their land and other productive assets to Thriftville to pay for their trade
deficits. Forever after, residents of Squanderville served as
under-paid workers beholden for their survival to Thriftville.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">America
clearly was not in that position in 2003 when Buffett wrote his
thought-provoking piece, nor is it today, but it is worth noting that
America’s net debt to foreigners as a share of GDP has risen from 20
percent of GDP when Buffett wrote his article to about 70 percent last year,
more than tripling in less than 20 years – while increasing by a factor of
six in absolute dollars. The recent underlying growth rates are even more
worrisome. From 2017 to 2020 our net external debt grew by 22.5% per year while
our GDP grew at only one-tenth that rate – 2.4% per year.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">These
trends are clearly unsustainable. If both indicators continued to grow at the
same rate, our net debt to foreigners would exceed 100% of GDP by
2023. It is impossible to say at what point our economy would collapse because
of excessive net debt to foreigners, but it is worth about the
following example: (a) The US pays 5 percent annual
interest on foreign borrowings; (b) its outstanding debt is 100
percent of GDP (which could easily happen within the next few years), and
(c) GDP growth averages about 2.5% per year – somewhat faster than
the actual average from 2016-2019. Under these conditions, America’s entire
annual growth would cover only half of the debt service owed. The rest would
have to be paid by (a) taking on more Ponzi-type debt, (b) reducing living
standards below levels of previous years to save the additional 2.5% of GDP
required to service foreign debt, and/or by selling off America’s assets, both
financial and real. In short, continuing on our present
path means stealing from our children.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">But
America does not have to go down this fateful road. If the Fed adds the
MAC to its monetary policy toolkit to moderate foreign demand for dollars and
dollar-based asset and if it maintains the Fed Funds Rate to moderate
domestic demand for dollars and dollar-based assets, the dollar will soon move
back to a fully competitive rate that allows Americans to earn as much
producing exports as they spend on imports. At this point, the current
account will be balanced.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">Once
this happens, America’s net debt to foreigners should stop growing, and as GDP
continues to grow – and it will do so at an accelerated rate because
the MAC will stimulate domestic production of additional goods to meet the
additional foreign and domestic demand for made-in-America products, America’s
net debt to foreigners can actually begin to return to more
sustainable levels.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Annex A: Transmission Mechanism: Fed Funds Rate
to Trade Deficits</span></i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 51.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 51pt; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Yield Spread:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> Raising
the Fed Funds Rate increases the average interest rate spread between US and
developed foreign countries.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 51.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 51pt; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Carry Trade:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> This
encourages speculators to borrow at low interest rates in Japan, for example,
and to invest in the US where interest rates are higher.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 51.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 51pt; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Exchange Rate Pressure:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 102.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 102pt; mso-list: l0 level2 lfo1; tab-stops: list 1.0in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Dollar:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> The money borrowed
abroad must usually be sold for dollars before being invested in US assets,
thus increasing the demand for and the price of dollars.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 102.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 102pt; mso-list: l0 level2 lfo1; tab-stops: list 1.0in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Other Currencies:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> The
increased supply of yen to international forex markets, for example, will tend
to push the yen’s value down relative to other currencies.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 102.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 102pt; mso-list: l0 level2 lfo1; tab-stops: list 1.0in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Net Effect:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> The
dollar becomes increasingly overvalued and the US suffers
trade deficits.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 51.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 51pt; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Domestic Money Supply:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 102.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 102pt; mso-list: l0 level2 lfo1; tab-stops: list 1.0in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Increased purchasing power in US:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> When
the US Government borrows from US residents to cover its budget deficits, this
shifts purchasing power from the private to the public sector within America.
However, borrowing from abroad injects additional purchasing
power and thus inflationary pressures into the US economy.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 102.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 102pt; mso-list: l0 level2 lfo1; tab-stops: list 1.0in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Money Multiplier and Reserve
Requirements:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> When the USG disburses the money borrowed from abroad to
pay staff, contractors, suppliers, etc., most recipients get the payments
either as direct transfers to their commercial bank accounts or as checks soon
deposited therein. Such deposits add directly to the money circulating in
America. Even worse, if the fractional reserve requirement is 10%, a million
dollars that is borrowed by selling Treasuries to Japan, for example, and that
is deposited into the US banking system can ultimately inject up to $10 million
of additional spending power – and up to $100 million if the reserve
requirement is only 1%. As of March 26, 2020, the Fed reduced the reserve
requirement to zero. (I don’t know how to calculate that multiplier!)<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 51.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 51pt; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Inflation:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 102.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 102pt; mso-list: l0 level2 lfo1; tab-stops: list 1.0in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">MV=PQ.</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> Because V varies
with the demand for money, this famous equation does not necessarily predict
what will happen to prices if M increases. However, <i>cet. par.</i>, the
money multiplication (</span><span style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: Arial; mso-fareast-font-family: "Times New Roman";">∆</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">Q)
caused by the inflow of foreign capital and its relenting under our fractional
reserve banking systems is likely to increase P if Q does not increase
correspondingly – a very real possibility given today’s supply chain problems.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 51.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 51pt; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Overvalued Dollar:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 102.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 102pt; mso-list: l0 level2 lfo1; tab-stops: list 1.0in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Trade-Weighted Exchange Rate.</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> If
domestic prices (P) increase faster than foreign prices because of such
inflows, the dollar is likely to become further overvalued in real terms at the
current exchange rate because higher domestic prices make imports relatively
cheaper and US exports increasingly too expensive to compete.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; margin-left: 102.0pt; margin-right: 0in; margin-top: 0in; margin: 0in 0in 0in 102pt; mso-list: l0 level2 lfo1; tab-stops: list 1.0in; text-align: left; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Trade Deficits.</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> As
imports increase relative to exports, the trade deficit increases potentially
causing serious damage to economic growth, employment, manufacturing capacity,
financial stability, social and political polarization, and high net debt to
foreign countries.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 0in; text-align: left;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Impossible Trinity: </span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">Augmenting
the FFR with the MAC breaks the Mundell-Flemming “Impossible Trinity” which
states that a country cannot have a fixed exchange rate, an independent
monetary policy, and free international capital movement. With a MAC in place,
a country can have an independent monetary policy using the FFR & QE, a
stable exchange rate that always trends toward balance, and free international
capital flows with no quotas or fixed barriers.<o:p></o:p></span></p>
<p class="MsoNormal"><o:p> </o:p></p></div><div style="text-align: center;"><b><span style="background-color: #2b00fe; color: white;"><br /></span></b></div><div style="text-align: center;"><b><span style="background-color: #2b00fe; color: white;">America Needs a Competitive Dollar - Now!</span></b></div>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-17726395562136650632022-02-16T00:32:00.027-05:002022-03-19T12:46:48.967-04:00Can the Market Access Charge Make the Federal Funds Rate More Effective?<p class="MsoNormal" style="break-after: avoid; mso-outline-level: 1; mso-pagination: widow-orphan lines-together; page-break-after: avoid;"><i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><b>Background</b></span></i></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">When inflation threatens
America’s stability and economic growth, the Fed raises the Federal Funds
Rate (FFR). This reduces domestic demand for borrowed
funds, and that reduces the growth of domestic money in
circulation and thus the rate of inflation.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">This approach worked
reasonably well from the 1930s when the FFR became an official policy
tool of the Fed until the Crash of 2008 when FFR targeting had
to be augmented by quantitative easing (QE) because it would be difficult
if not impossible to move the FFR below zero.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face="Lato, sans-serif" style="color: #1e1e1e;"><span style="font-size: 11.5pt;">Why just “reasonably
well“? Although few analysts have focused on the fact, the Achilles
Heel of the Fed Funds Rate system became exposed in the
1970s during the OPEC Oil Crises. During the 1970s and early 1980’s,
oil prices rose from about $3/</span><span style="font-size: 15.3333px;">bbl.</span><span style="font-size: 11.5pt;"> to well over $30/bbl,
forcing Americans to pay billions of additional dollars to Gulf
State oil exporters. At the time, the Gulf States were relatively small, poor,
and served by rather primitive domestic financial systems.
The tiny upper crust that controlled the oil revenues could
not or would not spend all this new money. Interest rates
were near zero because of limited demand, excessive supply, and
Islamic limits on charging interest.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">No surprise, then, that
the Gulf States sent billions of their excess petro-dollars back to
America where AAA corporate bonds were paying 8-10 percent. This
massive infusion of dollars back into the American economy immediately
triggered inflation, which rose from a minimum of about 1 percent in the
early 1970s to nearly10 percent by the end of the decade.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">Paul Volcker became Chair
of the Federal Reserve in August 1979 under President Jimmy
Carter and, desperate to control America’s run-away
inflation, accelerated the increases in the FFR.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">The Achilles Heel of
using the Fed Funds Rate to control inflation suddenly became obvious – at
least in retrospect. The FFR, which today is effectively
zero, jumped from about 5 percent in 1976 to over 16
percent in 1980 – and peaked at over 20 percent on several
occasions in late 1980 and early 1981. The close-to-zero rates in the
dollar-flush Gulf States, and the overnight Fed Funds Rate that sometimes
exceeded 20 percent created a massive opportunity for interest rate
arbitrage.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">At this point, the real
problem of trying to control inflation with nothing but the Fed Funds Rate
became obvious – at least in hindsight. Even though a major share of the money
returning was in dollars, the flood of carry-trade money coming into
the US economy created a tremendous demand for dollar-based assets by
pushing up the prices of stocks and other US assets. As a result, the
trade-weighted exchange rate for the dollar (TWEXBMTH) as calculated by the
Federal Reserve roughly doubled between 1980 and 1985. This led the
US current account as a share of GDP to plunge from a balanced position in 1980
to a deficit exceeding 3 percent of GDP by 1985.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">A three
percent deficit, commonly regarded by the IMF and the World Bank
as the red line between sustainability and ultimate disaster, shook
the US administration so deeply that in 1985 it used
the still-hegemonic power America enjoyed at the time as the
world’s defense against the Red Threat to force Japan and Germany to
agree, in the “Plaza Accord,”
to drive their currencies up by about 50 percent
against the dollar by using their dollar reserves (from trade surpluses
and Marshall Plan grants). In effect, the US forced a 50
percent devaluation of the dollar against the yen and the deutschmark.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><b>Lesson
for Today</b></span></i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">The Fed Funds Rate worked
reasonably well when international trade in financial assets was a mere
footnote to trade in real goods and services, Today, however, using the Fed
Funds Rate to fight inflation can cause serious problems because
resulting increases in interest rate differentials encourage
investors from abroad to bring their money into the US where
interest rates are higher and rising. This extra demand for dollars and
dollar-based assets overvalues the dollar, driving US trade deficits – a process
summarized in Annex A.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><b>MAC as the Solution</b></span></i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">All of these problems
associated with raising the Fed Funds Rate to control inflation could be
avoided by introducing a policy that would moderate the flow of foreign-source
money into US financial markets when carry-trade is triggered by raising US
interest rates relative to those abroad.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face="Lato, sans-serif" style="color: #1e1e1e;"><span style="font-size: 11.5pt;">The Market Access Charge (</span></span><i><span face="Lato, sans-serif" style="color: #1e1e1e; font-size: 11.5pt;">MAC</span></i><span face="Lato, sans-serif" style="color: #1e1e1e;"><span style="font-size: 11.5pt;">) is the needed policy instrument. The </span></span><i><span face="Lato, sans-serif" style="color: #1e1e1e; font-size: 11.5pt;">MAC</span></i><span face="Lato, sans-serif" style="color: #1e1e1e;"><span style="font-size: 11.5pt;">, a small variable tax
on incoming capital flows, would rise when US trade deficits rise and fall when
trade deficits fall. This would keep the inflow of foreign capital and
upward pressure on the </span><span style="font-size: 15.3333px;">dollar‘</span><span style="font-size: 11.5pt;">s value consistent with a
dollar exchange rate that is consistent with balanced trade.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">If a rising Fed Funds
Rate began to trigger excessive inflows of foreign money and an overvalued
exchange rate, the rising trade deficits would trigger the </span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><i style="color: black; font-size: medium;"><span face="Lato, sans-serif" style="color: #1e1e1e; font-size: 11.5pt;">MAC</span></i>. By reducing the spread between US and foreign
market yields, the </span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><i style="color: black; font-size: medium;"><span face="Lato, sans-serif" style="color: #1e1e1e; font-size: 11.5pt;">MAC </span></i>would make carry
trade and interest rate arbitrage less attractive. Inflows would
shrink, allowing the dollar to return to trade-balancing levels.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><b>Farewell
Squanderville</b></span></i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">In his classic
article in Fortune entitled </span><a href="http://www.berkshirehathaway.com/letters/growing.pdf%5d"><span face="Lato, sans-serif" style="color: #1359a0;"><span style="font-size: 11.5pt;">America’s
Growing Trade Deficit Is Selling </span><span style="font-size: 15.3333px;">the</span><span style="font-size: 11.5pt;"> Nation Out </span><span style="font-size: 15.3333px;">from</span><span style="font-size: 11.5pt;"> Under Us</span></span></a><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">,Warren
Buffett used a parable of two islands, Thriftville and Squanderville, to
highlight the dangers of constantly spending more on imports that we earn with
exports. As you have probably guessed, the people
of Squanderville mortgaged and then sold all of their
land and other productive assets to Thriftville to pay for their trade
deficits. Forever after, residents of Squanderville served as
under-paid workers beholden for their survival to Thriftville.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">America clearly was not
in that position in 2003 when Buffett wrote his thought-provoking piece, nor is
it today, but it is worth noting that America’s net debt to foreigners as
a share of GDP has risen from 20 percent of GDP when Buffett wrote his
article to about 70 percent last year, more than tripling in less than 20
years – while increasing by a factor of six in absolute dollars. The
recent underlying growth rates are even more worrisome. From 2017 to 2020 our
net external debt grew by 22.5% per year while our GDP grew at only one-tenth
that rate – 2.4% per year.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">These trends are clearly
unsustainable. If both indicators continued to grow at the same rate,
our net debt to foreigners would exceed 100% of GDP by 2023. It is
impossible to say at what point our economy would collapse because of excessive
net debt to foreigners, but it is worth thinking about the
following example: <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 27pt; text-indent: -13.5pt;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">(a) The
US pays 5 percent annual interest on foreign borrowings; <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 27pt; text-indent: -13.5pt;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">(b) its
outstanding debt is 100 percent of GDP (which could easily happen
within the next few years), and <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 27pt; text-indent: -13.5pt;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">(c) GDP
growth averages about 2.5% per year – somewhat faster than the actual
average from 2016-2019. <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">Under these conditions,
America’s entire annual growth would cover only half of the debt service owed.
The rest would have to be paid by (a) taking on more Ponzi-type debt, (b) reducing
living standards below levels of previous years to save the additional 2.5% of
GDP required to service foreign debt, and/or by selling off America’s assets,
both financial and real. In short, continuing on our present
path means stealing from our children.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">But America does not have
to go down this fateful road. If the Fed adds the </span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><i style="color: black; font-size: medium;"><span face="Lato, sans-serif" style="color: #1e1e1e; font-size: 11.5pt;">MAC </span></i>to its monetary
policy toolkit to moderate foreign demand for dollars and dollar-based asset
and if it maintains the Fed Funds Rate to moderate domestic demand
for dollars and dollar-based assets, the dollar will soon move back to a fully
competitive rate that allows Americans to earn as much producing exports as
they spend on imports. At this point, the current account will be
balanced.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">Once this happens, America’s
net debt to foreigners should stop growing, and as GDP continues to grow – and
it will do so at an accelerated rate because the <i>MAC </i></span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">will stimulate
domestic production of additional goods to meet the additional foreign and
domestic demand for made-in-America products, America’s net debt to foreigners
can actually begin to return to more sustainable levels.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><b>Annex
A: Transmission Mechanism: Fed Funds Rate to Trade Deficits</b></span></i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0.25in; mso-list: l0 level1 lfo1; tab-stops: list 3.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Yield Spread:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> Raising
the Fed Funds Rate increases the average interest rate spread between US and
developed foreign countries.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0.25in; mso-list: l0 level1 lfo1; tab-stops: list 3.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Carry Trade:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> This
encourages speculators to borrow at low interest rates in Japan, for example,
and to invest in the US where interest rates are higher.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0.25in; mso-list: l0 level1 lfo1; tab-stops: list 3.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><b><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Exchange Rate Pressure:</span></b><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0.5in; mso-list: l0 level2 lfo1; tab-stops: list 6.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Dollar:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> The money borrowed
abroad must usually be sold for dollars before being invested in US assets,
thus increasing the demand for and the price of dollars.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0.5in; mso-list: l0 level2 lfo1; tab-stops: list 6.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Other Currencies:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> The
increased supply of yen to international forex markets, for example, will tend
to push the yen’s value down relative to other currencies.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0.5in; mso-list: l0 level2 lfo1; tab-stops: list 6.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Net Effect:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> The
dollar becomes increasingly overvalued and the US suffers
trade deficits.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0.25in; mso-list: l0 level1 lfo1; tab-stops: list 3.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><b><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Domestic Money Supply:</span></b><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0.5in; mso-list: l0 level2 lfo1; tab-stops: list 6.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><u>Increased purchasing power in US</u>:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> When
the US Government borrows from US residents to cover its budget deficits, this
shifts purchasing power from the private to the public sector within America.
However, borrowing from abroad injects additional purchasing
power and thus inflationary pressures into the US economy.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0.5in; mso-list: l0 level2 lfo1; tab-stops: list 6.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><u>Money Multiplier and Reserve
Requirements</u>:</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> When the USG disburses the money borrowed from abroad to
pay staff, contractors, suppliers, etc., most recipients get the payments
either as direct transfers to their commercial bank accounts or as checks soon
deposited therein. Such deposits add directly to the money circulating in
America. Even worse, if the fractional reserve requirement is 10%, a million
dollars that is borrowed by selling Treasuries to Japan, for example, and that
is deposited into the US banking system can ultimately inject up to $10 million
of additional spending power – and up to $100 million if the reserve
requirement is only 1%. As of March 26, 2020, the Fed reduced the reserve
requirement to zero. (I don’t know how to calculate that multiplier!)<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0in; mso-list: l0 level1 lfo1; tab-stops: list -30.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><b><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Inflation:</span></b><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0.5in; mso-list: l0 level2 lfo1; tab-stops: list 6.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><u>MV=PQ</u>.</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> Because V varies
with the demand for money, this famous equation does not necessarily predict
what will happen to prices if M increases. However, <i>cet. par.</i>, the
money multiplication (</span><span style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: Arial; mso-fareast-font-family: "Times New Roman";">∆</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">Q)
caused by the inflow of foreign capital and its relenting under our fractional
reserve banking systems is likely to increase P if Q does not increase
correspondingly – a very real possibility given today’s supply chain problems.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0in; mso-list: l0 level1 lfo1; tab-stops: list -30.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><b><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Overvalued Dollar:</span></b><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0.5in; mso-list: l0 level2 lfo1; tab-stops: list 6.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><u>Trade-Weighted Exchange Rate</u>.</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> If
domestic prices (P) increase faster than foreign prices because of such
inflows, the dollar is likely to become further overvalued in real terms at the
current exchange rate because higher domestic prices make imports relatively
cheaper and US exports increasingly too expensive to compete.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-left: 0.5in; mso-list: l0 level2 lfo1; tab-stops: list 6.0pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="color: #1e1e1e; font-family: Symbol; font-size: 10pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.5pt; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><u>Trade Deficits</u>.</span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> As
imports increase relative to exports, the trade deficit increases potentially
causing serious damage to economic growth, employment, manufacturing capacity,
financial stability, social and political polarization, and high net debt to
foreign countries.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><b>Impossible
Trinity</b>: </span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">Augmenting the FFR with the </span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><i style="color: black; font-size: medium;"><span face="Lato, sans-serif" style="color: #1e1e1e; font-size: 11.5pt;">MAC</span></i>breaks the Mundell-Fleming
“Impossible Trinity” which states that a country cannot have a fixed exchange
rate, an independent monetary policy, and free international capital movement.
With a </span><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><i style="color: black; font-size: medium;"><span face="Lato, sans-serif" style="color: #1e1e1e; font-size: 11.5pt;">MAC</span></i>in place, a country can have an independent monetary policy using
the FFR & QE, a stable exchange rate that always trends toward balance, and
free international capital flows with no quotas or fixed barriers.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"> </span><i><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">About
the Author</span></i></p>
<p class="MsoNormal" style="background: white;"><span face=""Lato",sans-serif" style="color: #1e1e1e; font-size: 11.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";">Dr. John R. Hansen is a
member of the CPA Advisory Board. A former Economic Adviser at the World Bank,
he has four decades of first-hand experience in countries around the world with
global trade. Now “retired,” he has developed a fundamentally new global
monetary mechanism that will balance America’s international trade, restore
thousands of American factories to profitable operation, put millions of
Americans back to work at well-paying jobs, halt America’s growing dependence
on imported goods from countries like China, and start reducing America’s heavy burden of debt to foreign countries, debt that will otherwise burden our children and
grandchildren. This revolutionary mechanism, which is fully legal under
international and US law, will work without illegal protectionist trade
measures because it ties exchange rates to balanced trade, not to the
traditional failed anchors such as piles of precious metals like gold or to the
workings of imaginary “perfectly functioning” markets.</span></p>
<p class="MsoNormal" style="text-align: center;"><span style="background-color: #2b00fe; color: white;">America Needs a Competitive Dollar - Now!<br /></span></p>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-90715334441662448332022-02-15T16:11:00.002-05:002022-03-19T12:37:07.192-04:00Will the Market Access Charge Cause Inflation?<div><p class="MsoNormal"><a name="_Hlk18525084"></a><a name="_Hlk28871857"><span class="Heading3Char"><span style="font-size: 12pt; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><b><i>Question</i></b>:</span></span></a><span style="font-size: 12pt;"> Since the Market Access Charge (MAC) will reduce imports of inexpensive foreign goods and encourage the production
and consumption of more expensive domestic goods, won't this cause inflation?</span><span style="font-size: 12pt;"><o:p></o:p></span></p>
<p class="MsoNormal"><span class="Heading3Char"><span style="font-size: 12pt; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><b><i>Short Answer</i></b>:</span></span><i><span style="font-size: 12pt;"> </span></i><span style="font-size: 12pt;">Prices would probably increase for raw materials that
America cannot produce and for finished goods that are labor-intensive, both of
which would almost certainly continue to be imported. However, these increases
would tend to be offset by three important factors: <i>First</i>, foreign
exporters may lower their prices to maintain market share. <i>Second</i>,
imports are a small share of US GDP and expenditures. <i>Third</i>, the MAC may
stimulate economies of scale in US production that reduce the price of
made-in-America goods. <i>Also,</i> the stimulus to demand for US-made goods
would lead to employment and wage increases, so many consumers would end up
better off despite some higher prices. The CPI should not increase by more than
about 0.2%, a tiny price to pay for a revitalized American economy.<o:p></o:p></span></p>
<h3>1. Foreign Exporters may Lower Price
to Retain Market Share<span style="font-weight: normal; mso-bidi-font-weight: bold;"><o:p></o:p></span></h3>
<p class="MsoNormal"><span style="font-size: 12pt;">Foreign exporters, faced with a devaluation of the
dollar are likely to reduce their prices at least temporarily to maintain
market share. Price cutting to maintain market share has been noted as a </span><a href="https://hbr.org/1975/01/market-share-a-key-to-profitability"><span style="font-size: 12pt;">common
business practice</span></a><span style="font-size: 12pt;"> in both domestic and international trade. As </span><a href="https://prosperousamerica.org/five-reasons-why-trade-policy-is-not-impacting-inflation/"><span style="font-size: 12pt;">Ferry</span></a><span style="font-size: 12pt;"> has reported,
this happened when the Trump administration imposed heavy tariffs on goods from
China. As it commonly takes tariffs and
devaluations several years to "</span><a href="https://www.imf.org/-/media/Files/Publications/WP/2019/wpiea2019238-print-pdf.ashx"><span style="font-size: 12pt;">pass through</span></a><span style="font-size: 12pt;">" and
affect trade balances, this spreads out any inflationary impact, resulting in
lower yearly inflation rates. Furthermore, full pass-through may never occur. <o:p></o:p></span></p>
<h3>2. Imports Represent a Very Small
Share of US GDP<o:p></o:p></h3>
<p class="MsoNormal"><span style="font-size: 12pt;">In 2020, </span><a href="https://databank.worldbank.org/reports.aspx?source=world-development-indicators"><span style="font-size: 12pt;">US imports
(GNFS)</span></a><span style="font-size: 12pt;"> were only 13 percent of GDP – a ratio lower than for any other country
except Sudan and Cuba. Consequently, price changes for imported inputs and
consumption goods have a minimal impact on US prices because of the following factors: *<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.5in;"><span style="font-size: 12pt;">(a) the low share of imports in gross domestic product
(13%); <o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.5in;"><span style="font-size: 12pt;">(b) the time required for the MAC to reach a level that
balances US trade (5 years); <o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.5in;"><span style="font-size: 12pt;">(c) the percent of dollar devaluation that finally
passes through to domestic prices for imports (90% est.);<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.5in;"><span style="font-size: 12pt;">(d) the trade margins inside the US between port of
entry and final sale including domestic costs of transport, storage, retail
operations, and profit margins – all costs that directly affect the final
selling price and thus the CPI but have little or no imported content, further
reducing the inflationary impact of imported goods (33% est.); and <o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.5in;"><span style="font-size: 12pt;">(e) the share of imported goods in the CPI consumption
basket (12%).<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 12pt;">When all these factors are considered and multiplied together, the final
increase in the CPI driven by a 30% devaluation would only be about 0.3% per
year. <o:p></o:p></span></p>
<h3>3. Economies of Scale<o:p></o:p></h3>
<p class="MsoNormal"><span style="font-size: 12pt;">The increased domestic and foreign demand for
made-in-America goods that the MAC would generate with a truly competitive
exchange rate</span><span style="font-size: 12pt; mso-bidi-font-family: Arial;"> –</span><span style="font-size: 12pt;"> a value for
the dollar that allows Americans to earn as much producing exports as they
spend on import</span><span style="font-size: 12pt; mso-bidi-font-family: Arial;"> –</span><span style="font-size: 12pt;"> would lead to
economies of scale, new investments, and higher productivity. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 12pt;">These developments, which can sharply reduce unit
prices, would probably offset more than 100 percent of any inflation that might
otherwise be caused by more expensive imports. The MAC could therefore reduce
rather than increase inflation. <i><o:p></o:p></i></span></p>
<div style="text-align: left;"><span style="font-size: 12pt;">-----------</span></div><div style="text-align: left;"><span style="font-size: 12pt;">* These estimates are </span><span style="font-size: 16px;">currently</span><span style="font-size: 12pt;"> under review but are thought to be representative.</span></div><p class="MsoNormal"><span style="font-size: 12pt;">- </span></p></div><div><br /></div><div style="text-align: center;"><span style="background-color: #2b00fe; color: white;">America Needs a Competitive Dollar - Now!</span></div>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-17122290378948131712022-02-08T23:05:00.003-05:002022-02-10T00:02:15.867-05:00Modern Monetary Theory and Trade Deficits<div style="text-align: left;"><p class="MsoNormal"><a name="_Hlk18525084"></a><a name="_Hlk28871857"><i><span style="font-size: 12pt;"><b>Question</b>:</span></i></a><span style="font-size: 12pt;"> Modern Monetary Theory (</span><a href="https://www.nytimes.com/2022/02/06/business/economy/modern-monetary-theory-stephanie-kelton.html"><span style="font-size: 12pt;">MMT</span></a><span style="font-size: 12pt;">) proponents say that, if a country issues its own
currency and can borrow in that currency, it can run larger deficits to achieve
its goals because the central bank can create the money needed to repay the debts.
Does this mean that America can continue its current level of deficit spending at little or no
cost or risk? </span><o:p></o:p></p>
<p class="MsoNormal"><i><span style="font-size: 12pt;"><b>Short Answer:</b></span></i><span style="font-size: 12pt;"> This would be true only if the money thus created went primarily or exclusively to stimulating additional production with <u>existing domestic resources</u>. What is generally missing from modern monetary theory is explicit recognition that we live in a global economy and that money created and used in good Keynesian fashion to stimulate full utilization of domestic productive capacity and domestic resources will probably leak out to foreign countries rather than stimulating the domestic economy. </span></p><p class="MsoNormal"><span style="font-size: 12pt;">Why? Because if the Federal Reserve "prints" the money needed to finance subsidies to our households and businesses, we may not
be able to produce the goods that Americans want at internationally
competitive prices. When this happens, Americans will use the freshly printed dollars to import what they want from foreign producers </span></p><p class="MsoNormal"><span style="font-size: 12pt;">This is exactly what has been happening during the COVID
pandemic. Imports of things like furniture and appliances have soared. As a
result, t</span><span style="font-size: 16px;">he debt-financed stimulus goes to foreign rather than domestic producers. O</span><span style="font-size: 12pt;">ur external deficits and debts explode. And we are left with even more debt.</span></p>
<p class="MsoNormal"><i><span style="font-size: 12pt;"><b>Why has America lost its ability to
produce and compete internationally?</b><o:p></o:p></span></i></p>
<p class="MsoNormal"><span style="font-size: 12pt; mso-bidi-font-style: italic; mso-bidi-font-weight: bold;">America
has lost its ability to compete internationally for many reasons, but the most
important is undervaluation of the currencies of our main trade competitors –
China, Japan, and Germany. A recent CPA study by </span><a href="https://prosperousamerica.org/new-study-global-currency-misalignment-challenges-us-reindustrialization-efforts-u-s-dollar-17-overvalued-while-chinese-yuan-japanese-yen-euro-22-40-and-27-undervalued-against-dollar-respective/"><span style="font-size: 12pt; mso-bidi-font-style: italic; mso-bidi-font-weight: bold;">Ferry</span></a>, <span style="font-size: 12pt; mso-bidi-font-style: italic; mso-bidi-font-weight: bold;">which I highly recommend, shows that of our top 34 competitors, 31 have currencies that are currently undervalued
against the dollar. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 12pt; mso-bidi-font-style: italic; mso-bidi-font-weight: bold;">This
creates an implicit tax burden of 15-25% on all goods produced in America,
goods that might otherwise be competitive as exports or as import alternatives.
This "currency misalignment tax" has dire consequences for US producers. Unable to compete at home or abroad, they reduce or stop producing goods in America. They offshore production to
foreign countries. And factories still able to produce in America are forced to depend on fragile
supply chains that wrap around the world, creating risks that important inputs
will not be available when needed. In short, with the currency undervaluation of our key competitors, foreign producers thrive while US producers die.<o:p></o:p></span></p>
<p class="MsoNormal"><i><span style="font-size: 12pt;"><b>Examples of MMT-style deficit spending
financing foreign rather than US producers</b><o:p></o:p></span></i></p>
<p class="MsoNormal"><span style="font-size: 12pt;">The ongoing COVID crisis provides endless examples of
ways in which deficit spending – combined with America's loss of international competitiveness
because of serious exchange rate distortions </span><span style="font-size: 12pt; mso-bidi-font-family: Arial;">–</span><span style="font-size: 12pt;"> has benefited foreign producers while causing serious
short-term and long-term damage to American producers and families. Consider
two examples: <o:p></o:p></span></p>
</div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><div style="text-align: left;"><p class="MsoNormal"><span style="font-size: 12pt;">(a) Globalized supply chains, which have made America
heavily dependent on foreign suppliers for key inputs such as </span><a href="https://www.wsj.com/articles/chip-shortage-has-manufacturers-turning-to-lower-tech-models-11636885801"><span style="font-size: 12pt;">computer chips</span></a><span style="font-size: 12pt;">, have recently made it impossible for American factories
to finish and sell products such as motor vehicles, appliances, and tech gear. Consequently, many lose money and reduce output or close. Laid-off workers and their families suffer. <o:p></o:p></span></p></div><div style="text-align: left;"><p class="MsoNormal"><span style="font-size: 12pt;">(b) When COVID forced families to reduce their spending on
entertainment (restaurants, theaters, and travel), they used their savings –
enhanced by deficit-financed COVID relief </span><span style="font-size: 12pt; mso-bidi-font-family: Arial;"> –</span><span style="font-size: 12pt;"> to buy household
durables such as furniture, appliances, and home office equipment. This led to </span><a href="https://www.brookings.edu/blog/up-front/2021/12/08/a-most-unusual-recovery-how-the-us-rebound-from-covid-differs-from-rest-of-g7/#cancel"><span style="font-size: 12pt;">increased
imports</span></a><span style="font-size: 12pt;">, record trade
deficits, more foreign debt, and to a sharp increase in domestic inflation.<o:p></o:p></span></p></div></blockquote><div style="text-align: left;">
<p class="MsoNormal"><span style="font-size: 12pt;">In short, MMT advocates may be largely correct if they explicitly limit their recommendations to Keynesian-type stimulus payments that <i>put</i> <i>existing, underutilized, </i></span><i style="font-size: 16px;">internationally competitive</i><span style="font-size: 12pt;"><i> domestic capacity back to work. </i>However, with the sharp undervaluation against the dollar of most currencies of countries with which we have significant trade, deficit spending simply stimulates <u>foreign </u>countries while leaving </span><span style="font-size: 16px;"><u>us and our children</u></span><span style="font-size: 12pt;"> with larger deficits and debts, both domestic and foreign. Clearly a very bad deal!</span></p>
<p class="MsoNormal"><i><span style="font-size: 12pt;"><b>What can be done to make MMT work for
America? </b><o:p></o:p></span></i></p>
<p class="MsoNormal"><span style="font-size: 12pt; mso-bidi-font-style: italic; mso-bidi-font-weight: bold;">America
needs to move as quickly as possible to implement the <a href="http://abcdnow.blogspot.com/2016/05/how-mac-would-help-restore-american.html" target="_blank">Market Access Charge (MAC)</a>. This is a tax on countries that dump their trade surpluses into our financial markets to hold down the value of their currencies so that they can continue to run trade surpluses. With a MAC in place, this undervaluation relative to the dollar will disappear, America's factories will become internationally competitive and profitable, and this will lead to new investments in real plant and equipment that make US production even more efficient and competitive. The MAC will also stimulate the creation of millions of new well-paying middle-class jobs, thereby reducing the need for large deficit-financed subsidies to provide </span><span style="font-size: 16px;">adequate income for </span><span style="font-size: 12pt;">American families. </span></p><p class="MsoNormal"><span style="font-size: 12pt; mso-bidi-font-style: italic; mso-bidi-font-weight: bold;">Once the MAC is in place, the $300-500 billion dollars per year that will be generated by the MAC charge on surplus foreign savings being dumped into US financial markets will make it possible for the the Government to stimulate even greater economic growth and major improvements in infrastructure, renewable energy, education, affordable housing, and all the other things America is lacking today. </span></p><p class="MsoNormal"><span style="font-size: 12pt; mso-bidi-font-style: italic; mso-bidi-font-weight: bold;">Once the MAC has made America internationally competitive, we can if necessary follow the advice of MMT advocates knowing that the debt-financed expenditures will benefit America and not be siphoned off as trade surpluses to countries with undervalued currencies. </span></p><p class="MsoNormal"><span style="font-size: 12pt; mso-bidi-font-style: italic; mso-bidi-font-weight: bold;">P.S. </span><span style="font-size: 16px;">"Modern" Monetary Theory is a misnomer unless qualified as noted above. The same basic theory has been used for centuries by the leaders of bankrupt nations. I've worked in countries that have experienced inflation running from 8,000% to 24,000% <u>per year</u> because governments thought they could "print bread." However, if the exchange rate is overvalued, households will find it cheaper to import wheat to make their bread than to buy locally grown grains. The same is true for manufactured goods. And when this happens, local farms and factories die from lack of demand. Not a pretty sight. Not what we want for America!</span></p></div><div style="text-align: center;"><span style="background-color: #2b00fe;"><br /></span></div><div style="text-align: center;"><span style="background-color: #2b00fe;"><span style="color: white;">America Needs a Competitive Dollar - Now</span>!</span></div>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-45416745496249449312022-01-26T13:05:00.009-05:002022-01-26T13:17:19.324-05:00Plaza Multilateralism + MAC Dynamism = Multilateral MAC?<p class="MsoNormal" style="margin-bottom: 4.0pt; margin-left: 0in; margin-right: 0in; margin-top: 6.0pt; margin: 6pt 0in 4pt;"><a name="_Hlk18525084"></a><a name="_Hlk28871857"><i><span style="font-size: 12pt;"><b>Question</b>:</span></i></a><span style="font-size: 12pt;"> Could the Plaza Accord's multilateralism be combined with the dynamic adjustments
of the Market Access Charge (MAC), thus providing a tool that would attract multilateral
support and create economic balance not just in America, but around the world?</span><o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 4pt;"><i><span style="font-size: 12pt;"><b>Short Answer</b>:</span></i><span style="font-size: 12pt;"> Absolutely. Doing
this would provide an internationally-agreed policy like the the Plaza Accord, but
instead of being static, it would be dynamic like the MAC, continuously adjusting
exchange rates to assure balanced trade when inflation and productivity rise at
different rates across countries. </span><o:p></o:p></p>
<h2 style="margin-bottom: 4pt; text-align: left;"><i><span style="font-size: medium; font-weight: normal;">Bretton Woods
and Plaza Accord – The Good and the Bad</span></i></h2>
<p class="MsoNormal" style="margin-bottom: 4pt;"><i><u><span style="font-size: 12pt; mso-bidi-font-weight: bold;"><b>Good – Multilateral, not Unilateral</b></span></u></i><span style="font-size: 12pt; mso-bidi-font-style: italic; mso-bidi-font-weight: bold;">: The Plaza Accord of 1985 that arranged a
devaluation of the US dollar and a parallel revaluation of Japanese and German
currencies was based on international discussions and agreements, providing the
basis for more balanced trade.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-bottom: 4pt;"><i><u><span style="font-size: 12pt; mso-bidi-font-weight: bold;"><b>Bad – Static, not Dynamic:</b></span></u></i><span style="font-size: 12pt; mso-bidi-font-style: italic; mso-bidi-font-weight: bold;"> However, the Plaza Accord's effectiveness only
lasted for five years – just long enough for America to balance trade in 1990
for one year. After that, our trade deficits resumed and have continued ever
since. Unfortunately, the static one-time exchange rate adjustment that the Plaza
Accord achieved did not keep up with changes in international markets. In
contrast, the MAC will adjust the dollar's exchange rate as needed to maintain
balanced US trade forever – regardless of what happens in other countries.</span><i><span style="font-size: 12pt;"><o:p></o:p></span></i></p>
<h2 style="margin-bottom: 4pt; text-align: left;"><span style="font-size: medium; font-weight: normal;"><i>Market Access
Charge (MAC) </i><i> –</i><i> The Good and
the Improvable</i></span></h2>
<p class="MsoNormal" style="margin-bottom: 4pt;"><i><u><span style="font-size: 12pt;"><b>Best MAC Features</b></span></u></i><i><span style="font-size: 12pt;">: </span></i><span style="font-size: 12pt;"> The MAC focuses on the balance of financial flow
on the financial account as well as on the balance imports of and exports of goods
and services on the current account. Including financial flows is critically
important. Why? Exchange rates today are determined primarily by the balance of
inflows and outflows of money on the financial account, not by the balance of
imports and exports of real goods and services on the current account – the situation
for hundreds of years prior to the explosion of international financial flows
starting around 1970. This Great Paradigm Shift in exchange rate determination
has been overlooked by most economists and policy makers. Hence our serious and
growing global trade deficits.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-bottom: 4pt;"><u><span style="font-size: 12pt;"><b>Improving the MAC</b></span></u><span style="font-size: 12pt;">: As currently
</span><a href="http://abcdnow.blogspot.com/2016/05/how-mac-would-help-restore-american.html"><span style="font-size: 12pt;"><span style="color: #2b00fe;">designed</span></span></a><span style="font-size: 12pt;">, America would
apply the MAC unilaterally on all inflows of foreign-source money. While this unilateral
implementation is perfectly legal under IMF rules, it could trigger resentment, even
retaliation, by other countries. Thus, we should immediately implement the MAC,
by Executive Order if necessary, to save America, then expand its appeal and
impact with a voluntary multilateral MAC agreement.<o:p></o:p></span></p>
<h2 style="margin-bottom: 4pt; text-align: left;"><i><span style="font-size: medium; font-weight: normal;">Reasons to be
Optimistic about a Multilateral MAC </span></i></h2>
<p class="MsoNormal" style="margin-bottom: 4pt;"><span style="font-size: 12pt;">America is not the only country that has been
suffering from trade deficits. In 2010, during the height of the European Debt
Crisis, over half of OECD countries had trade deficits, and the Mediterranean countries
(Greece, Italy, Spain, and Portugal) experienced such severe crises that they could
well have collapsed except for massive bailouts from the IMF and the EU.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-bottom: 4pt;"><span style="font-size: 12pt;">The main cause of their crises was<b><span style="color: #2b00fe;"> </span></b></span><a href="https://abcdnow.blogspot.com/2017/04/germany-has-parlayed-its-eurozone.html"><span style="font-size: 12pt;"><b><span style="color: #2b00fe;">excessive inflows
of money, primarily from Germany</span></b></span></a><span style="font-size: 12pt;"><b><span style="color: #2b00fe;">.</span></b> Between 2010
and 2011, for example, Germany's surplus was over 83% of their total deficits,
and existing German reserves may well have financed the remainder. <o:p></o:p></span></p>
<i><span style="font-size: 12pt; mso-bidi-font-weight: bold;"><b>Summary</b>: </span></i><span style="font-size: 12pt;">Like<i> </i>the U.S., European countries
could benefit greatly from having a MAC. Implemented on a multilateral basis,
it would make a major contribution to balanced trade and sustainable growth
based on rising productivity, not debt, for America, for Europe, and by extension
for the rest of the world. Also, a <u>multilateral</u> MAC would avoid the
risk of America appearing to be serving only its own national interests.</span><h2 style="text-align: left;"><br /></h2><h3 style="text-align: center;"><span><span style="font-size: small;"><span style="background-color: white;"><span style="color: #2b00fe;">America Needs a Competitive Dollar - Now</span></span><span style="background-color: #2b00fe; color: white;">!</span></span></span></h3>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-830476928361925942022-01-22T23:43:00.000-05:002022-01-22T23:43:46.863-05:00Should the MAC Tax Different Financial Inflows Differently?<div><br /></div><p class="MsoNormal"><i><b>Question:</b></i><b> </b><i>Some
have suggested that the MAC should tax inflows of foreign-source money differently
depending on its origin, ownership, currency, liquidity, form, proposed use,
etc. For example, the version of the MAC that was presented to the Senate in
2019 exempted foreign-source money that was deposited in the United States in
short-term accounts not paying interest. Does this differentiation make any
sense?</i><o:p></o:p></p>
<p class="MsoNormal"><i><b>Short Answer:</b></i>
Absolutely not. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><i><b>Explanation</b>: </i>Money
in one form can usually be converted almost instantly into money in a different
form – and this can happen repeatedly with a single inflow. If exemptions from
the MAC are made for one form of money (e.g. short-term funds in no-interest
checking accounts), all money flowing into the United States will enter as short-term
funds deposited in no-interest <a href="https://guides/multi-currency-account-usa/">foreign currency checking
accounts</a>, then be converted (in ways that can be impossible to trade) into,
for example, US dollars that are used to buy US assets, both financial and
real, such as stocks, bonds, and real estate. <o:p></o:p></p>
<p class="MsoNormal">Other countries have tried to
differentiate between "good capital" and "bad capital," but
<a href="https://ideas.repec.org/p/fip/fedfwp/2007-31.html#abstract#abstrac">such
schemes almost always fail</a> because those involved can usually evade capital
flow management instruments such as the MAC by getting their "bad"
capital reclassified as "good" capital. <o:p></o:p></p>
<p class="MsoNormal">Offering exemptions or preferential
rates for some foreign-source inflows and not for others would almost certainly
destroy the MAC's effectiveness because:<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 40.5pt; text-indent: -.25in;">(a) the MAC would have little or no impact on foreign
demand for dollars and dollar-based assets; <o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 40.5pt; text-indent: -.25in;">(b) global demand would continue to drive the U.S. dollar
above rates consistent with balanced trade; <o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 40.5pt; text-indent: -.25in;">(c) the overvalued dollar would continue to cause US
trade deficits; and <o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 40.5pt; text-indent: -.25in;">(d) America would continue to suffer the serious consequences
of imbalanced trade.<o:p></o:p></p>
<p class="MsoNormal">The costs of imbalanced trade
include, for example, lost jobs, closed factories, excessive dependency on
global supply chains that collapse under pressure, increasing income inequality,
social and political polarization, loss of global technological and industrial
leadership, and growing debt to foreign countries – debt that is turning
America into the "<a href="https://www.berkshirehathaway.com/letters/growing.pdf">Squanderville</a>"
that Buffett wrote about so pointedly nearly twenty years ago.<span style="font-size: 12pt;"><o:p></o:p></span></p>
<p class="MsoNormal"><b>Conclusion</b>: <o:p></o:p></p>
<p class="MsoNormal">All money coming into America from foreign sources should be
taxed at a standard MAC rate regardless of currency, form, avowed purpose, etc. <o:p></o:p></p>
<i>P.S. If any exemptions are to be allowed – for example, money
borrowed abroad by the US Government through the sale of Treasuries, or money
used to pay for US exports– they should be granted on a rebate basis. The foreign-source
money would pay the standard MAC charge upon entry, but as soon as the funds have
been delivered to Treasury, or the exports have been shipped and certified by
US Customs, the MAC charge would be
rebated with market interest. This rebate approach would minimize the risk of
fraud.</i><div><br /></div><div style="text-align: center;"><span style="background-color: #2b00fe;"><span style="color: white;">America Needs a Competitive Dollar - Now!</span></span></div>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-72969547098575173952021-12-21T00:34:00.000-05:002021-12-21T00:34:48.257-05:00America Can Build Back Better Even Better<div><p class="MsoNormal"><span lang="EN" style="font-family: inherit; mso-ansi-language: EN;"><b>Current Problems with the Build Back Better Initiative</b></span></p><p class="MsoNormal"><span lang="EN" style="font-family: inherit; mso-ansi-language: EN;">Most Members of Congress seem to support much of what is in the draft Build Back Better (BBB) law. The main problems that have led some Republicans and some Democrats to reject the Build Back Better initiative are cost and coverage. </span></p><p class="MsoNormal">For understandable reasons, fiscal conservatives have been concerned that BBB will cost too much (and even more than current estimates indicate), will require too much borrowing and debt, and will further exacerbate inflation. Progressives, on the other hand, are rightly concerned that the effort to scale back the BBB investments to fit within total cost levels acceptable to fiscal conservatives has left some important investments on the cutting-room floor and has left other important initiatives so underfunded that they may fail simply because of inadequate resources. </p><p class="MsoNormal"><span lang="EN" style="font-family: inherit; mso-ansi-language: EN;">Today our exceptionally high levels of inflation, growing government
deficits, rising stock of government debt, swelling trade deficits, and record-setting debts to foreigners have made many think twice about spending even more trillions of dollars to Build Back Better.</span></p><p class="MsoNormal"><span lang="EN" style="font-family: inherit; mso-ansi-language: EN;"><b>A Better Way to Build Back Better - BBB2</b></span></p><p class="MsoNormal" style="text-align: left;"><span lang="EN" style="font-family: inherit; mso-ansi-language: EN;">This note proposes a way to Build Back Better Better, a program worthy of bi-partisan support that we could call BBB2. This program would be highly complementary to the present BBB legislation because, by adding a simple policy change that would make made-in-America goods internationally competitive again, BBB2 would:<br /></span></p></div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><div><p class="MsoNormal" style="text-align: left;"><span lang="EN" style="font-family: inherit; mso-ansi-language: EN;">1. <u>Fully pay for </u></span><u>most and perhaps all costs of the initiatives currently in BBB</u> without cutting other important programs and without raising taxes on the average American. This would address the widespread and fully understandable concern that the current legislation could involve incremental budget costs larger than those currently in the legislation and that financing these costs by borrowing and printing money could make our ongoing inflationary problems even worse.</p></div></blockquote><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p style="text-align: left;">2. <u>Allow many of the BBB initiatives that are currently funded for only a year or two to be funded for the life of the BBB implementation period</u>, thereby addressing some of the key criticisms of those worried about the real cost and long-term effectiveness of BBB. </p></blockquote><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p style="text-align: left;">(c) <u>Create an environment that would minimize the cost of key BBB initiatives</u> and that would help assure the the cost-effectiveness and lasting success of these initiatives, another concern of some critics. </p></blockquote><div><p class="MsoNormal"><span lang="EN" style="font-family: inherit; mso-ansi-language: EN;">In addition to providing an excellent way to pay for the</span><span style="font-family: inherit;"> physical and social infrastructure programs currently included in the administration's </span><span style="font-family: inherit;">Build Back Better plans, BBB2 would:</span></p><ol style="text-align: left;"><li><u>Create 3-5 million new well-paying middle-class American jobs,</u> especially in manufacturing and related industries because American workers would be able to produce internationally competitive exports and made-in-America import alternatives.<br /><br /></li><li><u>Increase average wages for all Americans</u> -- including wages for people currently working in low-pay service-sector jobs.<br /><br /></li><li><u>Make real investments in America profitable again</u> while reducing the risk of the financial bubbles and the destructive crises that inevitably follow.<br /><br /></li><li><u>Stimulate state-of-the-art research</u> in areas such as environmental sustainability, green energy, cutting-edge computer technologies, medicine, affordable housing, and other fields that are vital to our national security and global leadership.<br /><br /></li><li><u>Improve training and education programs</u> that will further improve America's international competitiveness and reduce economic and social polarization.<br /><br /></li><li><u>Accelerate US economic growth</u> with benefits distributed widely in ways that reduce America's increasing economic and social inequalities and polarization, measures essential to making the American Dream a reality for more Americans.<br /><br /></li><li><u>Reduce Federal Government budget deficits</u>, <u>the costs of servicing government debt,</u> <u>and the levels of outstanding debt</u>. This outcome, which would be made possible by moving the dollar to a fully-competitive exchange rate by imposing a tax on foreign speculators who make the dollar artificially expensive, would also grow the US tax base and reduce the need for "welfare" payments to families and companies hit by financial and economic crises. <br /><br /></li><li>Assure that <u>BBB benefits can be implemented at the lowest possible costs and become self-sustaining for generations to come. </u> BBB2 would assure this by creating an environment where Americans to earn as much producing exports as they spend on
imports.<br /><br /></li><li><u>Eliminate US trade deficits and reduce the debts to foreigners</u> that we are incurring by living far beyond our means -- debts that our children and theirs will have to repay.<br /><br /></li><li><u>Eliminate the loss of vitally important US factories,</u> <u>production technologies, and jobs to foreign countries</u>. These losses are a major reason for America's growing dependence on countries like China -- countries that openly seek to dominate the United States in critically important economic, political, and military areas. Even in times of peace, our dependence on such countries imposes serious economic burdens -- fragile supply chains, lengthy production delays, and the loss of American jobs and technological leadership. In times of war, the costs of this dependence would be far greater, even existential.</li></ol><div><b>How Can Such Benefits Be Possible?</b></div><div><br /></div>You may ask how all of these wonderful outcomes could be possible with a simple change in the current BBB draft legislation. </div><div><br /></div><div>The answer is simple: Incorporate into the BBB draft legislation the provisions of the<span style="font-family: times;"> <a href="https://www.congress.gov/bill/116th-congress/senate-bill/2357/text" target="_blank"><span lang="EN">Competitive
Dollar for Jobs and Prosperity Act</span></a><span lang="EN"> (</span></span><span style="font-family: times;">CDJPA</span><span style="font-family: times;">) that was presented on a bipartisan
basis to the US Senate during the previous session of Congress.</span></div><div><span style="font-family: times;"><span lang="EN"><br /></span></span></div><div><span style="font-family: times;"><span lang="EN">The key provision in the </span></span><span style="font-family: times;">CDJPA is a </span><span style="font-family: inherit;">modest <b><i>Market Access Charge (MAC) </i></b>that would be paid by foreigners exploiting our financial markets. The MAC's legal details are available at the CDJPA link in the previous paragraph. Further details regarding the need for the MAC and how it would work are available <a href="http://abcdnow.blogspot.com/2016/05/how-mac-would-help-restore-american.html">here</a> on my blog, <a href="http://ABCDNow.blogspot.com" target="_blank">Americans Backing a Competitive Dollar</a>. Modeling by the Coalition for a Prosperous America (<a href="https://prosperousamerica.org/">CPA</a>) indicates that the MAC would generate $300-500 billion dollars per year, or up to $4 trillion over the eight-year period that is sometimes given as the implementation period for the BBB initiative. </span></div><div><span style="font-family: inherit;"><br /></span></div><div><span style="font-family: inherit;">In other words, the MAC would make a very important contribution to financing the once-in-a-lifetime investments that America needs to make in its future. Including the MAC as part of the BBB legislation would sharply reduce (or even eliminate) the need to cut other programs, to raise taxes on Americans, or to print money that would almost inevitably increase inflationary pressures. </span></div><div><span style="font-family: inherit;"><br /></span></div><div><span style="font-family: inherit;">Furthermore, all of these benefits of the MAC for the BBB initiative are in addition to the main reason that the MAC has been carefully designed and modeled over the past several years -- namely to end our trade deficits, the loss of jobs and production capacity to foreign countries, the growth of our budgetary deficits, the sharp decline in America's economic growth, and the growing economic, social and political polarization that is threatening our nation. </span></div><div><span style="font-family: inherit;"><br /></span></div><div><span style="font-family: inherit;">Incidentally, a thorough review indicates that the MAC would be fully legal under US tax law as well as America's international obligations under its bilateral treaties and under the rules of the IMF, the WTO/GATT, and the OECD.</span></div><p class="MsoNormal"><span style="font-family: inherit;"><span face=""Calibri",sans-serif" lang="EN" style="mso-ansi-language: EN;"><b>Moving Forward Together</b></span></span></p><p class="MsoNormal"><span style="font-family: inherit;"><span face=""Calibri",sans-serif" lang="EN" style="mso-ansi-language: EN;">Given the exceptional complementarity and urgency of the BBB and the MAC, the logical way to assure the success of both initiatives would be to combine them in a "BBB2" law to be passed by Congress. The MAC would make it possible to fully fund </span></span>the excellent initiatives in the BBB<span style="font-family: inherit;"> in a way that does not require raising taxes on Americans, cutting existing programs that are also important, or borrowing money that could easily increase inflationary pressures.</span></p><p class="MsoNormal"><span style="font-family: inherit;">A BBB2 would address the serious and legitimate concerns of both Republicans and Democrats. Consequently, it should be entirely possible to move forward on a bi-partisan basis to build a better future for our nation.</span></p><p class="MsoNormal"><span lang="EN" style="font-family: inherit; mso-ansi-language: EN;">Alternatively, P</span><span style="font-family: inherit;">resident Biden could implement the CDJPA by Executive Order under the International Economic Emergency Powers Act (IEEPA). However, including the MAC as part of a revised Build Back Better package would clearly be preferable. In addition to the normal reasons for preferring laws over EOs, implementing the MAC as part of a law like the BBB with the support of both parties would make it clear that the program was being financed with a clear and exceptionally advantageous "pay for" – one paid by foreigners rather than by US tax payers. </span></p><p class="MsoNormal"><span style="font-family: inherit;">To paraphrase a famous quote from Russel B. Long many years ago, "Don't tax me. Don't tax thee. Tax that man beyond the sea." </span></p><p class="MsoNormal"><span style="font-family: inherit;">In summary,
implementing the MAC as a pay-for to finance the Build Back Better program –
and to trigger a renaissance in U.S. manufacturing that will gradually restore the
American Dream for middle and lower income Americans – holds more promise
than any other approach for securing passage of the vitally important Build Back
Better initiative.</span></p><div>
<p class="MsoNormal">John R. Hansen, PhD</p><p class="MsoNormal">December 21, 2021</p>
<p class="MsoNormal" style="margin-bottom: 0in; mso-layout-grid-align: none; text-autospace: none;"><br /></p></div><div style="text-align: center;"><span style="color: #2b00fe; font-family: inherit;"><b>America Needs a Competitive Dollar - Now!</b></span></div>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-44128747402353324062021-10-24T14:55:00.000-04:002021-10-24T14:55:13.160-04:00The Market Access Charge: It can Pay for Build Back Better with No New Taxes on Americans and Restore the American Dream<div>The following appeared online in the Washington Post on October 24, 2021 as a comment on an editorial entitle<span style="font-family: times;">d "Build Back Better is Falling Short of What President
Biden Promised."</span></div><span style="font-family: Arial, sans-serif; font-size: 14pt;"></span><div>-------------</div><div><p class="MsoNormal">The need to Build Back Better is clear. America is falling
deeper and deeper into an economic pit, and income inequality has reached
historic levels, polarizing our nation. Key parts of BBB are critical to restoring
rapid, widely shared growth based on growing productivity, not on growing debt.
<o:p></o:p></p>
<p class="MsoNormal">Approving the <u>Competitive Dollar for Jobs and Prosperity
Act (CDJPA)</u>, which has already been introduced in the Senate, would introduce a Market Access Charge (MAC) on foreigners trying to speculate in America's financial markets that could (a) <u>fully
finance BBB</u> <u>without new taxes on Americans</u> and without cutting
essential current programs, and (b) <u>stimulate an industrial renaissance</u>
in America that would put millions of Americans to work in well-paying
middle-class jobs, end our trade deficits and our slavish dependency on China,
and sharply increase America's growth while reducing its internal and external debts.
<o:p></o:p></p>
<p class="MsoNormal">John R. Hansen, International Economist<o:p></o:p></p></div><b><div style="text-align: center;"><b><span style="background-color: #2b00fe; color: white;">America Needs a Competitive Dollar - Now!</span></b></div></b>John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-31060960072195471382020-01-23T23:39:00.001-05:002020-01-30T11:25:25.386-05:00Currency Problems in the US-China Trade Agreement (Phase 1)This note examines the key currency-related provisions in the US/China Phase 1 Trade Agreement that was signed by President Trump and Vice-Premier Liu on January 15, 2020. It finds that currency policy provisions relating devaluation and market-determined exchange rates are expressed in a manner that could prevent America from ending the dollar's overvaluation unless corrective action is taken immediately -- probably through issuance of a side letter that would clarify the conflicting language in the agreement that could easily create serious problems for America.<br />
<br />
<h4>
Contents</h4>
1) Currency Policy Agreements in the US-China Trade Agreement (USCNTA)<span style="white-space: pre;"> </span><br />
2) General Enforcement Provisions in the US/China Trade Agreement<span style="white-space: pre;"> </span><br />
3) Market Access Charge (MAC) may be Prevented by the Agreement<span style="white-space: pre;"> </span><br />
4) Competitive Devaluation Ban<span style="white-space: pre;"> </span><br />
5) Market Determined Exchange Rates: A Dangerous Mandate<span style="white-space: pre;"> </span><br />
<br />
<h3>
1) Currency Policy Agreements in the US-China Trade Agreement (USCNTA)</h3>
<b>Overview:</b><br />
Little if anything has been gained on the currency front with the Phase 1 Trade Agreement with China. Both partners were already bound to most if not all of what is in the USCNTA by previous agreements – especially the IMF Articles of Agreement.<br />
<br />
In <a href="https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/rVaHxDBUtdew/v0#page=52" target="_blank">Chapter 5</a>, the USCNTA generally follows the standard model for current US trade agreements (c.f. the <a href="https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/33_Macroeconomic_Policies_and_Exchange_Rate_Matters.pdf" target="_blank">USMCA</a>) with provisions like: don't manipulate; be transparent about your international currency transactions; let the market determine your currency's exchange rate; if you violate the rules, we will have to talk; if we still have an issue, we will retaliate with tariffs; if that doesn't work, the deal is off.<br />
<br />
Although basically a copy of ideas on currency from previous agreements, the US/China Trade Agreement unfortunately added some serious inconsistencies with standard IMF language on currency practices, inconsistencies that the Chinese could exploit to make it difficult for the United States to restore balanced trade by moving the dollar to a trade-balancing exchange rate with, for example, the Market Access Charge (MAC). For more on this, see Section 3 below ("The Market Access Charge may be Prevented by the Agreement").<br />
<br />
<h3>
2) General Enforcement Provisions in the US/China Trade Agreement </h3>
<b>Summary</b>:<br />
In addition to the enforcement language specifically for currency agreements in Chapter 5, <a href="https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf" target="_blank">Chapter 7</a> contains language regarding overall enforcement of the US/China Trade Agreement that apply to currency practice agreements. The provisions do not seem to break new ground compared to other US trade agreements or give the US additional leverage to force compliance. In fact, the enforcement provisions mark a step <a href="https://apnews.com/4931ba9216edb995608bdc142e2b07a0" target="_blank">backwards</a>. The Agreement does not provide for any disputes go to a neutral arbitrator. Instead, if China and the US cannot work out their differences, the United States could impose tariffs — and the deal could unravel.<br />
<br />
<b>Discussion</b>:<br />
The Enforcement section of the USCNTA is structured as follows:<br />
<blockquote class="tr_bq">
• Articles 7.1 and 7.2 establish the purpose and structure of a "Bilateral Evaluation and Dispute Resolution Arrangement." </blockquote>
<blockquote class="tr_bq">
• Article 7.3 discusses "Requests for Information" in a normal way – the only possible red flag being that the parties are not obliged to provide "confidential information." (Who knows what the Chinese may declare to be "confidential.") </blockquote>
<blockquote class="tr_bq">
• The "Dispute Resolution" procedure in Article 7.4 is also routine – and relatively toothless, calling for consultations if one of the parties complains. If agreement is not reached, "the Complaining Party may resort to taking action based on facts provided during the consultations, including by suspending an obligation under this Agreement or by adopting a remedial measure in a proportionate way … ", thus opening the door to retaliatory tariffs, and possibly exit from the Agreement. And as noted in the summary above, the absence of a provision for a neutral arbitrator increases the risk of agreement failure.</blockquote>
<br />
<h4>
3) Market Access Charge (MAC) may be Prevented by the Agreement</h4>
<b>Summary</b>:<br />
Senior officials in the Trump administration offered assurances before signing that the US/China Trade Agreement will not create a barrier to implementing the MAC. Despite these assurances, the Agreement contains specific language could, as written, make the MAC's implementation impossible. The most problematic phrases in the Agreement are the following:<br />
<blockquote class="tr_bq">
1.<span style="white-space: pre;"> </span>The Parties shall refrain from competitive devaluations and not target exchange rates for competitive purposes… .</blockquote>
<blockquote class="tr_bq">
2.<span style="white-space: pre;"> </span>Each Party should achieve and maintain a market-determined exchange rate regime;</blockquote>
These two critically important issues are discussed separately in the next two sections.<br />
<br />
<h4>
4) Competitive Devaluation Ban </h4>
<b>Summary</b>:<br />
The Agreement's provision that, "The Parties shall refrain from competitive devaluations and not target exchange rates for competitive purposes… ." is highly problematic. The key purpose of the MAC is to devalue the dollar by enough to make it and American goods sufficiently competitive with foreign goods to bring the America's international trade back into balance.<br />
<br />
This provision in the US/China Trade Agreement categorically prohibits competitive devaluations for competitive purposes. This language could potentially prevent the US from implementing the MAC. Alternatively, the MAC's implementation could provide a basis for China to retaliate or to abandon the Agreement entirely, either of which could mean a renewed tariff war.<br />
<br />
<b>Discussion</b>:<br />
China could easily use the Agreement's unfortunate language regarding "competitive devaluations" as the legal basis for various forms of retaliation. However, such an interpretation would be inconsistent with the following provisions elsewhere in this same article of the Agreement:<br />
<blockquote class="tr_bq">
•<span style="white-space: pre;"> </span>The Parties shall … avoid unsustainable external imbalances.<br />
•<span style="white-space: pre;"> </span>Each Party confirms that it is bound under the International Monetary Fund (IMF) Articles of Agreement to … prevent effective balance of payments adjustment or to gain an <u>unfair</u> competitive advantage.</blockquote>
Upon joining the IMF, China and the United States each agreed to abide by the IMF's Articles of Agreement. By signing the US/China Trade Agreement, they may have violated the terms of their IMF membership because, by forbidding exchange rate adjustments for competitive purposes, they may have made it virtually impossible in today's world for either party to attain the "effective balance of payments adjustment" called for by the IMF's Articles.<br />
<br />
The IMF is the ultimate international arbiter of exchange rate issues, and the IMF language in essence says that (a) adjustment to achieve an effective balance of payments on the external account is a priority, (b) exchange rate management for competitive purposes is forbidden only if done to gain an unfair competitive advantage, and that (c) balanced trade, the goal of the MAC, can never reflect an unfair competitive advantage.<br />
<b><br /></b>
<b>Solution:</b><br />
We must conclude that the USCNTA article regarding devaluation for competitive purposes as cited above is not well worded and that more appropriate language would read as follows <i>(added language in bold):</i><br />
<blockquote class="tr_bq">
<i>"<b>Except as required to eliminate balance of payments deficits</b>, the Parties shall refrain from competitive devaluations and shall not target exchange rates for <b>unfair </b>competitive purposes.</i></blockquote>
A Definitions section should be added that states:<br />
<blockquote class="tr_bq">
<i>"Unfair" means actions taken to attain or maintain a balance of payments surplus. </i></blockquote>
Unfortunately, the Administration's decision to negotiate and implement this Agreement in secret with no public input, review or approval means that America is now saddled with a document that will be hard to correct in a manner that protects America's legitimate desire for balanced trade unless a way can be found to insert the missing words highlighted in the preceding paragraph. Perhaps this problem could be solved with an appropriate side letter signed before the Agreement goes into effect. Incidentally, a similar approach was used to cover currency issues in the Trans-Pacific Partnership (TPP) negotiations.<br />
<br />
<h4>
5) Market Determined Exchange Rates: A Dangerous Mandate</h4>
<b>Summary</b>:<br />
The Agreement's requirement that both countries "achieve and maintain a market-determined exchange rate regime" likewise creates potentially serious problems for the MAC's implementation because it is explicitly designed to fix a market-determined problem: For nearly fifty years, the market-determined exchange rate for the dollar has been overvalued, leading to unending trade deficits and associated problems.<br />
<br />
A market-determined exchange rate is the <u>cause,</u> not the <u>solution,</u> for America's trade deficits. The Agreement has done a potentially serious disservice to America by insisting that we continue to sacrifice our prosperity and our future on the false altar of market-determined exchange rates. Instead of more market fundamentalism, we need a tool like the MAC to restore a solid, dynamic link between the dollar's exchange rate and balanced trade.<br />
<br />
<b>Discussion</b>:<br />
Today, the dollar's exchange rate is "market determined," and this is the true source of America's trade deficits. If the United States does "maintain a market determined exchange rate" as required by the signed agreement, the US will face unending trade deficits, lost growth, lost employment, lost leadership in advanced technology, lost resources to develop and implement improved and green infrastructure, even worse income distribution than we have today, and mounting debts to foreign countries that will deplete America's wealth and seriously reduce the prospects of future generations for a better life than we have enjoyed. This is totally unacceptable.<br />
<br />
Markets can produce optimal results – providing highly specific requirements such as perfect knowledge and perfectly rational behavior are met. Unfortunately, thanks to highly asymmetric and imperfect information flows across national boundaries, and to the "herd behavior" of investors that is so common in financial markets, forex markets rarely meet the "perfect market" standards. The forex markets' ongoing market failure – the failure to set the dollar at a trade-balancing equilibrium exchange rate – also reflects (a) the global glut of foreign savings by trade-surplus countries, (b) the consequent excess demand for dollars and dollar-based assets, and (c) the absence for nearly fifty years of any link between balanced trade and exchange rates.<br />
<br />
With well over forty years of unbroken trade deficits as proof of global currency market failures, it is hard to imagine why anyone would think that insisting on "market-determined exchange rates" is the solution – just as it is hard to imagine why anyone would think that predatory, mercantilist currency manipulation as practiced over the years by many of the export-oriented "Asian Tigers" including, most recently, China is the solution. Any currency agreement should reject with equal vigor purely "market-determined exchange rates" and purely "mercantilist currency manipulation."<br />
<br />
The case for using a tool like the MAC to keep foreign money inflows and thus the dollar's exchange rate consistent with balanced trade is strengthened by the fact that, for over a hundred years, America has depended on the Federal Reserve to keep domestic money flows consistent with the <a href="https://www.federalreserve.gov/faqs/money_12848.htm" target="_blank">dual mandate</a> of maximum employment and stable prices.<br />
<br />
The key tools used by the Fed are the targeted <a href="https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm" target="_blank">Federal Funds Rate</a> and the Fed's <a href="https://www.federalreserve.gov/monetarypolicy/discountrate.htm" target="_blank">discount rate</a> (the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank). When domestic money flows are excessive and are threatening price stability, raising the Fed Funds rate and the discount rate serve as a charge that moderates the domestic demand for money, thereby keeping the flows consistent with price stability. In like manner, the MAC charge will keep foreign monetary flows consistent with exchange rate competitiveness and balanced trade.<br />
<br />
In fact, the MAC charge is really the long-missing partner of the Fed's domestic monetary policies, doing for cross-border money flows what those policies do for domestic money flows. Given that a very significant portion of increased domestic monetary flows come in from abroad, the MAC will directly complement the standard tools of the Federal Reserve while, at the same time, assuring trade-balancing exchange rates for the dollar.<br />
<br />
<b>Solutions:</b><br />
As with the Agreement's language on "devaluations for competitive purposes," it is hard to know how to get out of the problem that the agreement has created for America with its language on "market-determined exchange rates."<br />
<br />
Perhaps, as with the competitive devaluations problem, the solution may lie in a side letter signed in advance of the agreement's going into effect, a letter that makes subtle but very important changes in the agreed language as reflected in the following: (shaded text to be deleted; bold italic text to be added)<br />
<blockquote class="tr_bq">
Each Party should achieve and maintain <span style="background-color: #cccccc;">a market-determined</span> an exchange rate regime <i><b>that depends primarily on market-based incentive mechanisms such as fees and charges, not on direct currency market intervention, to move and keep market exchange rates at levels consistent with basic balance on the current account.</b></i></blockquote>
A Definitions section along the following lines should be added to further reduce any ambiguity:<br />
<br />
<ul>
<li><b><i>Market-based mechanisms</i></b> are those that moderate cross-border capital flows by using <i>ad valorem</i> charges on such flows proportional to the current degree of trade imbalance as would be done, for example, with the Market Access Charge (MAC).</li>
<li><b><i>Basic balance</i></b> on the current account is an aggregate current account balance with all trading partners that does not deviate from zero by more than one percent of GDP on average over the previous three years.</li>
</ul>
<br />
Besides solving potentially serious problems that could prevent America from eliminating its overall trade deficit, the solutions suggested here would eliminate serious internal inconsistencies in the Agreement as signed.<br />
<br />
These improvements would, in turn, reduce the risk that China, accusing the United States of violating the agreement, would renege on pledges regarding the purchase of US exports, increase retaliatory tariffs and non-tariff barriers against US exports, or abandon the agreement entirely. Finally, to the extent that the US/China Trade Agreement becomes part of a new USTR standard model for trade agreements world-wide, fixing the language as suggested here would significantly improve the quality of future trade agreements.<br />
<br />
<div>
<br /></div>
<br />
<div style="text-align: center;">
<b style="background-color: blue;"><span style="color: white;">America Needs a Competitive Dollar - Now!</span></b></div>
John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-19477701027311349642019-11-02T23:27:00.005-04:002019-11-03T23:15:01.904-05:00Making America Competitive Again - The Bipartisan Baldwin-Hawley Bill<br />
<br />
<i><b>Executive Summary</b></i><br />
America's trade deficits, which are caused primarily by America's overvalued dollar, are eroding the American Dream of sustainably growing and equitably shared prosperity for all. By making American goods too expensive to compete with foreign goods in domestic and export markets, the overvalued dollar kills jobs, reduces wages, closes factories, sends farms into bankruptcy, and endangers our national security. These problems, which cannot be solved by traditional tariffs, can be solved by attacking their monetary cause – the excessive flow of foreign capital into America's financial markets that overvalues the dollar, effectively creating a 27 percent tax on our exports and a 27 percent subsidy to foreigners today on all U.S. imports.<br />
<br />
The <span style="color: blue;"><a href="https://www.congress.gov/bill/116th-congress/senate-bill/2357/text" target="_blank">Baldwin-Hawley bill (S. 2357)</a> </span>includes two strong policy measures specifically designed to reduce these damaging capital inflows – a Market Access Charge (MAC) and Countervailing Currency Intervention (CCI), both of which are legal under IMF and WTO rules. The bill should be passed as soon as possible because it is the only policy package capable of increasing America's international competitiveness and ending US trade deficits in an efficient, cost-effective and timely, market-friendly manner. By making America more competitive, the bill will also support the other legislative initiatives required to restore the American Dream for all Americans.<br />
<br />
<b><i>America is suffering because we have lost our international competitiveness </i></b><br />
For the past 40 years, America has been spending more money importing foreign goods than it has been earning by exporting American goods. Consequently:<br />
<br />
<ul>
<li>millions of Americans have lost their well-paying middle class jobs in factories that can no longer compete with foreign-made goods as they did until the mid-1970s;</li>
<li>record-breaking numbers of farms in the American heartland are going bankrupt each year, unable to survive on commodity prices that have been driven down by a dollar now overvalued by 27 percent compared to the exchange rate that would balance U.S. trade; </li>
<li>government deficits rise because slower economic growth reduces tax revenues and increases the need for government expenditures to support workers and businesses no longer able to compete internationally;</li>
<li>U.S. productivity growth slows with reductions in government support for productivity-enhancing investments in infrastructure, skills training, R&D, green energy, environmental quality, national security, regional economic development, and efficient health care;</li>
<li>the financial sector, regularly faced with sharp swings in asset prices and occasional financial disasters like the Crash of 2008, finds it increasingly hard to focus on fulfilling its primary reason for being – to connect savers with real investors as efficiently as possible; and</li>
<li>the debt that we owe to foreigners – and that our children must ultimately repay – grows daily;</li>
</ul>
<br />
<i><b>America's biggest competitiveness problem today is the overvalued dollar </b></i><br />
These serious problems, which show that America is no longer as competitive internationally as it was up to the middle of the 1970s, are caused largely by the overvalued dollar.<br />
<br />
When we talk about American competitiveness and productivity, we normally think about things like the widgets per minute that a factory worker can produce or the bushels of wheat that a farmer can grow on an acre of land. <i>But when it comes to America's loss of international competitiveness, the overvaluation of the dollar's exchange rate compared to the rate at which total U.S. trade would be balanced is a far more serious problem than shortfalls in physical productivity.</i><br />
<br />
Take this simple example. If Stanley can make and sell a hammer in the US for $23 and China can make a comparable one that sells here for $20, Stanley's made-in-America hammers will not be able to compete without losing money. Consequently, American stores will import hammers from China, and our trade deficit with China will increase. But when the 27 percent overvaluation of the dollar is fixed by implementing the Baldwin-Hawley bill, the Chinese hammer price will rise from $20 to $25 while the US hammer remains at $23. Fixing the dollar would make U.S. hammers – and thousands of other U.S. products – fully competitive with imports not just from China, but from all countries.<br />
<br />
<b><i>A trade-balancing exchange rate eliminates trade deficits</i></b><br />
This hammer example shows that, without any investment in plant, equipment, R&D, staff training, etc. – an appropriate exchange rate can make our made-in-America hammer competitive with foreign-made hammers. Far more important, <u>this is true for all made-in-America products</u> that use made-in-America inputs such as steel and that are being produced at costs that do not exceed the price of competing imports by more than the dollar's overvaluation – currently 27 percent. Even if imported inputs are used, the dollar's realignment will still help America greatly.<br />
<br />
<i>Furthermore, if we fix our competitiveness problem by moving the dollar to a trade-balancing exchange rate, we will eliminate our <u>total</u> $500 billion current account deficit – something that country-specific tariffs cannot do because they simply divert our trade deficits to countries not subject to those tariffs in most cases. </i><br />
<br />
Also, using currency realignment rather than product-specific tariffs to balance US trade avoids the risk of <i>diverting imports from one product to another</i> – for example, from the steel rods and angle irons needed to fabricate steel joists to the joists themselves if the inputs are subject to tariffs and the fabricated joists are not. Such trade diversion is particularly costly because the fabrication value added goes to a foreign rather than a domestic fabricator, increasing U.S. import expenditures.<br />
<br />
<i>Balanced trade with the world as a whole will mean that Americans once again can earn as much producing exports as they spend on imports.</i> Moving the US dollar to a fully competitive level will lead to 3-5 million new jobs, higher wages, smaller deficits, more investment in infrastructure and other services best provided by the government, less need for the government to bail out failing industries, and less need for it to get involved in decisions best left to the private sector.<br />
<br />
<b><i>Exchange rate markets have been failing America for over forty years.</i></b><br />
Up to the 1970s, exchange rates were driven primarily by trade deficits. When America spent more on imports than it earned with exports, excess dollars would flood global foreign exchange markets, driving the dollar's value down. A cheaper dollar would make American goods cheaper and thus more competitive with foreign-made goods in both U.S. and foreign markets. This process, which worked well for centuries, was based on a firm link between exchange rates and balanced trade that kept America's trade in balance, preventing the loss of American jobs, factories, farms, and communities depending on U.S. production.<br />
<br />
Beginning in the mid-1970s, however, the linkage in global currency markets between exchange rates and balanced trade began to break down. Global financial flows started to expand far faster than global trade, and exchange rates became determined more by financial trade than by trade in real goods and services.<br />
<br />
For the United States, this quickly became a disaster. By the 1970s, the dollar was already the world's premier currency for international trade and international reserves. This status, plus the depth and breadth of U.S. financial markets, created an extraordinary global demand for dollars and dollar-based assets.<br />
<br />
This demand drove the dollar's exchange rate so high that it was increasingly difficult for made-in-America goods to compete with those made abroad, and the growing dominance of financial flows over trade in goods and services destroyed the link between exchange rates and balanced trade. Hence the serious trade deficits that are now eroding the economic, social, and political fabric of our nation.<br />
<br />
<b><i>The Baldwin-Hawley bill will restore the link between the dollar's value and balanced trade </i></b><br />
The <a href="https://www.govtrack.us/congress/bills/116/s2357" target="_blank">Competitive Dollar for Jobs and Prosperity Act (CDJPA)</a>, more commonly known as the Baldwin-Hawley bill, will rebalance America's external trade by attacking the key source of the dollar's overvaluation – excessive foreign capital inflows. The bill amends the Federal Reserve Act by adding a third mandate, achieving a current account balance, to the existing dual mandate of the Fed – full employment and price stability. And to facilitate fulfilling this new mandate, the bill adds a new policy tool, the Market Access Charge, that is specifically designed for efficient exchange rate management. It also reconfirms another tool used in the past to manage exchange rates – Countervailing Currency Intervention (CCI). <br />
<br />
<b><i>Market Access Charge (MAC)</i></b><br />
The Market Access Charge will discourage excessive foreign capital inflows by charging foreigners who want to bring money into America. This charge will reduce the attractiveness of dumping excess savings into America's financial markets when they are already awash with excess capital.<br />
<div>
The fee will start at 50 basis points (1/2 percent); gradually rise until foreign capital inflows are moderated to a level consistent with a trade-balancing exchange rate; then gradually decline until rising trade deficits indicate the need to resume moderating capital inflows with the MAC. This dynamic, data-based adjustment process will keep U.S. trade in balance more or less automatically in perpetuity. <br />
<br />
The MAC will cover all capital inflows at a standard rate. No exceptions will be granted in terms of country of origin, ownership, or declared purpose – except for <i>de minimis</i> transactions and money brought in to pay for U.S. exports. The MAC will be particularly effective in moderating private capital inflows because such flows are sensitive to the interest and dividends paid on invested funds.<br />
<br />
The Market Access Charge will generate up to<a href="https://www.prosperousamerica.org/up_to_100_billion_annual_revenue_potential_from_the_mac" target="_blank"> $100 billion of additional government revenues per year</a> from MAC fees, which will be <i>paid 100 percent by foreigners</i>, and from additional tax revenues on the increased output stimulated by the MAC. The additional government revenues can be used, for example, to support initiatives that increase U.S. competitiveness such as improved infrastructure.<br />
<br />
<b><i>Countervailing Currency Intervention (CCI) </i></b>The other weapon against trade deficits endorsed by the Baldwin-Hawley bill is Countervailing Currency Intervention (CCI). In the past, the Department of the Treasury and the Federal Reserve, which are America's monetary authorities, have occasionally intervened in the foreign exchange market to counter disorderly market conditions. The currencies used to intervene have usually come equally from Federal Reserve holdings and the Exchange Stabilization Fund of the Treasury. Under countervailing currency intervention, if China buys $500 billion of US Treasuries with yuan to force the dollar up and the yuan down, the Fed and Treasury will each purchase $250 billion worth of yuan to offset China's manipulation. Such intervention will help prevent further appreciation of the dollar driven by currency manipulation.<br />
<i><br /></i>
<i><b>Conclusion</b></i><br />
The MAC needs to be implemented as soon as possible because it will increase U.S. competitiveness in an effective, efficient, and timely, market-friendly manner – something that no other policy package can do. Increased competitiveness will balance America's foreign trade, thereby increasing economic growth, the number of jobs, wage rates, government revenues, and financial sector efficiency. This will bring closer the day when all Americans can enjoy the dream and the reality of shared prosperity.<br />
<div>
<br /></div>
<br />
<div style="text-align: center;">
<b style="background-color: blue;"><span style="color: white;">America Needs a Competitive Dollar - Now!</span></b></div>
</div>
John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com1tag:blogger.com,1999:blog-2819083306639305649.post-74693327067113393742019-08-27T21:16:00.001-04:002019-08-27T22:00:43.690-04:00World Prices are Expressed in Dollars, so Isn't Dollar Realignment Pointless?<h2>
</h2>
<h3>
<span style="font-size: small;">Question: </span><i style="font-weight: normal;">Most international trade contracts are priced and settled
in dollars. Doesn't that make the dollar's exchange rate irrelevant?</i></h3>
<div>
<i style="font-weight: normal;"><br /></i></div>
<div class="MsoNormal">
<o:p></o:p></div>
<h4>
Quick Answer: <span style="font-weight: normal;">No. International prices for U.S. exports may be <u>expressed</u>
in dollars, but they are <u>determined</u> in competition with similar products
from other countries at current market exchange rates. If the dollar is
overvalued, the price of U.S. products may be too high to compete with
similar products from other countries. </span></h4>
<div>
<span style="font-weight: normal;"><br /></span></div>
<div class="MsoNormal">
<o:p></o:p></div>
<h4>
Discussion: <span style="font-weight: normal;">A common reason that many Americans think the dollar does
not need to be devalued is that the price of
made-in-America goods are always expressed in dollars in everything we read.</span></h4>
<div>
<span style="font-weight: normal;"><br /></span></div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
For made-in-America goods sold within the United States,
this makes perfectly good sense because the dollar is the common currency of producers
and consumers. However, made-in-America goods sold as exports are also commonly
priced in dollars, and this is where the confusion starts. Before getting into the complexities of crop prices, let's start with a simple example to illustrate the point - hammers.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<i>The Case of Hammers</i>: What is the "world price" of a hammer that you buy at
the hardware store? A U.S. producer might produce one for $20, but a producer
in China might produce an identical one for RMB 120 including shipment to
America. If the exchange rate is RMB 6 per USD, the Chinese and American
hammers will compete head-to-head with both priced at $20. That becomes the
world price. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
But if the exchange rate is RMB 7 per USD, the hammer priced
at RMB 120 from China will only cost about $17 in the United States. Therefore,
to compete, the U.S. producer must cut his profits or even take a loss so that
he can sell his hammer that cost $20 for $17 – the "China Price" in
the U.S. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Our imaginary hammers must be priced at $17 or less because this is the world price and hammers will be invoiced and paid for at $17. However, though <u>expressed</u>
in dollars, the hammer's price in this simple example is actually <u>determined</u> by the RMB price of the hammer produced in China, converted to dollars at the prevailing exchange rate. The prevailing market exchange rate thus plays an important role in determining the world price.</div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Now let's take a far more important case, agricultural commodities, and see
the importance of distinguishing between prices <u>expressed</u> in dollars as
opposed to prices <u>determined</u> in U.S. dollars. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<h4>
<span style="font-weight: normal;"><i>The Case of Agricultural Commodities: </i></span><o:p></o:p><span style="font-weight: normal;">Many people think that, because the world price of
agricultural commodities is always given in dollars, it should make no
difference if the dollar itself is overvalued.</span></h4>
<div>
<span style="font-weight: normal;"><br /></span></div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
Soybeans and wheat are two important, widely exported American
crops. In fact, American farmers suffer greatly when world prices of these
crops fall. The following graphs show that both crops experienced serious price
declines during the first decade of the current century. Some of this reflected
fluctuations in soybean and wheat production among countries. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
But between half and nearly two-thirds of the declines and
subsequent increases in the prices of these two important crops can be
explained by movements in the price of the dollar. The dollar's price as
measured by its broad trade-weighted average exchange rate index<span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="color: windowtext; font-family: "times new roman" , serif;">[1]</span></span><!--[endif]--></span> fell
from the 170-180 range at the peak of the dollar's overvaluation at the end of
the Tech Bubble to about 135 in the aftermath of the Crash of 2008. During this
period of falling dollar prices, the prices of both soybeans and wheat rose
sharply. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
These two charts
dramatically demonstrate the importance to America's farmers of moving the
dollar back to a fully competitive exchange rate that balances imports and
exports. Because the dollar has gone up, the price of their crops has gone down.
When the dollar goes down to a more competitive exchange rate, the price of
their crops will go up!<span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="color: windowtext; font-family: "times new roman" , serif;">[2]</span></span><a href="file:///D:/_jh/Prof/Writing/BIB/BIB/Hansen,%202019.08.27,%20World%20Prices%20are%20Expressed%20in%20Dollars,%20So%20Isnt%20Dollar%20Devaluation%20Pointless.docx#_ftn2" title=""><!--[endif]--></a></span><o:p></o:p><br />
<span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="color: windowtext; font-family: "times new roman" , serif;"><br /></span></span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilaMmbWro-4MQb6JciSXj3APnI_DyO_rlOoHbKmlcBlqRQop4NeCf-O8ZrsAjaVZs9GemYc6rEq3GakZHOXkYtVSFR9RbxTqyXDQTfHeoplczqObZk_wJq0rCmmHpts1ROxf4_m_T75mo/s1600/Soy+%2526+Wheat.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="545" data-original-width="1425" height="244" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilaMmbWro-4MQb6JciSXj3APnI_DyO_rlOoHbKmlcBlqRQop4NeCf-O8ZrsAjaVZs9GemYc6rEq3GakZHOXkYtVSFR9RbxTqyXDQTfHeoplczqObZk_wJq0rCmmHpts1ROxf4_m_T75mo/s640/Soy+%2526+Wheat.jpg" width="640" /></a></div>
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<i>Conclusion: </i>Although contracts for America's
agricultural exports are written and settled in U.S. dollars, the exports
themselves must be priced at a level which makes them competitive with
exports of the same crops from other countries. Consequently, the higher the price
of the dollar, the lower the price that farmers receive. <o:p></o:p></div>
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<br /></div>
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Good crop prices require a competitive dollar, not the bloated, overpriced dollar that farmers have faced for most of the
past 40 years. No wonder the average American farmer is struggling so hard and
earning so little.<o:p></o:p></div>
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<!--[endif]-->
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<div id="ftn1">
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<a href="file:///D:/_jh/Prof/Writing/BIB/BIB/Hansen,%202019.08.27,%20World%20Prices%20are%20Expressed%20in%20Dollars,%20So%20Isnt%20Dollar%20Devaluation%20Pointless.docx#_ftnref1" name="_ftn1" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="color: windowtext; font-family: "times new roman" , serif;">[1]</span></span><!--[endif]--></span></a> Note that these figures
are an index number series indicating values of the dollar <i>relative</i> to
its average value against the currencies of other countries in 1990. These are
not exchange rates. <o:p></o:p></div>
</div>
<div id="ftn2">
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<a href="file:///D:/_jh/Prof/Writing/BIB/BIB/Hansen,%202019.08.27,%20World%20Prices%20are%20Expressed%20in%20Dollars,%20So%20Isnt%20Dollar%20Devaluation%20Pointless.docx#_ftnref2" name="_ftn2" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="color: windowtext; font-family: "times new roman" , serif;">[2]</span></span><!--[endif]--></span></a> In the two graphs, the right-hand axis showing the price indexes for
soybeans and wheat are inverted – higher prices appear towards the bottom and
lower prices towards the top of the vertical axis, thus making it easier to see
the significant <b>inverse</b> correlation
between the price of the dollar and the price at which U.S. farmers can sell
their crops at home and abroad<i>.</i><o:p></o:p></div>
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<div style="text-align: center;">
<b><span style="color: blue;">America Needs a Competitive Dollar - Now!</span></b></div>
John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-33740994967815567732019-08-17T01:14:00.001-04:002019-08-17T01:14:12.362-04:00Major Progress on the MAC - Now the Centerpiece of a Bill in the Senate<div class="MsoNormal">
Dear
Friends,<o:p></o:p></div>
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<br /></div>
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A
major milestone has just been reached in the battle to eliminate the U.S. trade
deficit, stop the offshoring of U.S. industry, and put millions of Americans to
work in well-paying jobs. Legislation for the <b style="font-style: italic;">Market Access Charge (MAC) </b>has just been introduced in the U.S. Senate!</div>
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<br /></div>
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Senators Tammy Baldwin (D) and Josh Hawley (R) have just introduced their bi-partisan <span style="background-color: white;"><i><b>Competitive Dollar for Jobs and Prosperity Act (CDJPA)</b></i>. The full text of this act, which is the </span><span style="background-color: white;">legislative vehicle for the </span><b style="font-style: italic;">Market Access Charge (MAC), </b>is now available on the Congress.gov website as <a href="https://www.congress.gov/bill/116th-congress/senate-bill/2357/text?loclr=cga-bill">Senate
Bill S.2357</a>. The Senate press release is available <a href="https://www.baldwin.senate.gov/press-releases/competitive-dollar-for-jobs-and-prosperity-act">here</a>.</div>
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<o:p></o:p></div>
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<br /></div>
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Within hours of the bill's presentation, the nation's news media and other organizations were commenting on the bill. One of the first notes came from the <a href="https://www.prosperousamerica.org/press_release_cpa_strongly_endorses_baldwin_hawley_currency_legislation">Coalition
for a Prosperous America</a> (CPA), a bi-partisan group representing American farmers, ranchers and manufacturers that is strongly supporting the MAC. </div>
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<br /></div>
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The CPA note was followed closely by coverage from the <a href="https://www.washingtonpost.com/business/economy/trump-not-alone-in-seeking-lower-dollar-as-lawmakers-unveil-foreign-investor-tax/2019/07/30/90c18a40-b308-11e9-951e-de024209545d_story.html?utm_term=.d5754531cc82">Washington
Post</a> (Lynch), <a href="https://thehill.com/opinion/finance/456768-trade-wars-and-the-over-valued-dollar?rnd=1565298424%0d">The
Hill</a> (Scott of EPI), <a href="https://www.barrons.com/articles/forget-tariffs-heres-a-better-way-to-close-the-trade-gap-51565348401">Barron’s</a>
(Klein), <a href="https://carnegieendowment.org/2019/08/01/5-smart-reasons-to-tax-foreign-capital-pub-79630">Bloomberg</a>
(Pettis of Carnegie), and <a href="https://amgreatness.com/2019/08/03/hawley-is-asking-the-right-questions-about-the-dollar/">American
Greatness</a> (Bovard). </div>
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The CDJPA has clearly generated a lot of interest and positive, thoughtful commentary from across
the political spectrum in a very short time!</div>
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<o:p></o:p></div>
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<br /></div>
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With the recent devaluation of China's currency below RMB 7/USD, introduction in the Senate of MAC could not have been more timely. The MAC offers a clear path forward to the goal of eliminating the US trade deficit by moving the US dollar to a fully competitive exchange rate -- one that will make it possible for Americans to earn as much producing exports as they spend on imports. </div>
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<br /></div>
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Furthermore, the MAC will accomplish this goal in a manner that avoids the fireworks associated with the current trade war, and it will minimize and possibly eliminate the risk of triggering beggar-thy-neighbor currency devaluations and a race to the bottom for global currency values. (Check back in a couple of days for a blog on this important issue.)</div>
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The CPA has played a key role in moving the MAC forward to this historic point. We should all be most grateful for their leadership and should support the fine work they are doing across America to help give our fine country the future it deserves. For more information on the CPA, see their <a href="https://www.prosperousamerica.org/">website</a>.</div>
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<br /></div>
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The
bill’s presentation to the Senate is indeed a major milestone – but only one of
many that lie between where we are today and the bill’s ultimate passage. Your support and advice would be most welcome as the process moves forward.<o:p></o:p></div>
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<br /></div>
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Please
share.<o:p></o:p></div>
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<br /></div>
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John
<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
John R.
Hansen, PhD<o:p></o:p></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
Former
Economic Advisor, The World Bank<o:p></o:p></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
Founding
Editor, Americans Backing a Competitive Dollar (ABCD)<o:p></o:p></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
Advisory
Board, Coalition for a Prosperous America<o:p></o:p></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
<a href="mailto:hansenj@bellsouth.net">hansenj@bellsouth.net</a><o:p></o:p></div>
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<o:p></o:p></div>
<a href="http://www.abcdnow.blogspot.com/">www.abcdNow.blogspot.com</a><br />
America Needs a Competitive Dollar - Now!John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-54412797428672784872019-08-14T22:36:00.000-04:002019-08-14T22:36:32.608-04:00<div class="MsoNormal">
<b><span style="font-size: 12.0pt; mso-bidi-font-size: 11.0pt;">Trade
Diversion, Tariffs, and Trade Deficits</span></b></div>
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<br /></div>
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The
following chart from a recent <a href="https://www.cfr.org/blog/trumps-trade-war-puts-belt-and-road-first">Geo-Graphics</a>
blog post highlights beautifully what many have been saying for a long time: The main impact of tariffs
is generally trade diversion – imports are diverted from one country to another, but tariffs alone can do little to reduce <u>overall</u> trade deficits.<br />
<span style="font-size: 12.0pt; mso-bidi-font-size: 11.0pt;"><br /></span>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFB5EbnNBdfiUI_BVSDC0dOQQzbO9MBkZyMWcOc-oWjtA7gsM-cP_Sn_BwtRZa9xb4ksBCcrSZxLbxRF7SZBNNYMthSPQDqfMnEoFfGdkZFHrZ1V27EcqIRM5rlSzxOgrB924n9zB3HhY/s1600/US+%2526+ROW+Trade+Balances+with+China.NT.OL.png" imageanchor="1" style="margin-left: auto; margin-right: auto; text-align: center;"><img border="0" data-original-height="592" data-original-width="508" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFB5EbnNBdfiUI_BVSDC0dOQQzbO9MBkZyMWcOc-oWjtA7gsM-cP_Sn_BwtRZa9xb4ksBCcrSZxLbxRF7SZBNNYMthSPQDqfMnEoFfGdkZFHrZ1V27EcqIRM5rlSzxOgrB924n9zB3HhY/s400/US+%2526+ROW+Trade+Balances+with+China.NT.OL.png" width="342" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><br /></td></tr>
</tbody></table>
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As the Geo-Graphics blog states:</div>
<blockquote class="tr_bq" style="text-align: left;">
<i>China … has retaliated
[to U.S. tariffs] by pressuring its firms to find alternative [sources of
supply], from agricultural goods to oil, helping to <span style="background: yellow; mso-highlight: yellow;">increase the U.S. deficit with China to just over
two percent of GDP</span>—as the blue line on the above figure shows. Meanwhile, <span style="background: yellow; mso-highlight: yellow;">America’s global trade deficit
has expanded by eight percent</span>.</i></blockquote>
</div>
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Given that the US trade deficit with China was already increasing sharply before the imposition of tariffs began, and given that existing contracts and problems of finding new sources of supply commonly cause a lag between the imposition of tariffs and changes in trade patterns, we should not read too much into these preliminary results.<br />
<br />
Nevertheless, the MAC, unlike tariffs, will make U.S. goods cheaper in addition to making Chinese goods more expensive. Consequently, the MAC will encourage the Chinese to purchase U.S. goods (making the Chinese more
dependent on us), while also discouraging U.S. purchases of Chinese
goods (making us less dependent on them). The MAC's result is precisely the kind of de-coupling and reduced Sino-dependency for the U.S. that many have been
advocating.<br />
<br />
Furthermore, because the MAC will keep pushing imports down and exports up until balanced trade is achieved, it will assure the virtual elimination of the US trade deficit, thus making it possible once again for Americans to earn as much producing exports as they spend on imports.</div>
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<br /></div>
<div style="text-align: center;">
<span style="color: blue;">America Needs a Competitive Dollar - Now!</span></div>
John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-80593500738005914062018-05-08T23:31:00.003-04:002018-05-08T23:31:59.748-04:00The global trade system is broken because the global exchange rate mechanism is broken.<i>Background</i>: I posted the following on the current debate being sponsored by The Economist. The topic: <a href="https://debates.economist.com/debate/global-trade-system-broken">Is the Global Trade System Broken</a>. I would encourage you to follow this interesting discussion.<br />
-----------------<br />
<h4>
Is the Global Trade System Broken?</h4>
The global trade system is broken because its very foundation -- the global exchange rate mechanism -- is broken. It no longer sets relative prices for domestic and foreign goods at levels consistent with balanced trade.<br />
<br />
As Autry rightly notes, in the days of Ricardo, Hume, and other fathers of classical free-trade economics, an automatic mechanism assured that exchange rates were consistent with balanced trade.<br />
<br />
Especially for countries like the United States with widely-used currencies, exchange rates today float in a manner determined largely by international capital flows, flows that now vastly outweigh cross-border flows of real goods and services. Exchange rates set in this manner often bear little or no relationship to the rates that would balance trade.<br />
<br />
For example, compared to the exchange rate that would fully balance US trade, the dollar is now overvalued by 20-25 percent. The failed global exchange rate system, which no longer provides the basis for balanced global trade, has led to the massive trade deficits that have been undermining the US economy for forty years - and have been generating lots of business for the WTO!<br />
<br />
To fix today's broken trading system, the world must first create a new exchange rate determination system. This could be based, for example, on the Market Access Charge that is currently under consideration in the United States. Whenever a country like the United States suffers persistent trade deficits, the MAC would moderate capital inflows to levels consistent with a trade-balancing equilibrium exchange rate for the dollar. Applied globally, this approach would fix the world's broken exchange-rate system, thereby fixing the imbalances that plague today's global trade system.<br />
<br />
Yes, the WTO is imperfect, but no bureaucratic mechanism can fix a trade system that is broken because there is no link between currency values and balanced trade!<br />
<br />
John<br />
<div>
<br /></div>
<br />
<div style="text-align: center;">
<b><span style="color: blue;">America Needs a Competitive Dollar - Now!</span></b></div>
John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-87500734541779255842017-10-06T22:35:00.005-04:002017-10-06T22:37:51.123-04:00Devaluation - Making Good Wages a Reality for AmericansWould the U.S. workers who must compete with low-wage Mexican workers benefit from a twenty-five percent devaluation of the dollar, the change needed to balance overall U.S. trade? Absolutely. [1]<br />
<br />
In fact, a twenty-five percent devaluation of the dollar would make the wages of workers in Mexico and other low-wage countries virtually irrelevant to the competitiveness of U.S. workers. This may sound like an outrageous claim, but the numbers back it up.<br />
<br />
Before we turn to specific quantitative examples, let’s step back and look at the big picture. Why would correcting the dollar’s current twenty-five percent overvaluation benefit U.S. workers so greatly? According to data from the U.S. Bureau of Economic Analysis, payments to employees account for only 16 percent of the selling price of American manufactured output (Fig. 1). [2] However, moving the U.S. dollar to its trade-balancing equilibrium exchange rate would increase the total selling price of America’s manufactured goods by 25 percent. [3]<br />
<br />
<b>Figure 1. Labor represents a small share of the selling price for manufactured goods.</b><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglmEELVQ-Mx6kaaz8Q1Bi2U8mIr4a16bb9wYFIvI9C1v38XiusfifylSHPO6jubewRsorMjHP4FurA76_X2FiO9qPdp0K6oU8WYYUEC3248H9WWyF-THpUZX_8zdn9wepC8RlkVuN-ZTY/s1600/Wage+share+of+Output+Value.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="435" data-original-width="693" height="250" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglmEELVQ-Mx6kaaz8Q1Bi2U8mIr4a16bb9wYFIvI9C1v38XiusfifylSHPO6jubewRsorMjHP4FurA76_X2FiO9qPdp0K6oU8WYYUEC3248H9WWyF-THpUZX_8zdn9wepC8RlkVuN-ZTY/s400/Wage+share+of+Output+Value.png" width="400" /></a></div>
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<br />
And in sectors such food, beverages, motor vehicles and parts, and primary metals where labor only represents 10-12% of the selling price, the impact of competition from low-wage Mexican workers is even smaller. For these sectors, the 25 percent increase in selling prices that the dollar’s devaluation would make possible would have an even greater positive impact.<br />
<br />
<h4>
Quantifying the impacts of moving to a fully competitive dollar</h4>
<br />
This note presents a model that has been developed to make it easy to quantify the impacts of moving to a fully competitive dollar at the firm level under different assumptions regarding (a) the size of the devaluation; (b) the allocation of the “devaluation bonus” (the additional revenues that devaluation would generate for American manufacturing firms) between workers, investment, profit-taking, and (c) tradeoffs between raising dollar prices to increase revenues directly vs. lowering prices in foreign markets to increase sales volumes. (See Annex A. The model is also available online <a href="https://drive.google.com/open?id=0B9wSlwkCYQy1MG9hbVFBejJKVWM">here</a>.)<br />
<br />
Some basic parameters such as the initial exchange rate, the devaluation needed to move U.S. trade to a true-zero balance, and the share of wages in U.S. manufacturing output are shown in Section 1 of the model. Other parameters, which are also highlighted in green, are located elsewhere in context. Incidentally, the model can easily be used for other countries by entering appropriate parameters.<br />
<br />
<h4>
Devaluation Could Raise U.S. Wages Sharply</h4>
<br />
If dollar selling prices for exports were raised by the full amount of the 25 percent dollar devaluation needed to balance U.S. trade, factories would earn an extra $25 for every $100 of sales (see Section 2). This devaluation bonus would be more than enough to cover any wage differentials between Mexico and the U.S. In fact, it would be enough to pay the entire $16 average labor cost embodied in goods selling for $100 – with money left over for increased investments and profits. Moving to a competitive dollar would make the current low wages in Mexico and similar countries irrelevant.<br />
<br />
Under these conditions, if U.S. manufacturers kept wages at the current average level of 16 percent of the dollar value of output, a 25 percent devaluation would push wages from $16 to $20. Because the total volume of products shipped does not increase in this scenario, no additional output or workers would be needed to generate the added dollar revenues. Consequently, existing workers could share the additional revenues generated by devaluation as wage increases.<br />
<br />
If workers were to receive the entire $25 devaluation bonus, wages per $100 of output measured would rise from $16 to $41. Such a massive increase in wages is, of course, highly unlikely. U.S. manufacturers would almost certainly retain part of the additional dollar earnings to invest in plant, equipment, and worker training – and to increase net profits. But this scenario demonstrates the powerfully positive impact that devaluation could have on the wages of American workers – regardless of wage rates in Mexico. Conversely, it indicates how seriously U.S. workers and enterprises have been harmed by the dollar’s current overvaluation.<br />
<br />
<h4>
Devaluation Could Raise U.S. Sales, Investment, Employment, and Economic Growth</h4>
<br />
With devaluation, U.S. producers could reduce their prices in foreign currencies while, at the same time, increasing their dollar prices. Lower prices in foreign markets would expand sales, production volumes, and economies of scale.<br />
Section 3 of the model explores this scenario using two additional parameters – the share of the devaluation bonus used by U.S. producers to increase dollar prices, and the price elasticity of foreign demand.<br />
<br />
With a trade-balancing devaluation in place, U.S. producers could increase the dollar price of their exports by the full extent of the devaluation, which is the implicit strategy for the Section 2 scenario. Section 3 can generate the same scenario if 100% is entered as the share of devaluation benefits “used by U.S. producers to increase dollar prices.” In this case, the devaluation fully offsets the dollar price increase, leaving the peso price unchanged, and the U.S. producer immediately enjoys a 25 percent increase in dollar revenues as discussed above.<br />
<br />
At the other extreme, U.S. producers could keep their dollar prices at pre-devaluation levels. In this case, zero percent of the dollar’s devaluation would be used to increase the selling price in dollars, and one hundred percent of the devaluation’s impact would be used to lower selling prices in peso terms in Mexico – a strategy that would be attractive to companies wishing to expand total sales volumes in the country. (Any reasonable value between zero and 100 percent could, of course, be entered for this parameter.)<br />
<br />
To complete this calculation, we need an estimate of the price elasticity of Mexican demand for U.S. exports – the percentage by which Mexican demand would increase for every one percent decrease in the price of U.S. exports expressed in pesos. If the price elasticity of demand is greater than zero, which it almost always is for goods and services, decreasing the peso price for American exports will increase sales in Mexico. For example, if the price elasticity of demand is -1.0, a widely used assumption, a 25 percent decrease in the peso price of American exports would generate a 25 percent increase in the dollar value of sales to Mexico. (Note: Price elasticities are normally negative numbers, reflecting the fact that, as prices decrease, demand increases and vice versa).<br />
<br />
These simple scenarios show the range of impacts that are possible on variables important to U.S. producers and workers – including the value and volume of sales, wages, and gross profits. Regardless of the strategy followed by individual producers, the positive impact of a trade-balancing exchange rate on prices, sales, wages, and profits is undeniable.<br />
<br />
<h4>
Total U.S. Employment Benefit from Devaluation</h4>
<br />
The memo item in Section 5 at the end of the model looks at the overall impact of devaluation on employment in the United States. Data from the International Trade Administration indicate that, as of 2016, a billion dollars of additional net exports will support 5,744 new jobs on average.[4] BEA data indicate that America’s current account balance last year was a minus USD 461 billion, and that the merchandise trade balance was in the hole by USD 778 billion.<br />
<br />
If 100 percent of the devaluation impact was used to reduce foreign currency prices of U.S. exports to make them more competitive, and if America brings the dollar back to an exchange rate that balances U.S. external trade by implementing the Market Access Charge (MAC), this could generate between 2.6 million and 4.5 million new jobs, depending on the target set.<br />
<br />
<h4>
Conclusion</h4>
<br />
Low wages in foreign countries contribute to low wages, falling employment in the United States, and growing trade deficits only if the U.S. dollar is overvalued. Moving the dollar to its trade-balancing equilibrium exchange rate would allow American producers to pay higher wages, employ more workers, investment more heavily in enhanced productivity and growth, and enjoy higher net profits.<br />
<br />
A competitive exchange rate makes American workers competitive.<br />
<br />
<div style="text-align: center;">
<b><span style="color: blue;">America Needs a Competitive Dollar - Now!</span></b></div>
<br />
--------------------<br />
Notes:<br />
[1] <span style="font-family: "times new roman" , serif; font-size: 12pt;">For further information on the adjustment needed to
move the dollar to a trade-balancing equilibrium exchange rate, see </span><span style="font-size: 9.0pt; mso-bidi-font-size: 12.0pt;"><a href="https://abcdnow.blogspot.com/2017/07/worlds-most-misaligned-currencies.html">here</a></span><span style="font-family: "times new roman" , serif; font-size: 12pt;">, </span><span style="font-size: 9.0pt; mso-bidi-font-size: 12.0pt;"><a href="https://drive.google.com/open?id=0B9wSlwkCYQy1WlR6ZmNxemIzNDg">here</a></span><span style="font-family: "times new roman" , serif; font-size: 12pt;">, and </span><span style="font-size: 9.0pt; mso-bidi-font-size: 12.0pt;"><a href="https://d3n8a8pro7vhmx.cloudfront.net/prosperousamerica/pages/2764/attachments/original/1499708589/170623_working_paper_currency_v5_MCS.pdf?1499708589">here</a></span><span style="font-family: "times new roman" , serif; font-size: 12pt;">.</span><br />
[2] <a href="file:///D:/_jh/Prof/Writing/BIB/BIB/U.S.%20Bureau%20of%20Economic%20Analysis" style="font-family: "Times New Roman", serif; font-size: 12pt;"><span style="color: navy; font-size: 9.0pt;">U.S. Bureau of
Economic Analysis</span></a><span style="font-family: "times new roman" , serif; font-size: 12pt;">, KLEM, Shares of Gross Output by Industry</span><br />
[3] <span style="font-family: "times new roman" , serif; font-size: 12pt;">Should these calculations be based on the share of
labor in value added, which is higher than its share in the value of output?
No. Factories sell output, not value added. This applies to foreign exports as
well as domestic sales. When Americans buy a cheap refrigerator from Mexico,
they buy the entire refrigerator, not just the value that was added in Mexico.
This is equally true when Mexicans buy America’s exports. They pay the total
price, not just the cost of value added in America. Furthermore, exchange rates
apply to the </span><i style="font-family: "Times New Roman", serif; font-size: 12pt;">total</i><span style="font-family: "times new roman" , serif; font-size: 12pt;"> price, not just
the value added. </span><br />
[4]<span style="font-family: "times new roman" , serif; font-size: 12pt;"> The model is also available on line in executable form at <a href="https://drive.google.com/open?id=0B9wSlwkCYQy1MG9hbVFBejJKVWM"> https://drive.google.com/open?id=0B9wSlwkCYQy1MG9hbVFBejJKVWM</a></span><br />
<br />
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John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-68557863762122264842017-10-02T23:43:00.001-04:002017-10-02T23:45:50.069-04:00Will Offshore Dollar Trading Undermine the MAC?<b>Introduction</b><br />
<br />
The Market Access Charge (MAC) would be a charge on foreign capital flowing into the United States when excessive inflows from abroad are driving the U.S. dollar to non-competitive levels on a sustained basis. As it would be difficult to impose this tax on transactions taking place in other countries, some have suggested that the untaxed trading of dollars and dollar-based assets outside the United States would undermine the MAC's effectiveness.[1]<br />
<br />
This note summarizes the impact that offshore dollar trading might have on the dollar's exchange rate, then examines the reasons why the MAC would still be the best possible way to move the dollar to its fundamental equilibrium exchange rate – the exchange rate that would eliminate America's external trade deficits by restoring the international competitiveness of its goods and services, workers, factories, and farms, regardless of offshore trading activity.<br />
<br />
<b>Would offshore trading in dollars reduce the efficacy of the MAC</b><br />
<br />
In the U.S., the MAC would lower the value of the dollar because the price of the dollar, like any price, is set by supply and demand. Charging the MAC whenever a foreigner purchases an asset located or registered in the United States will reduce the desirability of acquiring dollars, thus moving the value of the dollar towards its trade-balancing equilibrium exchange rate.<br />
<br />
The MAC would be charged on (1) purchases of dollars and dollar-based assets from US resident owners by non-US residents and (2) sales of securities whose ownership is registered in the United States and must be re-registered when securities are sold by non-US residents to other non-US residents.<br />
<br />
Sales of dollars already outside the US such as dollars trading in London would not be subject to the MAC. Although the volume of USD trade outside the US is very large, this volume is not a measure of the influence such trading has on the exchange rate because much of the trading is very short-term and is often reversed many times per day to exploit market fluctuations.<br />
<br />
The MAC would divert the supply of dollars being traded from U.S. markets where the charge would have to be paid to offshore markets. By increasing the supply of dollars in offshore markets, the MAC would push down the dollar’s price, assuming a relatively fixed demand, and this would tend to lower the price of dollars traded even in offshore markets, thus reinforcing the price impact of the MAC on trades in U.S. markets.<br />
<br />
The MAC would be applied to all purchases of U.S. financial securities, public or private, whose ownership is registered in the United States. For such securities, this means that, even if the transactions take place between foreigners located in other countries, the securities would have to be re-registered in the United States for the transaction to be legally binding. The MAC would be applied by the depository banks and companies such as DTC and Cede & Co. that manage the ownership registration for book-entry securities and entitlement transfers. In this way, the impact of the MAC can be extended well beyond the purchase and sale of securities across the border that would be taxed directly by the MAC.<br />
<br />
The MAC would also cover the sale to foreigners of intellectual property, American homes, farms, factories, and natural resources such as mines – another important source of capital inflows that distort the dollar’s value.<br />
<br />
In brief, while the offshore stock of dollars not subject to the MAC may reduce somewhat the initial impact of the MAC charge on the dollar’s value, this effect will be limited, and it will be offset to a considerable degree by the increased supply of dollars now trading in foreign markets not subject to the MAC and by capturing U.S.-based re-registration of foreign ownership. If further adjustment to the dollar’s price is needed to achieve balanced trade, the MAC charge will automatically increase to compensate.<br />
<br />
<b>Other Factors Enhancing the MAC’s Offshore Impact</b><br />
<br />
Falling returns to speculators, the rising risk of losses caused by exchange rate adjustment, and the signaling effects of the MAC would further increase the efficiency with which the MAC moves the dollar to its trade-balancing equilibrium exchange rate.<br />
<br />
<b><i><span style="font-family: "times" , "times new roman" , serif; font-size: x-small;">Figure 1. 2013 Taper Tantrum: Market is Sensitive to Interest Rate Changes</span></i></b><br />
<b><i><span style="font-family: "times" , "times new roman" , serif; font-size: x-small;"> – Even if Only Potential and Small</span></i></b><br />
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<b><i><span style="font-size: x-small;"><br /></span></i></b>
<br />
<blockquote class="tr_bq">
<b><i>Falling Returns</i></b></blockquote>
The MAC will reduce returns to traders. This will reduce incentives to purchase dollars, and will increase the incentives to purchase other currencies such as Euros, British pounds, and Japanese yen. Markets are very sensitive even to the possibility of even small yield changes. Note, for example, the sharp and immediate response to Fed Chair Ben Bernanke's observation on June 19,2013, that, because of improved economic conditions, "it would be appropriate to moderate the monthly pace of purchases later this year." This triggered the famous "taper tantrum" of 2013 shown in Figure 1 (Neely, 2014).<br />
<blockquote class="tr_bq">
<b><i>Risk of Valuation Losses</i></b></blockquote>
Implementing the MAC will make it very clear that the U.S. intends to devalue the dollar by as much as required to balance U.S. trade. Any investor can quickly discover from the IMF, the Peterson Institute, the Coalition for a Prosperous America website, or the Americans Backing a Competitive Dollar blogsite that this will probably require a devaluation of 20-30 percent. This would ultimately translate into a similar valuation loss for foreigners holding assets denominated in dollars.<br />
<blockquote class="tr_bq">
<b><i>Signaling</i></b></blockquote>
Perhaps the MAC's greatest power will be as a signaling device. Its most effective signals will be the following:<br />
<br />
<ul>
<li>The U.S. has finally become serious about balancing its external trade and, to this end, will do "whatever it takes" to move the dollar to its trade balancing fundamental equilibrium exchange rate.</li>
<li>The U.S. will no longer be the dumping ground for the "glut of savings" flooding in from countries like China that, through unfair mercantilist trade and currency policies, have run up huge surpluses with the United States, killing thousands of U.S. factories and millions of U.S. jobs.</li>
<li>The U.S. will no longer be the "buyer and borrower of last resort" that the world has come to take for granted as the source of global growth. Future growth must be built on balanced trade, not on America's ever-growing external debts that future generations of Americans must repay.</li>
</ul>
<br />
The knowledge that the U.S. Government and the American people intend eliminate the U.S. trade deficit by moving the dollar to a fully competitive exchange rate will be an exceptionally powerful signal moderating the foreign demand for dollars. In fact, this effect will undoubtedly be far more important than the MAC charge of 50-100 bp itself!<br />
<br />
<b>Conclusion</b>: MAC is the best option for making America Competitive Again<br />
No other policy has been identified that would focus as sharply as the MAC on fixing the main cause of U.S. trade deficits the overvalued U.S. dollar.<br />
<ul>
<li>The MAC would be applied to the purchase of all securities with ownership registered in the United States.</li>
<li>The MAC will reduce the demand for dollars and dollar-based assets by reducing the return to foreigners on such assets.</li>
<li>The MAC's signaling effects regarding America's determination to devalue the dollar to a level that will balance trade will increase its efficacy.</li>
</ul>
The MAC is not a perfect solution for all of America's trade problems, and it will need to be complemented by other policies designed to combat outright currency manipulation by foreign governments, and unfair trade practices at the sectoral and product levels. However, in a complex world, we cannot let a futile search for the perfect be the enemy of the good – especially since the MAC is a better way to fix the overvalued dollar than anything else on the table today.<br />
<br />
John R. Hansen<br />
September 22, 2017<br />
<br />
<b>Notes:</b><br />
[1] A more detailed explanation of the MAC and how it would work is available <a href="http://abcdnow.blogspot.com/2016/05/how-mac-would-help-restore-american.html">here</a> and <a href="http://www.prosperousamerica.org/why_the_market_access_charge_is_necessary_to_fix_trade_imbalances">here</a>. The links between the MAC and balanced trade for American can be summarized as follows: MAC charge on capital inflows > smaller inflows > less upward pressure on the value of dollars and dollar-based assets > a more competitive exchange rate for the dollar > more exports & fewer imports > balanced trade > more employment, more investment, more profits & more growth.<br />
<br />
[2] The trading volumes are many times larger than the actual stock of dollars held overseas because of the extremely high velocity and thus turnover of forex trading.<br />
<br />
<b>References</b>:<br />
Stumo, Michael, Jeff Ferry, and John R. Hansen. 2017.07.13. <i>The Threat of U.S. Dollar Overvaluation: How to Calculate True Exchange Rate Misalignment & How to Fix It.</i> Washington: Coalition for a Prosperous America. <a href="http://www.prosperousamerica.org/the_threat_of_u_s_dollar_overvaluation_how_to_calculate_true_exchange_rate_misalignment_how_to_fix_it">(http://www.prosperousamerica.org/The Threat of U.S. Dollar Overvaluation: How to Calculate True Exchange Rate Misalignment & How to Fix It</a>.)<br />
<br />
Hansen, John R. 2017.09.08. Why the Market Access Charge is Necessary to Fix Trade Imbalances. Washington: Coalition for a Prosperous America. (<a href="http://www.prosperousamerica.org/why_the_market_access_charge_is_necessary_to_fix_trade_imbalances">http://www.prosperousamerica.org/why_the_market_access_charge_is_necessary_to_fix_trade_imbalances</a><a href="http://www.prosperousamerica.org/why_the_market_access_charge_is_necessary_to_fix_trade_imbalances">http://www.prosperousamerica.org/why_the_market_access_charge_is_necessary_to_fix_trade_imbalances</a>)<br />
<br />
Neely, Christopher J., 2014.01.28, “Lessons from the Taper Tantrum,” Economic Synopses: St. Louis, Federal Reserve. (<a href="https://research.stlouisfed.org/publications/economic-synopses/2014/01/28/lessons-from-the-taper-tantrum/">https://research.stlouisfed.org/publications/economic-synopses/2014/01/28/lessons-from-the-taper-tantrum/ </a>)<br />
<br />
<div style="text-align: center;">
<span style="color: blue;">America Needs a Competitive Dollar - Now!</span></div>
John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-2822013045697547182017-10-02T13:41:00.001-04:002017-10-02T13:41:22.316-04:00Low Mexican Wages, U.S. Trade Deficits, and NAFTA<br />
<h4>
Introduction</h4>
Wages in Mexico are only one-eighth to one-quarter of U.S. levels.[1] Because of this wage differential, many Americans believe that NAFTA is killing hundreds of thousands of American jobs and is driving wages for the remaining jobs down towards Mexican levels.[2] <br />
<br />
Some go on to suggest that, unless we can get the Mexican Government to sign a revised NAFTA agreement with a clause that forces it to make Mexican companies to pay wages closer to U.S. levels, we should terminate NAFTA and wait until a better wage parity between Mexico and the United States has been achieved. This would be a serious mistake for the following reasons:<br />
<br />
<ul>
<li>First, the Mexican government is highly unlikely to sign a binding agreement with enforceable sanctions that would obligate it to make private Mexican enterprises to pay wages well above prevailing Mexican market wage rates.</li>
<li>Second, and far more important, global data on U.S. bilateral trade deficits and on wages in partner countries indicate no significant connection, either in the past or today, between low foreign wages and U.S. trade deficits. </li>
<li>Third, while low foreign wages and U.S. bilateral trade deficits do occur simultaneously, the cause of the deficits lies not in the low wages but elsewhere. Killing NAFTA would probably not end these trade deficits. Instead, it would destroy jobs on both sides of the border as supply chains dependent on cross-border trade collapse. In fact, the trade deficit could become even worse if, as is likely, NAFTA’s caused the peso’s collapse, making Mexican goods even cheaper.</li>
</ul>
<br />
<h3>
No real connection between low foreign wages and U.S. trade deficits</h3>
Between the end of World War I and the second OPEC Oil Crisis, virtually all of America’s trading partners had incomes lower than those in America.[3] If low wages drive trade deficits, America should have suffered substantial deficits during these years. However, the reality was far different. America had a current account surplus, or a deficit less than one-half percent of GDP, in fifty-nine of those sixty-five years! In the other years, events such as the Great Depression, WWII, and increased oil prices – not wage differentials – clearly caused the deficits.<br />
<br />
Country-specific data for the past quarter century likewise undermine the assumption that trade with low-wage countries causes trade deficits. Were this true, we should see a consistent pattern across U.S. trading partners of large bilateral trade deficits with low wage countries, and small bilateral trade deficits, or even trade surpluses, with high-wage countries.<br />
<br />
However, consider Figure 1, which is based on data for thirty-five OECD and BRIC countries. The countries are ranked along the horizontal axis by wages and along the vertical axis by bilateral trade deficits.[4]<br />
<br />
<b><i><span style="font-size: x-small;">Figure 1. Low Foreign Wages Not the Real Cause of U.S. Trade Deficits</span></i></b><br />
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<br />
This figure demonstrates beyond all reasonable doubt that low foreign wages do not explain bilateral U.S. trade deficits. If they did, the data points would cluster tightly along the trend line. Furthermore, bilateral trade deficits would increase as we move from high-wage countries like Australia, Switzerland, and Iceland on the left to low-wage countries like China, Mexico, and Brazil on the right.<br />
<br />
Instead, the data points show virtually no correlation between wage levels and bilateral U.S. trade deficits. In fact, the r-squared is only 0.023, indicating that barely over two percent of U.S. bilateral trade deficits can be explained by low wages in partner countries.<br />
<br />
Country detail is also important. America’s largest bilateral trade deficits (towards the top of the chart) are with relatively poor countries like China, Mexico, and India to the right side– but also with relatively rich countries like Canada, Japan, and Germany to the left. <br />
<br />
Conversely, America’s smallest bilateral trade deficits, which appear towards the bottom of the chart, are with relatively rich countries like Australia, Belgium, and the Netherlands to the left – but also with relatively poor countries like Brazil, Turkey, and Chile to the right.<br />
<br />
It is worth mentioning that our two NAFTA partners – Canada and Mexico – are both high on the vertical deficit scale, but are near opposite ends of the horizontal wage rate scale.<br />
<br />
Note also that membership in free trade zones seems to be largely irrelevant to trade deficits. Although Canada and Mexico lie close to the top of the U.S. trade deficit scale, so do Japan, Germany, and China.<br />
<br />
<b>Conclusions:</b> We should not base recommendations regarding NAFTA’s future on the assumption that Mexico’s low wages make large U.S. bilateral trade deficits inevitable. <br />
<br />
We must also conclude that factors other than low wages are the primary determinant of bilateral U.S. trade deficits. These factors, which should be our policy focus, will be discussed in a forthcoming blog.<br />
<br />
John R. Hansen<br />
September 25, 2017<br />
--------------------<br />
Notes:<br />
[1] The international wage data in this note, which cover OECD and BRIC countries, come from the Organization for Economic Cooperation and Development. The data on America’s bilateral trade deficits come from the U.S. Census Bureau.<br />
[2] See, for example, Scott, 2017.08.21, Renegotiating NAFTA Is Putting Lipstick on a Pig.<br />
[3] Based on data from Maddison on per capita GDP income data in International (PPP) Dollars. Because wages and GDPpc income correlate well, we can assume that GDPpc is a reasonable proxy for wages. American GDPpc was a bit lower than in a few other countries like Switzerland and the UK during the Great Depression. And since the 1950s, certain oil-producing countries in the Arabian Gulf have had higher levels of GDPpc. These were the only significant exceptions until recent years when certain financial centers – often islands and small city states serving as tax havens – began to have incomes higher than those in America.<br />
<div>
<div class="MsoFootnoteText">
<span style="font-family: Times New Roman, serif;">[4]</span> The figure uses rank correlations rather than raw data because the dispersion
of raw values between rich vs. poor, and small vs. large countries is so extreme
that such data make it virtually impossible to see underlying patterns. The rank
ordering is as follows. For data on America’s bilateral trade deficits,
countries are ranked from smallest deficit (or largest surplus) to largest
deficit; Netherlands is #1 on this scale and China is #35. (Note that the U.S. has
had an average trade surplus since 1990 with the Netherlands and the other
seven countries in the graph up to and including Iceland.) The wage data for
Figure 1 is ranked from high to low with Switzerland as #1 and India as #35.<o:p></o:p></div>
<span style="font-family: "Times New Roman", serif;">[5] For
perspective, America’s comparable average wage figure on $52,272 for the period
would place it between Denmark and Norway on the chart.</span></div>
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<br /></div>
<div style="text-align: center;">
<b><span style="color: blue;"><br /></span></b></div>
<div style="text-align: center;">
<b><span style="color: blue;">America Needs a Competitive Dollar - Now!</span></b></div>
John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0tag:blogger.com,1999:blog-2819083306639305649.post-64807133727045231042017-07-31T16:12:00.000-04:002017-07-31T16:12:33.729-04:00The Threat of U.S. Dollar Overvaluation: How to Calculate True Exchange Rate Misalignment and How to Fix It <h3>
<div style="text-align: center;">
<div style="text-align: left;">
<i><span style="font-size: x-small; font-weight: normal;">Cross-posted from:</span></i></div>
</div>
</h3>
<div style="text-align: center;">
<a href="https://d3n8a8pro7vhmx.cloudfront.net/prosperousamerica/pages/2764/attachments/original/1499708589/170623_working_paper_currency_v5_MCS.pdf?1499708589"><span style="font-size: x-small;"><b><i>Coalition for a Prosperous America: Michael Stumo (CEO) Jeff Ferry (Research Director) and John Hansen (Advisory Board), July 2017</i></b></span></a></div>
<br />
<b>Introduction</b><br />
<div style="text-align: left;">
This memo explains (1) the dollar overvaluation problem, (2) how to accurately calculate the dollar’s misalignment against trading partner currencies, and (3) how the Market Access Charge (MAC) that CPA and others favor would fix this serious threat to America’s future.</div>
<br />
The foreign exchange value of the national currency should play the pivotal role in bringing excessive trade deficits (or surpluses) back into balance.<br />
Unfortunately, however, exchange rates have lost their link with trade balancing equilibrium pricing. The graph below shows very problematic over and undervaluation of the currencies of the United States and its major trading partners.<br />
<br />
We propose a new policy tool, the <b><i>Market Access Charge (MAC)</i></b>, to move the dollar back to a competitive, trade-balancing exchange rate.<br />
<br />
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For remainder of the original article, click <a href="https://d3n8a8pro7vhmx.cloudfront.net/prosperousamerica/pages/2764/attachments/original/1499708589/170623_working_paper_currency_v5_MCS.pdf?1499708589">here</a>.<br />
<br />
<i>For full data set showing derivation </i><i>of exchange rate adjustments required for </i><i>true-zero current account balances, click <a href="https://onedrive.live.com/?cid=CF98262C984B4E9A&id=CF98262C984B4E9A%2171257&parId=CF98262C984B4E9A%21106&o=OneUp">here</a>.</i><br />
<br />
<div style="text-align: center;">
<b><i><span style="color: blue;">America Needs a Competitive Dollar - Now!</span></i></b></div>
<br />John R Hansenhttp://www.blogger.com/profile/10293551867955924834noreply@blogger.com0