Monday, March 2, 2015

Political Rhetoric Meets Real World Economics

Its not very often that one gets what one wants in life, and politics is by far no exception. A strong dollar looks and sounds good from a strategic and rhetorical standpoint, but in real terms the outcomes are not always so romantic. Looking at contributions to real Gross Domestic Product (GDP) growth, which is an economic indicator compiled by the Bureau of Economic Analysis (BEA), two components stand out as having a negative impact on Real GDP growth on a quarter-on-quarter basis. Both net exports and government [spending] are down. First, net exports are down as result of an appreciating dollar that has been making domestic goods and services more expensive relative to foreign equivalents. Second, government spending is self-explanatory, as it simply spends less.

These ideologies are appealing on paper and in speeches, but in the real world they leave the US with a losing hand in globalized trade. US investors also lose the net gain from repatriating returns on foreign denominated investments that occurs when cheaper dollars bought back than were sold at the time of the initial investment. Cuts in government spending that free up productive capacity that the market cannot fill tends to cause the price of marginal units of productive capacity to fall; we see this overall effect in Real GDP, wages, and inflation expectations. There’s a time and a place for everything – or so it is said – and the US economy is the place where a globally- traded currency can appreciate with little detriment vis-a´-vis its peers. The time however, is not favorable for fiscal policies that increase rather than decrease excess productive capacity in the US economy. At least not in conjunction with the tightening monetary policy aspirations of the Federal Reserve System.

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