The recent trands and interrelationships between U.S. trade deficits and
the general exchange rated of the dollar are once more serving to trash
neoclassical theory. In neoclassical theory, there is, ceteris paribus, a
two-way relationship between extent trade deficits and the general
exchange rate of the dollar with both hovering around some hypothesized
"long-term equilibrium" or "center of gravity" levels.
It is said that viewing the extent of trade deficits as the independent
variable and the general exchange rate of the dollar as the dependent
variable, the overall relationship is said to be inverse: Trade deficits
(up)---> (down) demand for U.S. dollars---> dollar down.
And viewing the general exchange rate of the dollar as an independent
variable and the extent of trade deficits as a dependent variable, then
the overall relationship is hypothesized to be direct or: dollar (down)
--->Px (down), Pm(up)---> X (up), M(down)---> trade deficits (down)
So overall:
trade deficits(up)--->dollar (down)--->trade deficits (down)--->dollar
(up)--->trade deficits (up)--->...
Now all of this assumes that the primary use of/demand for the dollar is
to pay for U.S. exports and that the dollar's political role or role as a
key currency in international trade is not pronounced or working at cross
purposes with movements of the general exchange rate of the dollar when
trade deficits are rising. All of this also assumes that the sales of
exports and imports is primarily determined by relative and
exchange-rate-converted prices such that when the dollar goes down for
example, it now takes less Yen to buy a dollar or a dollars's worth of
U.S. exports so that PX (exchange-rate-converted prices of exports) go
down thus making exports cheaper and ore competitive and imports relative
more expensive (in dollars) thus causing X (up) and M (down) and then
trade deficits down.
But as the dollar diminishes as a key currency in international trade and
as the Euro assumes increasing importance, we see the possibilities of
[the real world of] non-linear causality and feedback effects that
undermine these hypothesized linear and unidirectional relationships shown
above. For example:
trade deficits (up)--->dollar (down)--->confidence in holding dollars
(down)--->demand for dollar (down) --->dollar/$holdings(down)--->dollar
reserves necessary for purchase of U.S. exports (down) ---> trade deficits (up)
This process can continue with a dollar meltdown (as in the mid-70s) where:
dollar (down)--->confidence in holding dollars (down)---> demand for
dollar (down)---> dollar(down)--->confidence in holding
dollars(down)--->dollar meltdown
There is a further potential feedback in:
trade deficits(up)---> dollar (down)--->willingness to hold
dollars/holdings of dollars by central banks (down)--->dollar reserves to
purchase exports (down)---< trade deficits(up)--->...
All of this (the real world) and all of those "assumed givens" of
neoclassical theory are serving to further undermine, impeach and expose
as irrelevent, the basic "ultimate indpendent and dependent variables",
linear and unidirectional "causality" of bourgeois neoclassical orthodoxy.
Jim Craven
James M. Craven
Blackfoot Name: Omahkohkiaayo-i'poyi
Professor/Consultant,Economics;Business Division Chair
Clark College, 1800 E. McLoughlin Blvd.
Vancouver, WA. USA 98663
Tel: (360) 992-2283; Fax: (360) 992-2863
"The people who cast the votes decide nothing.
The people who count the votes decide everything."
Josef Stalin
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