How About A Fine Cuban Cigar?

Last weekend Chairman Ben Bernanke attended a meeting of central bankers from the major economies from around the world in Basel, Switzerland. Japan’s chairman of their central bank was there as was central bankers from Canada, England, France and China. Yet, everyone knows who is the 900 pound gorilla in the room. That title goes to the United States as we are still the world’s biggest economy.

But, being big is not enough, we need to lead by example. Everyone at these BIS meetings (Bank for International Settlements) wants what is best for their economy. But like a league of any kind, while each team is trying to win championships, without a league to play in, there are no championships.

Since the beginning of time, trade among nations has been a way for nations to build their wealth and bring needed commodities and products to their shores. Herodotus discusses the importance of trade in his Histories. Thousands of years later, international trade is bigger than ever. One of the problems is exchange rates, as nearly every nation wants their currency to have a favorable exchange rate so that the products they export are affordable in the countries they export their products to. When a nation feels and believes that another country is dumping too cheap a product or commodity on their nation, they retaliate by placing a tariff on those products. That then leads to trade wars if an agreement is not reached. Trade wars lead to shooting wars if they are not solved. There is no need to discuss shooting wars, as we all know the down side of war. Unfortunately, for some, there is an up side economically.

The United States imports a lot of stuff. Besides all the foreign oil that we import, we import a whole lot of stuff made in China. As a result of all the stuff we Americans buy, we run a huge trade deficit. As a nation, we need to have more balance between our exports and our imports. Without this balance, our dollar is too exposed to the laws of supply and demand. The government of China buys a lot of our US Treasury notes and bonds with their dollars. They hold a lot of our debt. Too much debt in the hands of any foreign nation is not a good thing for the United States. That is why we need more balance in our exports and imports.

When China refuses to raise the value of their currency (Yuan) because they want to continue to have a favorable exchange rate to the dollar, products manufactured in China remain cheap for the American consumer. The American consumer is happy to buy all the cheap goods produced in China because they get more for their dollar. Unfortunately, too many dollars in the market means that there is a greater supply of dollars than there is a demand. As a result, the dollar goes down in value in the foreign currency exchange markets. The weaker dollar then leads to an increase in the price of oil. Remember, oil is priced in US dollars, and if the dollar goes down in value the price of oil (even if demand remains the same for oil) must go up. In the end, the American consumer may buy a cheaper toy made in China, but winds up paying more for gas at the pump.

If you are importing stuff from China and selling it to stores in the United States, you are probably happy that the Chinese continue to produce goods so cheaply for you. The American consumer is happy to be able to buy those cheap goods to satisfy his/her needs. But what are the Chinese buying from us? We import oil from Saudi Arabia and the Saudis buy what? Our friends the Saudis recycle those petrodollars and buy lobbyists, who in turn buy our politicians. What are the Chinese buying with all their dollars? That may be something you might want to think about.

International trade is good. We have the opportunity to buy goods from almost all over the world. However, we do not buy cigars from Cuba. Cuba makes fine cigars, but Cuba is governed by a communist dictator so we do not trade with Cuba. Cuba sells their fine cigars in other countries and cigar smokers enjoy their fine cigars outside the United States. China does not make fine Cuban cigars, but they are a Communist dictatorship too. Evidently the United States has no problem trading with dictatorships or kingdoms regardless of their record on human rights. We just do not like dictatorships that make fine cigars. I would be willing to buy a little less from China so I could buy a few Cuban cigars, and I am waiting for our government to figure that out. In the meantime, I smoke non-Cuban cigars. We need to get our priorities straight when it comes to cigars. Perhaps, if we got the Cuban cigar thing right, we could get the oil thing right and then the dollar would turn the corner and start back up in value.

This currency exchange stuff is not rocket surgery. We need to be looking out for the welfare of all Americans, not just the ones importing oil and stuff made in China. Write your congressman and tell him what you know about international trade and foreign currency exchange. Tell him/her what you think of your falling dollar and its lack of purchasing power. We need to get people thinking about their money and our monetary policy. Stay tuned.