Tuesday, June 10, 2008

Is the US Becoming a Marshall-Lerner Renegade?

It is a commonplace of international economics that virtually all economies obey the Marshall-Lerner conditions, which must be met if a change in the exchange rate is to have the “proper” effect on net exports. It’s just possible, however, that this no longer applies to the US. When the dollar falls, US exports rise and non-oil imports fall by enough to otherwise satisfy M-L. But much of the rise in oil prices, as experienced in the US, is also attributable to the decline of the dollar, and our demand for brown goo is (so far) highly inelastic. As reported in Brad Setser’s invaluable blog, this explains why the US trade deficit increased in April despite deteriorating domestic demand. So: has the US left the predictable world of M-L? It depends. How much of the price spike in petroleum is traceable to the fading dollar? How do we parcel out the role of declining domestic demand from that of dollar depreciation on the trade balance? I’m too involved in other things to figure this out, so I place it in your laps, estimable readers.


BruceMcF said...

Luckily we have a second roughly comparable economy that does not use the US$ and does use plenty of imported crude oil, to make a comparison.

Average the US$ and the Euro crude oil price increase ... the US$ crude oil price increase over that average is close enough to the price increase due to the the drop in the US$ to serve as a first cut.

Then US crude oil imports times that percentage increase and we've got a rough estimate.

I'm sure there are plenty of more elaborate approaches, but that's simple enough to explain in a first year essential of economics class.

Anonymous said...

Again, economists from the left leave the impression that a falling dollar will solve our trade deficit.

History offers no example of this. Countries that let their currency devaluate fall by the wayside litter the pages of hhistory.

Myrtle Blackwood said...

" Countries that let their currency devaluate fall by the wayside litter the pages of hhistory."

Like Australia, for instance.

Anyway, which country has control over the value of its currency today? It seems to me that such a strategy would require strict controls over international lending, controls over interest rate and labour arbitrage. Limiting the power of large corporations.

Unlikely when whole nations spread across the globe are now run like businesses with a bureaucracy that uses public office for private gain. Each country operating on their own or in cliques to serve their naked self-interest. Possessing a single value: moneymaking.

C Wright Mills was correct when he said wrote about the bankrupted nature of the word 'crisis'. A term that "so many men in high places have evoked..in order to cover up their extraordinary policies and deeds."

BruceMcF said...

Again, economists from the left leave the impression that a falling dollar will solve our trade deficit.

I do not understand this remark. This is the standard simplified neo-classical prediction, adopted more widely by large numbers of mainstream marginalist economists.

How this is something that is a particular characteristics of "economists of the left" is something that I simply cannot see.

Anonymous said...

Brenda Rosser,

~ First, countries have control over the deficits they run both in trade and in budgets, Second financial market regulation.

~ I am chiding the economists of the left, economists of the right share this opinion also.

~ The prediction that a our falling currency will lower our trade deficits ignores the fact that we are the world's reserve currency. Debasing our currency causes inflation overseas that destroys demand for our products and inflates the oil we need to import.

YouNotSneaky! said...

I was under impression that the commonplace of international economics was that a lot of economies FAIL the Marshall Lerner condition in the short run. There is at least some evidence for the J-Curve. So, for one, I think it's actually to early too early to say anything about what happened with oil prices and the deficit in April.


I don't think this makes any sense - "Debasing our currency causes inflation overseas that destroys demand for our products and inflates the oil we need to import." - since inflation abroad would DECREASE the relative price of US goods and stimulate demand for US products.

Anonymous said...


The basics of life, commodities, are priced in dollars. When commodities go sky high overseas consumers must divert their disposable income ( pray they have any ) to food and energy and away from other goods and services.

So when we debase the dollar we cut our own throat in value added exports and services.

Myrtle Blackwood said...

Michael McKinlay said: "~ First, countries have control over the deficits they run both in trade and in budgets, Second financial market regulation..."

What are your assumptions here?

- no imperialist/violent attacks from other nations and from large multinational corporations?

Is this realistic?

- Governments are not in bed with the financial industry or corrupted/bribed by the financial-military-industrial complex? Are the nation's representatives voted in, or are they appointed? (if the latter, by whom?)

[Who decided that Obama and Clinton and McCain would run for office in the US? Who funded them? Who are the other candidates? Did they get the same funding and press coverage?]

"..these tendencies - (i) for the political elite to begin on the national level and thus to by-pass local and state offices, (ii) never to serve in national legislative bodies, (iii) to spend less proportions of their total working life in politics - these tendencies point to the decline of the legislative body and to the by-passing of elective offices in the higher political career. They signify the 'bureaucratisation' of politics and the decline at the political top of men who are professional politicians in the simple, old-fashioned sense of being elected up the political hierarchy and experienced in electoral politics. They point, in short to the political outsider.."

C Wright Mills, 'The Power Elite', published in 1956.

"..by the late 1960s the Vietnam War was sinking the U.S. deeper into debt. The U.S. war machine was to be the main tool for financier enforcement of their worldwide plan of domination, but the nation was going broke. ...But President Richard Nixon’s Secretary of State Henry Kissinger had a plan. The government worked out an arrangement whereby Saudi Arabia and the other OPEC nations would gradually increase the price of oil, with the profits to be used by the oil-producing nations to buy U.S. Treasury debt securities. By 1980 the cost of oil would be ratcheted up from about $3.50 a barrel to $39.50. The drastic increase of the price of gasoline at the pump acted as a de facto tax on the U.S. economy. But the plan worked. The “petrodollar” and “dollar hegemony” were born, with the dollar becoming the world’s reserve currency. Dollars could flood the world only because in 1971 the Nixon administration had abandoned the dollar’s gold peg as a basis for international currency exchange. Now currencies floated freely in world markets with speculation and inflation rampant. The economies of the world were no longer based on production, but on financial manipulation. It was also the start of the era of monetarism, where the Federal Reserve thought it could regulate the economy by the raising and lowering of interest rates. The Kissinger plan also made the U.S. dependent on Middle Eastern oil and turned it into the muscle behind the financiers’ ambition for Israel to dominate the region. So now Americans, who had liberated Europe from the Nazis, had to fight and die for the financiers in the Middle East . The final conquest of Iraq , starting in 2003, and the planned war against Iran are the latest phases....

Extraordinary Times, Intentional Collapse, and Takedown of the U.S.A. By Richard C Cook
Accessed on 19th May 2008.

Peter Dorman said...

A minor technical note: the M-L conditions are assumed to apply over the time lag associated with the J-curve. That is, this is why the curve is expected to bend upward after an initial dip. However: there is evidence that indicates the dip does not always occur, according to Menzie Chinn.

Anonymous said...

Brenda Rosser 5:16 PM ,

This was a hypothetical , obviously , because it sure isn't working here.

And I agree with you in the rest of your post.

The Imperialism of the US has been and is the bane of the world.

Myrtle Blackwood said...

"This was a hypothetical , obviously , because it sure isn't working here. "

Can you explain what you mean?

Myrtle Blackwood said...

One significant reason why nations have lost control of their trading balances is because of US dollar hegemony. Since 1971 the United States has been the only nation that can produce the global reserve currency by FIAT.

"World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world's interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies. To prevent speculative and manipulative attacks on their currencies, the world's central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces the world's central banks to acquire and hold more dollar reserves, making it stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973..."

Dollar Hegemony, by Henry CK Liu, 11th April 2002. http://henryckliu.com/page2.html
By Henry C K Liu
(Originally published as [US Dollar Hegemony has to go] in AToL on April 11. 2002)

***CRITICAL commodities denominated in $US dollars.

***Much of the world's debt denominated in US dollars.

***OPEC 'tolerated' by the US. That is, OPEC toes a US line or the US uses its military and economic might.

PS: Has anyone heard of the 'Khemlani affair' from 1970s Australia. The corporate media ran the most intensive campaign of attack against the Labor Government here when it tried to borrow large sums of money directly from Middle East nations instead of through the US Morgan-Stanley Wall Street monopoly.

('Oil in troubled waters' by Jim Cairns. 1976)