From the November 01, 2009 issue of Futures Magazine • Subscribe!

Making sense of the dollar: Exposing dangerous myths about trade and foreign exchange

Making Sense of the Dollar: Exposing Dangerous Myths About Trade and Foreign Exchange
By Marc Chandler
Bloomberg Press
$27.95, 240 pages

Marc Chandler is the chief foreign exchange strategist at Brown Brothers Harriman.

A frequent contributor to Barron’s, TheStreet.com and other traditional and online media, Chandler also serves as associate professor of international economics at New York University’s Center for Global Affairs. In this welcome study, Chandler seeks to debunk 10 widely held but flawed beliefs about forex and global economics, myths that he feels could lead U.S. policy makers to make poor, possibly disastrous decisions.

Chandler begins with an upfront statement of what his book is not about. “Anyone wanting a guide on trading currencies or advice on making a fortune in the foreign exchange market should look elsewhere." Rather, Chandler’s mission is to refute conventional but dangerous beliefs about foreign exchange and trade. Each chapter cites a popular misconception about the currency markets and global economics. Chandler then systematically repudiates these claims with a mixture of discerning logic and sometimes surprising statistics.

Of the 10 flawed perspectives on global finance, Chandler focuses on three main misconceptions. First, Chandler argues that the U.S. dollar is in no danger of being supplanted as the world's foremost currency. He notes that U.S. Treasury bonds are the deepest and most liquid fixed income market in the world, uniquely enhancing the appeal of the dollar. Recall that in the fall of 2008, as the worldwide financial crisis intensified, the U.S. dollar soared while almost every other global asset class was decimated.

Not only is the dollar in better shape than most believe, but the U.S. economy also is much more globally competitive than is widely thought. While many commentators bemoan the decline in domestic factory production, the U.S. remains by far the world’s largest manufacturer. In fact, the U.S. manufacturing sector is bigger than China’s entire economy. Thanks to striking gains in productivity, U.S. factory workers deliver disproportionate levels of manufacturing output.

A third main point is that the U.S. trade deficit is not as severe as it appears. Chandler notes that half of the trade deficit as calculated traditionally consists of overseas movement of goods and services within the same U.S. company, as one affiliate exports to another U.S. affiliate elsewhere. Due to this and other evolving trends in global finance, Chandler argues that conventional foreign trade accounting is deceptive. He cites a new, more realistic accounting treatment that cuts the U.S. trade deficit from $700 billion to $466 billion.

Chandler’s quarrel is not just academic. He believes that policy makers acting on unsupported beliefs could do severe damage to the U.S. economy and the international financial system. To cite one example: “Overblown concern about the trade deficit amid a weak economy and rising unemployment could ignite a new round of trade protectionism in Washington, which could spark similar responses around the globe.” Are these echoes of the 1930s?

The text furnished for this review was an uncorrected manuscript proof. There were some editorial lapses that will hopefully be remedied in the final published edition. Otherwise Chandler’s prose is clear and sharply focused. The author is well acquainted with the literature of global finance, and his findings are richly documented. The text reflects not just Chandler's experience but also his scholarly erudition.

Nelson Freeburg is editor of Formula Research, a financial letter that builds and tests quantitative timing models for stocks, bonds and commodities. Formula Research serves systematic traders and institutional money managers in 27 countries.

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