What the Depreciation of the Dollar Means

for the Palouse

Andrew J Cassey

School of Economic SciencesWashington State University

October 5, 2011

Andrew J Cassey Depreciation & the Palouse

Why Listen to This Guy?

I Ph.D. 2008 University of Minnesota

I Dissertation: State Export Behavior & Policy

I Research interest: Regional development throughexportation• Information barriers to trade• Costs to begin exporting• Export promotion policy

I Contact information• Cassey@wsu.edu• 509-335-8334• extecon.wsu.edu/pages/Regional_Economics

Andrew J Cassey Depreciation & the Palouse

Introduction to Currency Exchange

I Purchases of foreign goods and assets involves two trades• Buy foreign good or asset with foreign currency:

Foreign goods market• Buy foreign currency with domestic currency:

Exchange rate market

I Effective price can change in two places instead of one

I Theory of exchange rates & international trade

I Data on recent exchange rate trends

I What does this mean for U.S., WA, and the Palouse?

Andrew J Cassey Depreciation & the Palouse

Market for Goods

Andrew J Cassey Depreciation & the Palouse

Market for Foreign Currency

Andrew J Cassey Depreciation & the Palouse

Foreign Currency Price Changes

Andrew J Cassey Depreciation & the Palouse

Appreciation vs. Depreciation

I Appreciation is when each unit of domestic currencybuys more foreign currency than before• This means price of foreign currency decreases• Strong currency

I Depreciation is when each unit of domestic currencybuys less foreign currency than before• This means price of foreign currency increases• Weak currency

I Widespread belief that currency “strength” associatedwith nationalism

I In reality, exchange rate changes help some Americans &hurt others

Andrew J Cassey Depreciation & the Palouse

An Example

I A cheeseburger costs 100 pesos in Mexico.Exchange rate is 10 pesos.It costs $10 for an imported cheeseburger(No transportation costs, taxes, or fees)

I Now cheeseburger still costs 100 pesosBut exchange rate = 20 pesos.

I What is U.S. price to import a cheeseburger now? $5Has the peso appreciated? No, depreciatedHas the dollar appreciated? Yes

I Conversely, if a hotdog cost $8 in the U.S., Mexicansused to pay 80 pesos, but now they pay 160 pesos!

Andrew J Cassey Depreciation & the Palouse

Exchange Rates and International Trade

I When domestic currency appreciates then• Imports become cheaper for domestic buyers• Exports become more expensive to foreign buyers

• Who benefits? U.S. cheeseburger eaters(whether they import or not), Mexican exporters

• Who loses? U.S. cheeseburger makers, Mexicanimporters

I When domestic currency depreciates then• Imports become more expensive for domestic buyers• Exports become cheaper to foreign buyers

I Absolute exchange rate does not matterOnly the change in exchange rate matters

Andrew J Cassey Depreciation & the Palouse

Exchange Rate Trends: Biggest Partners

Andrew J Cassey Depreciation & the Palouse

3 Variables Correlated with Exchange Rate

1 Relative inflation: High inflation ⇔ DepreciationU.S. has low inflation, but high relative to Can. or Euro.

2 Relativel interest rates: Low interest ⇔ DepreciationRelated to relative public debtsU.S. has low interest relative to Eurozone

3 Trade: Deficit ⇔ DepreciationU.S. trade deficits not historic, but big

I Randomness: By definition, not correlated, butimportant, especially if volatile

Andrew J Cassey Depreciation & the Palouse

Exchange Rate Trends: North America

Andrew J Cassey Depreciation & the Palouse

Exchange Rate Trends: Europe

Andrew J Cassey Depreciation & the Palouse

Exchange Rate Trends: East Asia

Andrew J Cassey Depreciation & the Palouse

Is the U.S. in decline?

I Is the U.S. weakening? Or weakening relative to others?

I Maybe, but I don’t think exchange rate informationindicates this

I It does indicate that now is a relatively good time to be aU.S. exporter

Andrew J Cassey Depreciation & the Palouse

What does this mean for Washington? Palouse?

I Washington exports more of its shipments than any otherstate

I 60+% of WA exports in aerospace industryPerhaps not a big impact here because contracts are notperfectly competitive

I Other big exporters: petroleum & coal products;navigational instruments; computer equipment

I I suspect gains will be “big” for small exporters, but notshow up in state-level data

I What about wheat?

Andrew J Cassey Depreciation & the Palouse

Exchange Rate Trends: Wheat producers

Andrew J Cassey Depreciation & the Palouse

Implications for Exporters

I After 10 years of a strong currency (favoring importers,consumers), dollar is in a weakening trend benefiting U.S.firms

I Will it last? - Nobody knows (but people paid to predict)

I 2008 appreciation due to worldwide recessionInvestors sold domestic assets to buy U.S. debt (bonds)requiring dollars

Andrew J Cassey Depreciation & the Palouse

But what about the Euro?

I Question: What will happen with the European debtcrises?

I Answer: I don’t know.

I My understanding of plans is that Europeans are hopingexports can save them

I If decreased government spending does NOT increaseconsumption and investment, then where else can growthcome from?

I Will ECB manipulate currency (as China does) to spurexports?That is outside of its mandate for inflation target

Andrew J Cassey Depreciation & the Palouse

Export Assistance Program

I No cost, confidential, in-depth and long-term exportadvice

I Assessment of export readiness

I Co-development of export plan

I Guidance through export forms and barriers

I Small Business Development Center

I Washington State Department of Agriculture

I Community & Economic Revitalization Board

I cassey@wsu.edu

Andrew J Cassey Depreciation & the Palouse