from Follow the Money

American tourists in Europe forced to live on bread, unable to afford croissants and eggs …

January 17, 2007

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At least not the croissants at Cafe de Flore.   Or the eggs, coffee and salad, which are rather on the expensive side.  There is cheaper option: the bakery just around the corner on rue de Saints Peres (I think).  I spent a year as a cash-strapped student at Sciences-Po (which is also around the corner) back in the days of the franc fort.  

I thought, though, that the headline that accompanied the Porter/ Landler article was a bit off.  It could have been titled "High prices force American tourists in Europe to cut back on pricy European goods (like coffee, croissants and eggs)." That is adjustment. 

Or it could have been titled "The dollar remains strong against Asian currencies, hindering broad adjustment."   The authors quite rightly note that the both the euro and the dollar are strong v. the yuan and yen.   And they supply a couple of anecdotes illustrating how European companies are responding to the strong euro by relocating production to China. 

That is adjustment.  Just not the kind of adjustment the global economy needs.  Right now, when the dollar falls, the global economy adjusts in large part by locating even more production in the low cost part of the dollar zone -- i.e. China.   That lets China export more.  It also allows China to finance the US more.   The rise in China's surplus offsets the rise in the United States' deficit -- the overall deficit of the dollar zone doesn't change much, even as the US deficit rises.

Of course, ultimately, it is the US -- not the dollar zone -- that needs to adjust.  The US deficit needs to shrink.  China's surplus doesn't need to rise more.  Ask the PBoC.

More generally, the evidence strongly suggests that the recent stabilization of the US non-oil trade deficit is very tightly linked to the dollar's fall.    US exports are way, way up since 2003.  That is the way most economist would expect a weak dollar to impact the trade balance.   The impact of a weak dollar on imports -- higher prices can offset lower volumes, or those selling to the US may cut their margins to keep their market share -- is more ambiguous.  

True, the overall US trade balance hasn't started to improve.  But when the dollar was strong, the deficit was poised to get a lot bigger.  Stabilization is a change, something that wouldn't have happened absent the surge in export growth.  Moreover, the US trade deficit has stabilized or started to head down against those parts of the world that have let their exchange rates adjust, but not against those parts of the world that have not. 

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