The Non-Luck of the Irish

Irish gold

Paul Krugman shows everyone why it’s rough to be Irish these days (despite their recent success in rugby and soccer):

The combination of deficits and exposure to bank losses raised doubts about Ireland’s long-run solvency, reflected in a rising risk premium on Irish debt and warnings about possible downgrades from ratings agencies.

Hence the harsh new policies. Earlier this month the Irish government simultaneously announced a plan to purchase many of the banks’ bad assets — putting taxpayers even further on the hook — while raising taxes and cutting spending, to reassure lenders.

Ouch. And Dr. Krugman doesn’t even mention that Ireland’s best bet for recovery, export led growth, is hampered by its inclusion in the Eurozone. Ireland would normally devalue its currency making its goods less expensive on the international market. That’s a no go when you share a currency with Germany and France. PLUS the pound has almost equal to the euro now so Irish goods will be about the same price as nearby British goods.

At least they don’t have snakes . . .


The yuan and trade

Remember when Tim Geithner caused a big hubbub when he called China a currency manipulator? I guess he doesn’t think so any more.

I think the whole currency manipulation issue should be put on the back burner for a while. In the midst of a massive global economic downturn we don’t need another reason for either country to go on a populist bonanza. Secretary Geitner is correct to point out that China has been very cooperative about the economy and has delivered a huge stimulus package. A whole lot more than our European allies have contributed.

As for the manufacturers who blame Chinese currency manipulation for the massive US trade deficit, you might want to look at the structural issues of the Sino-American relationship. “Chimerica” works like this: The United States government LOVES to cut taxes but still provides important governmental services for its citizens (like, say, pirate – killing snipers). So the Federal government runs a budget deficit and needs someone to buy American debt. China, with its rapidly growing economy and desire for foreign exchange reserves, steps in and buys a large chunk of the Treasury offerings. The increased demand for US dollars makes the yuan weak compared to the green back and now Chinese goods are less expensive than before. Considering that the cost of producing is much lower even without the favorable exchange rate, you get lots of Chinese imports to America.

So instead of complaining about currency manipulation maybe manufacturers should be vote for candidates who promise to decrease the budget deficit or the implementation of a new global reserve currency (creates less demand for the dollar and US debt).  Either way, they’ll be happy to know the trade deficit is rapidly decreasing.

The Death of the Dollar?

Justin Fox has an opinion piece in Time about the newest threat to the dollar’s status as the global reserve currency:

Over the short term, this can seem like a positive; we can get away with running a federal deficit that could hit $2 trillion this year only because of the dollar’s status as global reserve currency. But borrowing trillions isn’t really a ticket to long-run prosperity. In fact, the current economic crisis may have been spawned by huge imbalances in global trade and capital flows that are in part the product of the dollar’s special status. Global demand for dollars supplanted demand for U.S. products and services, argues Columbia University economist and longtime SDR fan Joseph Stiglitz, resulting in trade deficits, the decline of U.S. manufacturing — and years of supereasy mortgage credit.

Fox makes a good point that the demand for the dollar allowed to us to spend its way into the current crisis. Sure it would be create to take the US off the drug that is super easy credit. Unfortunately that would only aggrevate our long term debt problem. In case you haven’t checked recently, the national debt is over $10 trillion and we eventually have to pay that back. So we have a really dilemma here: we can use SDR and take away our ability to borrow easily, but then we will have a hard time paying off the debt we have accumulated in the past. Not an easy puzzle to solve

Picture by Flickr user shyb used under a Creative Commons license