[Marxism] Fwd from Jim Craven: US Trade Deficits, the Dollar and Neoclassical Theory

Louis Proyect lnp3 at panix.com
Wed Mar 30 13:26:32 MST 2005

>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
>Employer has no association with private/protected opinion

Louis Proyect
Marxism list: www.marxmail.org 

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