Hi. We're here with Northern Trust Chief Economist Carl Tannenbaum. Carl, great to see you.
Good to be with you.
So the US dollar has been declining lately. Yet, the world economy seems to be doing very well. What's going on?
Well currencies, like some college students, are graded on the curve. And by that, I mean to suggest that while our economy has been doing very well, and for most of the last several years, our markets have been doing very well, other markets have been doing even better over the course of the last 12 to 18 months. Europe, in particular, has shown renewed economic vigor, and their markets have been doing very well. And so relatively speaking, our dollar is a little less attractive than, for example, the euro.
So earlier this year, the Treasury Secretary made a comment that roiled financial markets. Break that down for us.
Well Treasury Secretary Mnuchin, when he was at the World Economic Forum in January, made the observation that is familiar to many who have studied economics. Which is, that a weaker dollar would be good, and good for trade, suggesting that if the dollar was a little bit less expensive, that so would our products, and that might improve our prospects on the world exchange markets.
So could a weaker currency actually be helpful?
Unfortunately, if you go to economics 201, you find out that a weak currency doesn't always guarantee you a greater share of world markets. In particular, because so many products these days are made in a variety of different places, so an exchange rate for one country may not change the overall cost of making that product. Secondly, producers that want to keep their market share constant can choose to absorb any currency change in their margin, keeping their local prices the same, and keeping up share. And third, trade flows are very often influenced by restrictions that some countries may put on trade, which make the translation from currency change to a trade change difficult to calculate.
So bottom line, what are the potential downsides of a cheaper dollar?
Well, what the Treasury Secretary was reminded of in the hours after he made that statement, is that he is responsible for issuing a whole lot of treasury debt. And a lot of foreigners buy that debt. When the dollar is weaker, the foreigners earn much less of a return, because they ultimately have to take the treasury proceeds and convert them back into their local currencies. To compensate for currency depreciation, they'll ask for a higher yield. A higher yield on treasuries is not good for the budget, and as a result, in the days afterwards, the Treasury Secretary retreated. And he should make sure that the next time he comments on the dollar, it is with more perspective.
Carl, thank you for your time. Good to be with you.