Monday, December 8, 2014

Gary Shilling explains why currency differences dont make much difference to consumers

You might expect a strengthening dollar to depress U.S. economic growth by encouraging cheaper imports and reducing more expensive exports, but the actual effects are small, as are the resulting deflationary pressures. When a currency strengthens, exporters don’t pass on the cost to buyers but shave their profit margins to avoid losing sales.  

Conversely, importers don’t pass all of the currency's rise onto customers, and instead fatten their profit margins. These actions explain why import-price volatility is only about a third the volatility of a currency. 

Instead, the principal force affecting imports and exports is economic growth. When an economy is growing, consumers and businesses buy more of everything, especially imported products. The correlation between U.S. imports and the dollar is weak, but the relationship between imports and GDP is strong. My firm’s statistical models show that imports rise 2.8 percent for each 1 percent rise in GDP, but fall only 0.1 percent for each 1 percent rise in the dollar.