Want to know how to create up to 5.8 million jobs in three years? End currency manipulation. So says a new study released from the Economic Policy Institute. If it was stopped, the U.S. trade deficit would shrink by up to $500 billion in three years, annual GDP would increase up to $720 billion, the federal budget deficit would be reduced by $100 billion each year and 40% of the new jobs created would be in manufacturing.
Isn't it strange then that anything but currency manipulation is mentioned by the Obama administration and other politicians when it comes to job creation? Just today, former Federal Reserve chair Ben Bernanke claimed one reason manufacturing jobs have increased is increased energy production in the United States. While assuredly true, this factor pales into what confronting currency manipulation would do for the U.S. manufacturing sector.
Currency manipulation involves foreign currency exchange rates. There is a certain ratio of U.S. dollars to say the Japanese Yuan or Canadian dollar. Normally these rates change minute by minute, they float and are traded in open markets. Trade in particular is affected by exchange rates. If another country's exports become more expensive due to the value of that country's currency, then the importing country will bring in less goods and services from exporting nation since the items would now cost more. This what is meant by cheap Chinese goods. Because China's currency is so undervalued, it makes their goods very cheap in other nations. Those Chinese exports then flood the U.S. markets since the same good made in America is more expensive than it's Chinese counterpart.
Currency manipulation is when nations peg their currency to a certain fixed exchange rate instead of letting their currency float and thus find it's true value in international currency trading markets. Manipulators fix the exchange rate to a set ratio because it gives them an unfair trade advantage. Some nations game the system in so many words. When one has international trade players gaming the system, it can decimate other countries trying to manufacture goods for export. Many former United States manufacturing plants relocated to China in a mass exodus due to the Chinese undervaluing the currency artificially and thus making it absurdly cheap to manufacture there.
Here are the summary effects that ending currency manipulation would bring:
Nine of the top 10 states gaining the most jobs (as a share of total employment) in both scenarios are in the Midwest, including six states where manufacturing predominates: Wisconsin (64,700 to 156,600 jobs), Indiana (61,000 to 152,600 jobs), Iowa (34,000 to 79,600 jobs), Minnesota (55,900 to 135,300 jobs), Michigan (82,800 to 207,200 jobs), and Ohio (103,200 to 254,600 jobs); and three states that also benefit from manufacturing and/or agricultural job growth: South Dakota (9,200 to 21,100 jobs); Kansas, a major producer of aircraft and parts (28,900 to 67,000 jobs); and Nebraska (19,000 to 44,200 jobs). In the West, Idaho, a significant employer in computer and electronic parts production (13,900 to 32,700 jobs), rounds out the top 10 states gaining the most jobs. Jobs are gained in most congressional districts in the low-impact scenario, and in all congressional districts in the high-impact scenario. In the high-impact scenario, each of the top 20 districts by jobs created as a share of district employment would gain at least 14,700 jobs and as many as 24,400 jobs (gains representing between 5.79 percent and 8.65 percent of total district employment). Of the top 20 congressional districts, five are in California; three are in Wisconsin; two each in Indiana, Ohio, and Michigan; and one each in Kansas, Nebraska, Illinois, Minnesota,
Below is a map of jobs gained per state if currency manipulation had been stopped in 2013. Impressive isn't it?
The study gives solutions to bring about change in three steps:
First, Congress should pass pending legislation (H.R. 1276 and S. 1114) that would allow the Commerce Department to treat currency manipulation as a subsidy in Countervailing Duty trade cases (nearly identical legislation was passed by large majorities in the last three years but never enacted). Second, as a majority of the House has insisted, the proposed Trans-Pacific Partnership (TPP) trade agreement should include “ strong, enforceable currency manipulation provisions. ” Third, the administration must implement strategies that would tax and/or offset purchases of foreign assets by currency manipulating governments, which would make efforts to manipulate the dollar and other currencies costly and/or futile.
Since ending currency manipulation is such a no-brainer way to create millions of jobs and boost U.S. economic growth, why has this administration and Congress not done anything?
China is the largest holder of U.S. treasuries and in spite of recent reduction of their T-bill holdings, is still the biggest foreign creditor to the United States. This gives China enormous power over the U.S. economy and federal debt. Also highly suspect are U.S. multinational corporations blocking any currency manipulation confrontation. Multinationals play national tax codes, international markets and nation-states against each other, all to squeeze maximum profits for the firm. By manufacturing in China with a highly manipulated exchange rate, U.S. multinationals make out like bandits. Corporate lobbyists run the nation, so don't expect currency manipulation to actually be confronted by the Obama administration or legislation passed by Congress. It is truly outrageous since America is literally sliding down the economic slope and by allowing such manipulations to continue has destroyed the American middle class.
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Livio S. Nespoli has been a broker, registered investment advisor, and financial publisher since 1985.