In the early 1980s the U.S. suffered record trade deficits and severe de-industrialization as a result of an overvalued dollar. Those problems were tackled by the 1985 Plaza accord - an agreement between the U.S. and its major trading partners - which depreciated the dollar, reduced the trade deficit, and helped keep the economic expansion going. (more…)
The China Business Forum recently (January 2006) released a report titled “The China Effect†that claims “the long-term benefits to the United States of Trade with China are substantial and likely to endure (Executive Summary).†The top line conclusion of the report is that the average US household stands to be one thousand dollars better off by 2010 as a result of lower prices and increased productivity in the U.S. due to the China effect. The bottom line take-away from reading the report is that it is flawed and misleading. Here is why. (more…)
The establishment of the euro represents an important step in the creation of an integrated European economy. Over time it should yield dividends as increased competition and lower transaction costs generate increased efficiency. However, member countries have had to give up their own exchange rates and interest rates, which has created problems for economic management by reducing the number of policy instruments. In particular, the European Central Bank (ECB) must wrestle with how to set interest rates when some countries are booming, while others suffer high unemployment. Asset based reserve requirements (ABRR) can fill this policy instrument gap. (more…)