Currency Wars

 

The motion picture “Rollerball” was originally produced in 1975. The nations of the world did not engage in “war combat” anymore, in other words, bombs, bullets, and battles no longer determined who was the “greatest of them all,” instead corporations fought each other in an arena using a violent game called “rollerball.”

Here’s a movie trailer for the film “Rollerball”, it’s a good “popcorn” movie with enough violence to keep the audience’s attention. I’m not a proponent of violence or violent movies. The movie just reminds me of what we may be vicariously experiencing now  in the “Currency Markets.”

I came across this article in my “hard copy”, crinkly, Chicago Tribune. Actually the article was written by Don Lee of the LA Times. U.K. crisis raises fears of currency wars.

In sifting through the news article, I can link many of the ideas and comments of Mr. Lee to blogs that I have previously written. As I’m a “former” computer trainer and instructor, I learned that ‘chunking” the information helps in understanding it. I, like you, get “cross-eyed” when trying to understand the financial goings-on (or “off”) of the stock market, banks, financial entities such as the Federal Reserve Bank, IMF International Monetary Fund, you name it!

Anyway, here are some references to Mr. Lee’s article and accompanying blog references:

“Meanwhile, U.S. and Japanese government bond yields hit record lows as anxious investors continued to run for safety.” (See What is a government bond? )

“And the British pound fell to a fresh 31-year low—to less than $1.30—in what some analysts see as a sign of prolonged volatility ahead for financial markets and increased contention among nations especially over currency values, which are critical in global trade and capital flows.” (See Trade Deficits and Exchange Rates, also see Devalue Currency)

“…but the British referendum to quit the EU has brought a resurgence of demand for the dollar as investors seek the security of U.S. Treasury notes.” (See Reserve Currency, see Strong Dollar, see U.S. Treasury Bonds)

“…Like the dollar, the Japanese yen is a “safe-haven” currency, and it has jumped in recent days, much to the chagrin of Japanese officials who want to preserve their exports.” (See Current Account Deficit)

The “Currency Wars” are not just about “money”, they are about “trade”, they are about the “value of money”, they are about the quantity of imported goods a country’s money will be able to “buy”, and they are about how much money (income) a country’s exported goods will generate for the exporting country.

So you see Mr. Lee’s news article brings together a ton of issues under one “umbrella” so to speak. As for the movie “Rollerball”, it is science fiction. The script and a magazine article were written in the 1970s. However, isn’t it amazing how fiction can reflect reality in retrospect!

 

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Storm
Shiver

Mega Eye Crosser: Trade deficits and a little bit about exchange rates

Try to bear with me on this one all the way to the bottom of the posting. It may or may not become clearer after the first reading. To coin the phrase “it’s a small, small world after all”, (Walt Disney) we all need each other to make any “trade” deal!

This is such a MEGA MEGA Eye Crosser, what else can I say!!! I will start with a disclaimer. As I mention in my “About” page, I am not an economist. I am an amateur investor (versus a professional trader, etc.). I am writing this blog to help me as well as anyone else who is interested, to hopefully, better understand our current economic conditions and circumstances here in the United States. As I sift through information and resources available on the “web”, I try to choose sources that are credible and have “currency” as far as data and informational quality.

In gathering information for the Trade Deficit topic, I feel that I have truly run into one of the most intertwining mechanisms that bind the entire world populations together. In other words, when one hears or reads of a politician saying he/she will “solve” the U.S. trade deficit situation, be very attentive to their words. Oh, and the Federal Reserve source I used also talks about the Exchange Rate and its influence upon the trade between countries. Of course that makes sense since we are measuring/comparing currencies/ values to make the trade deals. I had not intended to put the two (2) concepts together but, of course, how can one talk about one without the other!

Now, back to the subject at hand, The Trade Deficit:  The terms or concepts of “trade surplus,” trade balance,” and “trade deficit” are all encompassed within another concept called current account balance. In struggling on how to present the concept of trade deficit to you, the reader, I have decided that perhaps definition and relationship of terms would be the way to go.

Balance of Payments:  tracks international transactions of goods, services, and finances. Every international transaction is recorded as both a debit and a credit somewhere in the Balance of Payments. The result of this accounting identity is the Fundamental Balance of Payments Identity, which says that the sum of the Current Account, Financial Account, and Capital Account must be zero by definition.

There are three (3) main components of the Balance of Payments:

1. Current Account
2. Financial Account
3. Capital Account

1. Current Account: commonly referred to when trade balance is discussed. It reflects comparison of national saving and national investment. Current Account is part of the Balance of Payments first mentioned above.

Current Account Balance:   is difference between nation’s income and expenditures and any additional debt the country takes on to cover the difference. Transactions that arise from exporting or importing of goods and services enter directly into the Current Account.

• Trade Surplus:  when a country exports more than it imports, (i.e. the difference between exports and imports is positive).
• Trade Balance:  when a country exports exactly as much as it imports.
• Trade Deficit:  when a country imports more than it exports.

 2. Financial Account: Countries also engage in trade in financial assets. Transactions that arise from trade in financial assets are recorded in the Financial Account.

3. Capital Account: certain other activities result in transfers of wealth between countries. These are recorded in the Capital Account; for instance, transactions such as non-produced, non-financial, and possibly intangible assets, i.e. copyrights and trademarks).

 National Income Accounting Identity:   the current account balance is equal to difference between national saving and national investment.

When a country has trade surplus (positive trade balance), national savings must, by definition, exceed domestic investment. That is, a country with current account surplus is also net lender (this country uses savings not invested domestically to make loans to foreigners).

When a country has a current account deficit, national saving must, by definition, be below investment. The country is a net borrower (as national saving is not sufficient to finance all of domestic investment, and so extra investment must be financed by borrowing from abroad).

What all of the above is getting at is that the concept Trade Deficit that I thought I would talk about singularly by itself is not a very plausible idea. The Trade Deficit is a result of a multitude of transactions and like the other Current Account items: Trade Surplus and Trade Balance, is a cumulative number. Every trade agreement that the United States signs will affect our “trade numbers”.

Just like all the other mechanisms that make up our economic and/or financial systems, calculations of trade balance are very complex and complicated. Here’s my source from the Federal Reserve Bank of San Francisco, the article  is called:   Is the U.S. trade deficit a problem? What is the link between the trade deficit and exchange rates?

There are two (2) other sources that I will give you. Both of them discuss  the concept Trade Deficit in relation to the United States. They are both short items to read. I think they will help clear the question of is a trade deficit good or bad. We sell products like airplanes, wheat, paper, abroad and the buyer must use U.S. dollars to pay the manufacturer, producer or grower. That’s where the exchange rate comes in. Countries must have U.S. dollars in order to complete a transaction. At the same time, all those U.S. dollars in the hands of other countries must be used to purchase U.S. goods or make investments in U.S. financial instruments. Over the years, China has purchased a multitude of U.S. Treasury bonds, so although we have a huge trade deficit with the Chinese, they also have owned a “ton” of U.S. Treasury Bonds:  CNBC article here.

Trade Deficits aren’t good or bad, just weird by Sabri Ben-Achour

Is the U.S. Trade Deficit Really Bad News?  By Daniel Griswold

Needless to say, getting it right with such a very complicated subject is very difficult. Constructive additions to my posting are welcome.

Author’s Addendum 9/23/2015:  Here is a link to the Office of the United States Trade Representative.  Listed are all the current trade agreements between the United States and other countries.