Graphics: Microeconomics versus Macroeconomics

From smbc-comics.com

Different Trading Partners And The Currency Option

Another reason why proposed mercantilist policies particularly based on the currency valve option are not likely to work: different trade partners by different states or regions.

This from the Wall Street Journal Blog, (bold emphasis mine)

But the dollar’s impact will not be equal on each state or region. That’s because, for instance, Texas ships more exports to Mexico while New York sends more exports to Canada. Understandably, then, the health of Texan exporters depends more on changes in the dollar-peso rate while New York exporters care more about the U.S.-Canadian exchange.

To gauge the regional impact of exchange rates, the Federal Reserve Bank of Dallas has developed a real trade-weighted value of the dollar index for each state.

Foreign-exchange markets tend to focus on the dollar’s value versus the euro or yen. But for state exporters, the exchange rates in emerging nations and our NAFTA partners Canada and Mexico are probably more important.

“National exchange rate indexes do not always reflect individual state experiences,” the report says. “States at times face sharply different effective exchange-rate shifts, often provoked by economic or financial crises.”

This should not even be limited to the state or region level.

Competitiveness can be analytically regressed to independent enterprises where each firms operates on distinct cost structures, have different fields or areas of specialization and of the idiosyncratic competitive advantages, [even if they come from the same industry and operate in the same territory].

Where exchange rates could have diverse effects from the micro level from the different location of trading partners, the transmission mechanism of proposed exchange rate policies are likely to be ambiguous.

The other way to say this is that one size fits all exchange rate option is a political gamble undertaken by technocrats with society’s equity at stake.

Does Macro Economics Matter?

In an article, "What's the Point of Macro?" Societe Generale Dylan Grise remarked,

``So my advice to anyone about to embark upon Einhorn's path of using macro to "actively manage your long-short exposure." is to think long, hard and honestly about what your sphere of competence actually is." (thanks to my dear friend Mr. Laird Smith)

If importation of product X is my business, and suddenly our government prohibits the imports of this item and its related lines, then what's the effect to my business? Obviously I'd have to either shift to other products where imports are allowed or close shop! [yes my dad suffered from this predicament nearly 30 years ago]. In short, business conditions respond to macro policies.

Thus my corollary: The more the government intervenes in the marketplace, the more macro perspective becomes relevant, and vice versa, in determining the viability of investments.

Put differently, the usefulness of the macro perspective relative to risk-reward tradeoff depends on the expected level or degree of government interventionism or inflationism.

As a caveat, while macro does matter, we shouldn't ignore the micro developments. Importantly, we should NOT depend on mathematical formalism to make macro appraisals.