from the hip

I am frequently surprised by the ability of American media to explain away or minimize the role of domestic factors in the current recession in the US. Washington Post provide the most recent example of this kind of foolishness. Today it featured the following headline:

Exports Not Hurt by Euro’s Strength, Official Says

BRUSSELS, April 15 — Most European exporters are not yet feeling the pain of the strong euro, a European Union official said Tuesday — even as aircraft maker Airbus, which sells its planes in U.S. dollars, called the level “unbearable.”

Now, if the euro was strong, this would be ok. However, if it is the dollar that is weak, then businesses in the EU don’t really have any big problems. Then it is only sales in the US that are affected.

From a business point of view it matters a lot whether it is the dollar that is weak or the euro that is strong – it is only for trade between those two areas that it does not matter which is what. But for all other trade – and an increasing proportion of world trade falls in that category – it matters.

And really, the Euro has strengthened somewhat versus a number of currencies, but the US dollar has weakened by 30-40% against virtually all currencies that count. Therefore it is much more appropriate and correct to speak of a weak dollar than a strong euro!

Competitively speaking, that means raw materials and goods that are imported have become comparatively cheaper for the EU and other countries, while they have become comparatively more expensive for the US.

Thus, the low interest rates in the US and the recession feeds back on the competitive situation of the US in the world economy.

American media continue to focus on the rising price of oil, and how they drive inflation and increase energy costs.

While this is true, it is only true in an indirect sense. It’s not the oil that is extremely expensive – it was much more expensive in 1980, if measured in other currencies – it is the dollar that is weak.

Here’s that chart for the USD versus the Euro for the last 12 months:

Here is the Brent spot price for the same period:

Adjust oil prices for the dollar slip, and there is still a price increase, but it is actually not all that huge.

The dollar is weak because the US interest rate is low – actually negative when adjusted for inflation – and because the US banking system and credit markets are shaky. And the stock marked is in for a rough ride, whether Americans want to believe it or not. So investors, both inside and outside the US, go into oil and commodities.

This, of course, means the causes for the high oil price to a large extent is found in policy failures within the US. There really isn’t all that much cause to blame the Arabs or the rest of the world, certainly not for the current recession in the US, and only to a limited extent for the current oil prices.

Following the coverage of the current crisis in the US, I strongly feel the news media in the US attribute far too big a role to the current prices of oil as a factor causing or contributing to the recession.

For instance, New York Times a few days ago published a graph showing the inflation adjusted price of oil, and pointed out that oil now was more costly than in 1980, and at its highest ever price (after the most recent price adjustments) (illustration from New York Times):

While this is obviously true, it is also only true when viewed from an American point of view. If the declining value of the dollar in international currency markets it factored in, oil is actually still 30-40% less expensive now than it was in 1980.

So to my mind, Americans, and most certainly American media, are looking in the wrong direction when explaining the crisis to the American public. To the extent that their explanations are believed, this may slow down the appropriate and necessary adjustments to the current challenges facing the American economy. It is necessary to look elsewhere.

More to come!