DJB, in my opinion higher interest make the trade deficit even worse. First, higher rates increase borrowing costs and these costs are passed on to the consumer in higher prices for goods and services, therefore, with higher prices for goods, exports go down.
Secondly, higher interest rates stengthen the dollar against other currencies. As the dollar goes up, it will take more yen, pounds, etc. to buy American made goods, therefore fewer exports, and that make the deficit even worse.
Japan has intervened more than once to stop the Yen from gaining too much against the dollar because of the fear that a higher Yen will mean higher costs to other countries (e.g., U.S.) and therefore fewer exports from Japan.
The only way Greenspan can rationalize increasing interest rates to increase exports is that with higher interest rates, then borrowing goes down, credit card rates go up, spending on plant and equipment goes down, hiring slows, consumers buy less, retailers lower their prices and with lower prices that should increase exports. I think that's Greenspan's motive... and if it is, he taking too much Viagra on a empty stomach...(interest rates are not the only thing rising all the time when they don't need to!!!) |
