Why Every Country Can’t Export More
As Germany and Japan join China in trying to export their way out of their economic dilemmas, the world is pinning its hopes on U.S. consumers—many of whom have not received a raise in six years.
German banks spent the past twenty years lending money to European countries and consumers to enable them to buy German goods and services. But after the European debt and banking crisis, this is no longer a viable option. So German companies need to find new customers. They could find customers in Germany or abroad. To find them at home, German corporations would have to pay their own workers more. The country decided against this and, instead, hopes to sell more goods to the U.S. To do this, Germany must cheapen the euro.
Using Currency to Increase Exports
Euro-cheapening is done by shrinking the government budget deficits of Portugal, Italy, Ireland, Spain and Greece in a process called austerity. Through spending cuts, tax and user fee increases, etc., austerity pushes interest rates lower, which forces the euro to drop against the dollar. But austerity also increases unemployment and lowers wages in those countries.
Japan’s export strategy involves their version of quantitative easing: the central bank buys government bonds to cut already low-interest rates, which in turn pushes the Japanese currency—the yen—lower vs. the dollar. A lower yen makes Japanese exports cheaper.
A Race to the Bottom
Falling wages, rising unemployment, and a weakening currency, however, all reduce the ability of foreigners to buy U.S. goods. And when U.S. businesses sell less, they lay people off. And people without jobs can’t buy exports.
The whole world cannot increase their exports because someone has to buy them. And it can’t be just the U.S. consumer who buys them. China, Germany, Great Britain, etc. must import more. If they don’t, the world will continue down this 1930s path of lower GDP, lower wages, and higher unemployment.
These are the opinions of financial advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.