The Economist recently published its updated Big Mac Index aimed at demonstrating whether a currency is cheap or expensive relative to the US dollar, as benchmarked to the price of the a McDonald's Big Mac Burger in the US.
According to the Economist, (bold highlights mine)
``THE Big Mac index is based on the theory of purchasing-power parity (PPP)—exchange rates should equalise the price of a basket of goods in different countries. The exchange rate that leaves a Big Mac costing the same in dollars everywhere is our fair-value benchmark. So our light-hearted index shows which countries the foreign-exchange market has blessed with a cheap currency, and which has it burdened with a dear one. The most overvalued currency against the dollar is the Norwegian kroner, which is 96% above its PPP rate. In Oslo you can expect to pay around $7 for a Big Mac. At the other end of the scale is the Chinese yuan, which is undervalued by 49%. The euro comes in at 35% over its PPP rate, a little higher than half a year ago.
Looking at the chart above, 'expensive' nations hail mostly from the Euro zone except for Australia, Canada and Turkey.
On the other hand, emerging markets, especially our ASEAN neighbors Indonesia, Thailand and Malaysia have been classified along with China as "cheap".
So by virtue of association we assume that the Philippine Peso is likely to be in the 'cheap' category.
Yet reading through the article we observe that 'cheap' currencies have been reckoned as "blessed" whereas 'dear' currencies have been deemed as "burdened".
This is just an example of the perverted mainstream view [as recently discussed in Dueling Keynesians Translates To Protectionism?] which gives prominence to mercantilist ideology that the advocates "inflationism" and varied form of regulatory protectionism.
The oversimplistic idea is that 'cheapness' equals export strength and competitiveness which translates to economic growth.
Yet such preposterous prejudice is unfounded.
Based on the list of world's export giants from wikipedia.org estimates (left window), 8 nations from Europe plus Canada comprise the top 15 biggest international exporters belong to the "expensive" category. In short, a majority.
Meanwhile, only 3 of the ultra blessed 'cheapest' currency nations (Mexico, Russia and China) and marginally cheaper (South Korea and Japan) are part of the roster of elite exporters.
Moreover, in terms of competitiveness, except for Singapore, Japan and the US, 7 out of the 10 most competitive nations, according to the World Economic Forum, come from the 'burdened' expensive currency group.
In other words, the rationalization of 'cheap' as blessed and 'dear' as burdened greatly misleads because, as evidence reveals, cheapness doesn't guarantee competitiveness or export strength.
Why the mainstream's predisposition on such a view? Because of the fixation to parse on economic disequibrium predicated current account asymmetries.
Zachary Karabell writes in the Wall Street Journal that global imbalance is a myth because in no time in history has there been a global economic equilibrium.
From Mr. Karabell (bold highlights mine), ``The blunt fact is that at no point in the past century has there been anything resembling a global economic equilibrium.
In looking at the US current account chart from globalpolicy.org one would note that deficits began to explode during the 80s.
This probably implies that, aside from the above assertion by Mr. Karabell, as the China and emerging markets got into the globalization game, the US deficits soared. This bolsters the Triffin Dilemma theory as vastly contributing to such phenomenon.
Moreover, mainstream experts seem mixed up on the participating identities of those involved in current account and trade deficits with that of budget deficits.
With budget or fiscal balancing it is the government that accrues the surpluses or deficits. In contrast with trade balances, individuals through enterprises and not nations engage in commerce.
Professor Mark Perry makes a lucid explanation, (all bold underscore mine)
``It might be a subtle point, but it's important to realize that countries don't trade with each other as countries - rather it's individual consumers and individual companies that are doing the buying and selling. The confusion gets reinforced when we constantly hear about the "U.S. trade deficit with Japan" or China, which might again imply that the "unit of analysis" for international trade is the country, when in fact the unit of analysis is the individual U.S. company that engages in trade with other individual companies on the other side of an imaginary line called a national border.
``It's possible that some of the confusion about international trade can be traced to confusion about the "trade deficit" and the "budget deficit." The relevant unit of analysis for the budget deficit is indeed the country, since it's the entire country via elected officials that is responsible for the "budget deficit." By conflating these two distinctly different deficits, it's then easy to assume that the relevant unit of analysis for both is the "country" when in fact that only applies to the "budget deficit" and not the "trade deficit."
``Once one understands that it's individual companies, not countries, that are doing the trading, then it's not so easy to get fooled by statements or headlines like "Punitive tariffs are being imposed on China," or "Obama to hit China with tough tariff on tires." Since China doesn't actually trade with the United States at the national level, tariffs cannot be imposed on the country of China - it's not like the United States government sends a tax bill to the Chinese government.
``Rather, since it is companies that are trading, it's companies that have to pay the taxes (tariffs) TO their OWN government. In the case of U.S. tariffs on Chinese tires or steel, the tariffs (taxes) are being imposed not on the Chinese government or even the Chinese steel-producers, but on American companies who now are taxed for buying tires or steel from China, and then those taxes are ultimately passed along to the individual Americans who purchase the tires and purchase the consumer products like automobiles that contain Chinese steel."
In addition, it would seem similarly incoherent and ironic to think that manipulating currencies to subsidize "exporters" would generally benefit the country engaged in such policies.
That's because as a general rule for every subsidy someone has to pay for the "subsidized" cost. In short, subsidies redistribute rather than generate wealth.
Professor Donald Boudreaux debunks the favorite fixation of the mainstream: the US-China imbalances,
``The real costs of the resources and outputs exported by the Chinese people are not lowered simply because Beijing keeps the price of the yuan artificially low. And the resources spent to supply the extra American demand that results from an artificially low price of yuan—even though they are unseen by the untrained eye—represent a huge cost that harms the Chinese economy."(emphasis added)
So not only have mercantilists been barking up at the wrong tree, they have been brazenly promoting policies that focuses on short term fixes, which favors a select political group, and importantly, raise the risks of provoking a mutuality destructive trade war.
In closing this apt quote from John Chamberlain, ``when nations begin worrying about the "balance of trade," they are saying, in effect, that the price of a currency expressed in an exchange rate is more important than bananas, or automobiles, or whatever. This is a perversion that sacrifices the consumer to an abstraction; better let the currency seek its own level in the world's money markets."
According to the Economist, (bold highlights mine)
``THE Big Mac index is based on the theory of purchasing-power parity (PPP)—exchange rates should equalise the price of a basket of goods in different countries. The exchange rate that leaves a Big Mac costing the same in dollars everywhere is our fair-value benchmark. So our light-hearted index shows which countries the foreign-exchange market has blessed with a cheap currency, and which has it burdened with a dear one. The most overvalued currency against the dollar is the Norwegian kroner, which is 96% above its PPP rate. In Oslo you can expect to pay around $7 for a Big Mac. At the other end of the scale is the Chinese yuan, which is undervalued by 49%. The euro comes in at 35% over its PPP rate, a little higher than half a year ago.
Looking at the chart above, 'expensive' nations hail mostly from the Euro zone except for Australia, Canada and Turkey.
On the other hand, emerging markets, especially our ASEAN neighbors Indonesia, Thailand and Malaysia have been classified along with China as "cheap".
So by virtue of association we assume that the Philippine Peso is likely to be in the 'cheap' category.
Yet reading through the article we observe that 'cheap' currencies have been reckoned as "blessed" whereas 'dear' currencies have been deemed as "burdened".
This is just an example of the perverted mainstream view [as recently discussed in Dueling Keynesians Translates To Protectionism?] which gives prominence to mercantilist ideology that the advocates "inflationism" and varied form of regulatory protectionism.
The oversimplistic idea is that 'cheapness' equals export strength and competitiveness which translates to economic growth.
Yet such preposterous prejudice is unfounded.
Based on the list of world's export giants from wikipedia.org estimates (left window), 8 nations from Europe plus Canada comprise the top 15 biggest international exporters belong to the "expensive" category. In short, a majority.
Meanwhile, only 3 of the ultra blessed 'cheapest' currency nations (Mexico, Russia and China) and marginally cheaper (South Korea and Japan) are part of the roster of elite exporters.
Moreover, in terms of competitiveness, except for Singapore, Japan and the US, 7 out of the 10 most competitive nations, according to the World Economic Forum, come from the 'burdened' expensive currency group.
In other words, the rationalization of 'cheap' as blessed and 'dear' as burdened greatly misleads because, as evidence reveals, cheapness doesn't guarantee competitiveness or export strength.
Why the mainstream's predisposition on such a view? Because of the fixation to parse on economic disequibrium predicated current account asymmetries.
Zachary Karabell writes in the Wall Street Journal that global imbalance is a myth because in no time in history has there been a global economic equilibrium.
From Mr. Karabell (bold highlights mine), ``The blunt fact is that at no point in the past century has there been anything resembling a global economic equilibrium.
``Consider the heyday of the "American century" after World War II, when Western European nations were ravaged by war, and the Soviet Union and its new satellites slowly rebuilding. In 1945, the U.S. accounted for more than 40% of global GDP and the preponderance of global manufacturing. The country was so dominant it was able to spend the equivalent of hundreds of billions of dollars to regenerate the economies of Western Europe via the Marshall Plan, and also of Japan during a seven year military occupation. By the late 1950s, 43 of the world's 50 largest companies were American.
``The 1970s were hardly balanced—not with the end of the gold standard, the oil shocks and the 1973 Arab oil embargo, inflation and stagflation, which spread from the U.S. through Latin America and into Europe.
``The 1990s were equally unbalanced. The U.S. consumed and absorbed much of the available global capital in its red-hot equity market. And with the collapse of the Soviet Union and the economic doldrums of Germany and Japan, the American consumer assumed an ever-more central position in the world. The innovations of the New Economy also gave rise to a stock-market mania and overshadowed the debt crises of South America and the currency implosion of South Asia—all of which were aggravated by the concentration of capital in the U.S. and the paucity of it in the developing world. When the tech bubble burst in 2000, it had little to do with these global dynamics and everything to do with a glut of telecommunication equipment in the U.S., and stock-market exuberance gone wild."
In looking at the US current account chart from globalpolicy.org one would note that deficits began to explode during the 80s.This probably implies that, aside from the above assertion by Mr. Karabell, as the China and emerging markets got into the globalization game, the US deficits soared. This bolsters the Triffin Dilemma theory as vastly contributing to such phenomenon.
Moreover, mainstream experts seem mixed up on the participating identities of those involved in current account and trade deficits with that of budget deficits.
With budget or fiscal balancing it is the government that accrues the surpluses or deficits. In contrast with trade balances, individuals through enterprises and not nations engage in commerce.
Professor Mark Perry makes a lucid explanation, (all bold underscore mine)
``It might be a subtle point, but it's important to realize that countries don't trade with each other as countries - rather it's individual consumers and individual companies that are doing the buying and selling. The confusion gets reinforced when we constantly hear about the "U.S. trade deficit with Japan" or China, which might again imply that the "unit of analysis" for international trade is the country, when in fact the unit of analysis is the individual U.S. company that engages in trade with other individual companies on the other side of an imaginary line called a national border.
``It's possible that some of the confusion about international trade can be traced to confusion about the "trade deficit" and the "budget deficit." The relevant unit of analysis for the budget deficit is indeed the country, since it's the entire country via elected officials that is responsible for the "budget deficit." By conflating these two distinctly different deficits, it's then easy to assume that the relevant unit of analysis for both is the "country" when in fact that only applies to the "budget deficit" and not the "trade deficit."
``Once one understands that it's individual companies, not countries, that are doing the trading, then it's not so easy to get fooled by statements or headlines like "Punitive tariffs are being imposed on China," or "Obama to hit China with tough tariff on tires." Since China doesn't actually trade with the United States at the national level, tariffs cannot be imposed on the country of China - it's not like the United States government sends a tax bill to the Chinese government.
``Rather, since it is companies that are trading, it's companies that have to pay the taxes (tariffs) TO their OWN government. In the case of U.S. tariffs on Chinese tires or steel, the tariffs (taxes) are being imposed not on the Chinese government or even the Chinese steel-producers, but on American companies who now are taxed for buying tires or steel from China, and then those taxes are ultimately passed along to the individual Americans who purchase the tires and purchase the consumer products like automobiles that contain Chinese steel."
In addition, it would seem similarly incoherent and ironic to think that manipulating currencies to subsidize "exporters" would generally benefit the country engaged in such policies.
That's because as a general rule for every subsidy someone has to pay for the "subsidized" cost. In short, subsidies redistribute rather than generate wealth.
Professor Donald Boudreaux debunks the favorite fixation of the mainstream: the US-China imbalances,
``The real costs of the resources and outputs exported by the Chinese people are not lowered simply because Beijing keeps the price of the yuan artificially low. And the resources spent to supply the extra American demand that results from an artificially low price of yuan—even though they are unseen by the untrained eye—represent a huge cost that harms the Chinese economy."(emphasis added)
So not only have mercantilists been barking up at the wrong tree, they have been brazenly promoting policies that focuses on short term fixes, which favors a select political group, and importantly, raise the risks of provoking a mutuality destructive trade war.
In closing this apt quote from John Chamberlain, ``when nations begin worrying about the "balance of trade," they are saying, in effect, that the price of a currency expressed in an exchange rate is more important than bananas, or automobiles, or whatever. This is a perversion that sacrifices the consumer to an abstraction; better let the currency seek its own level in the world's money markets."
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