Now, in the U.S., the debate centers on how to keep Social Security solvent. In Europe and Japan, the projected costs of public pension plans also point to severe financing problems within the next few decades.

How serious and imminent are these problems? Which countries will be hardest hit? Can Social Security be saved or should it be privatized?

Brookings convenes a panel of leading experts to explore the domestic and international policy implications.

      

 

 

The exchange rate is simply the price of dollars in terms of a foreign currency. If a foreign entity wants to buy an American product, service, or financial asset, they must first buy dollars, and a rising exchange rate implies a strong demand for those dollars.

Fluctuations in exchange rates are notoriously hard to predict because they depend so heavily on expectations.  That is particularly true of changes on a bilateral basis, such as the dollar-yen rate, because we do not know if they reflect changes in one country or the other.

More meaningful patterns can be observed by comparing the exchange value of a currency to a broad average of its trading partners.

On the evening of Trump’s election, investors feared financial disorder in reaction to some of his extreme campaign promises and the dollar initially fell sharply in value. Investors quickly turned their attention to his economic policies and what they might mean for investments in the United States.

Trump has promised large business tax cuts and a much more expansionary fiscal position that should raise government borrowing and interest rates. All of this is good news for owners of capital, and investment funds have poured into the United States, driving up the dollar exchange rate.

However, it is also important to view these changes from a longer-term perspective where the value of the dollar has been steadily appreciating for the past five years – 30 percent since early 2011. During that period the United States has been a lone bright spot in the global economy.

With unemployment below the historic norm, record levels of corporate profits, and the Federal Reserve now poised to raise interest rates, financial capital is being redirected to dollar-denominated assets. It is the judgment of global investors that the United States has completed its long recovery from the financial crisis and is on the verge of a return to normality.

Investors also appear to believe that Trump’s more extreme statements about the global economy can be massaged away, and his election will initiate a period of lower capital taxation and other pro-business policies.

It is the judgment of global investors that the United States has completed its long recovery from the financial crisis and is on the verge of a return to normality.

What does a higher value of the dollar mean for the U.S. economy?  First, much depends on where you sit.

A high value of the dollar is good for consumers – it is a favorable time to vacation abroad, and foreign-produced goods have declined dramatically in cost. Prices of imported goods have held down consumer price inflation and contributed to the rise in real incomes.

On the other hand, for those who are employed in export-based jobs, the high cost of American-made goods will tend to drive down exports and increase the pressures to produce abroad.

Second, for comparisons with trade, it is important to focus on real, or inflation-adjusted, values since, for many countries, the change in the nominal exchange rate is simply an offset to relatively high rates of domestic inflation.

This is particularly important in comparing the United States to China. The Chinese inflation-adjusted exchange rate has appreciated even more than that of the United States over the past decade.

Finally, we should recognize the response of trade flows to an exchange rate change will stretch over several years as both exporters and importers wait to see if it will be enduring.  Most recent studies of U.S. trade suggest a lag response stretching over 2-3 years.

Those studies also typically conclude that a 10 percent appreciation of the dollar would lead to a long-run increase in the U.S. trade deficit by about 1 percent of GDP. Thus, we should anticipate that a continued strong dollar should exert a drag on the U.S. economy as a widening of the trade deficit from the current 3 percent of GDP to about 4 percent in the next 1-2 years.

The recent appreciation will make it difficult to achieve President-elect Trump’s goal of narrowing the trade deficit. However, the exchange rate is still below its 2005 peak, and the magnitude of the trade deficit is far below the levels reached in the mid-2000s.

The anticipated change in the trade balance is also occurring against the backdrop of a surprisingly weak performance of global trade in recent years. This suggests that the response to exchange rates may be more damped than in the past.

At present, the strong dollar reflects investors’ relative optimism about their prospective returns on dollar-denominated assets, and not a precursor of a deteriorating trade performance. Whether their optimism is justified remains to be determined.

Author

Barry P. Bosworth

The Robert V. Roosa Chair in International Economics

Senior Fellow - Economic Studies

      

 

 

Common concerns, no common plan

The top economic items on the agenda for the May meeting include: a discussion of potential actions to spur global economic growth, Japan’s intervention in currency markets, and concerns over excess capacity in the steel industry. None of these are areas where the G-7 is likely to reach a consensus for meaningful action. While there is a high level of concern about the evident weakness of the global economy, options for stimulus on the monetary front are extremely limited, and there are deep divisions over any expansion of fiscal deficits. Japan and the eurozone are already actively pursuing programs of quantitative easing, with the potential for negative interest rates. Meanwhile, the Federal Reserve is on a path of likely increases in short-term interest rates in coming months. The divergence of monetary policies implies further increases in the dollar exchange rate.

A global saving glut and universally low interest rates suggest that the present is an ideal time to make a major push to expand and modernize the public infrastructure, but the member governments remain more concerned about the overall size of their fiscal deficits and are being pressured to adopt contractionary fiscal measures. Germany and the U.K., in particular, are opposed to any joint commitment to additional fiscal stimulus. 

Japan is alone in believing that its intervention in the exchange market can be justified. The more common view is that such individual country actions are likely to have only transitory effects and are overwhelmed but the larger resources of the private market. In addition, the United States can hardly agree to support a Japanese intervention at a time that it is encouraging China to rely on a market-based determination of its exchange rate.

The G-7 leaders may use the summit as an opportunity to reiterate their support for free trade. That seems likely in view of the weakness of growth in global trade over the past two years and the anti-trade rhetoric that has infused the U.S. presidential primary. However, there is no meaningful list of actionable measures that that could be put before the leaders. Similarly, a purposeful discussion of excess capacity in the steel industry, which has led to import restrictions by several countries, will be handicapped by the absence of China—the producer and consumer of nearly half the world’s steel.

While the group may voice common concerns about the state of the global economy, there is no consensus about how those concerns should be addressed.

Given the lack of agreement on significant economic measures, the summit may focus more than usual on discussion of some foreign policy issues, such as the refugee crisis in Europe and global terrorism. The lack of specific proposals in these areas, however, again suggests the discussion will be largely exhortatory and avoid controversial issues. As an example, while the other members may desire that Britain remain in the European Union, it is not evident that external comment would be beneficial to next month’s vote. Climate change will be on the agenda in the aftermath of the 2015 Paris agreement to limit the global rise in temperature, of which the G-7 members were strongly supportive. There are no plans for significant new commitments at the summit, however, and discussion may be limited by the host country’s controversial decision to expand its own reliance on the use of coal for electrical generation.

Overall, the G-7 meeting is unlikely to result in any significant agreement for coordinated action on the range of issues on the agenda. While the group may voice common concerns about the state of the global economy, there is no consensus about how those concerns should be addressed, and each member will be left to tailor their actions to their own individual needs. The G-7 remains as a useful forum for discussion and coordination among the industrial democracies, but its role at the center of global economic policy may have passed.

      

 

 

The U.S. Social Security system, which established old age benefits, is designed to be highly progressive by redistributing income from workers with high average lifetime earnings to workers—and their dependents—who have low lifetime earnings.

Under the basic benefit formula, workers that make less over the course of their lifetime will see a higher percentage of their monthly earnings replaced through Social Security benefits than workers with high lifetime earnings.

The program is one reason America’s senior citizens, when taken as a whole, have fared so well—even throughout the Great Recession. While the average income (adjusted for inflation) of households with a head below the age of 65 fell by 4 percent between 2003 and 2013, the income of those with a head 65 and over rose by 15 percent.

But new research from Barry Bosworth, Gary Burtless, and Kan Zhang finds evidence that some of the program’s progressivity is being offset due to a growing gap in life expectancy between the rich and the poor.

That gap, when taken together with the rise in average retirement ages since the early 1990s, means the gap between lifetime benefits received by poor and less educated workers and the benefits received by high-income and well educated workers is widening in favor of the higher income workers.

Why Americans are working longer

Labor for participation rates have been falling slowly for decades. After the early 1990s, however, the pattern reversed for workers over age 60. For older men, the labor force participation rate increased by nearly one-third from 26 percent in 1995 to 35 percent today. Rates for older women have also increased, from 15 percent in 1995 to 25 percent in 2014.

So why are Americans working longer? One reason is education. Men and women with more education tend to have higher-paying, usually more-rewarding, jobs that provide greater incentives to continue working. In 1985, 42 percent of 60-74 year-olds had less than a high school diploma. In 2013, only 12 percent did.

There are other policy-related reasons, as well. An increase in the age at which workers can claim full benefits from 65 to 66 creates more incentives to delay claiming a pension and possibly to keep working. The shift from private defined-benefit (DB) pension plans to defined-contribution (DC) plans means the longer someone works, the more money they accumulate in their retirement savings accounts, no matter how long they continue working. Then there’s health care: the elimination of many employer-funded retiree health plans makes it riskier for workers to leave their jobs if they aren’t yet eligible for Medicare.

In addition to the fact that more Americans are working longer, there has been a notable shift in the proportion of older Americans continuing to work full time as opposed to part time. Since 1995, the relationship between full and part time work among America’s aged has completely reversed.

Americans who earn lower wages retire earlier than those earning high wages

But a closer look at who’s retiring when shows big differences based on income. Fifty-six percent of men and women in the bottom third of the mid-career income distribution—and with a full-retirement age of 66—begin claiming Social Security at or before age 62. Only 13.8 percent delay claiming a pension until they’re 66 years old.

We know that the longer a person works, the more money they receive from Social Security each month once they start claiming retirement benefits. What this means, then, is that early benefit claiming by low-wage workers—when combined with delayed claiming by high-wage workers—magnifies the difference in monthly benefit payments received by low- and high-wage workers.

For retirees with a full retirement age of 66, delaying the age of benefit claiming from age 62 to age 70 increases their basic monthly benefit by at least 76 percent.

Social Security helps combat rising inequality—but what if people retire later?

Income inequality has increased noticeably since 1979, and there are many reasons—and theories—as to why.

One reason is that workers at the bottom of the earnings distribution have seen negligible or even negative changes in their real earnings since 1980, while workers at the top have seen their real earnings climb. Nowhere has the ascent been faster than among the top 1 percent of earners.

Because wages and self-employment earnings compose the majority of income for families headed by working-age men and women, inequality among the working age has soared. But what about inequality among families headed by men and women that are older or retired?

While rising earnings inequality has contributed to some growth in inequality among the aged (because more lifetime earnings means more savings and bigger pensions), the gap between high- and low-income families headed by seniors hasn’t grown as quickly as the gap between other high-and low-income working-age families.

How come? Social security and other government transfer benefits. When a birth cohort transitions from ages when labor income provides the bulk of family income to ages when Social Security and pensions provide most family income, families at the bottom of the income distribution see some improvement in their spendable incomes compared with the median family in their age group. The reason is that Social Security provides a floor on retirement income for America’s low-income elderly. Delayed retirement, however, has changed things. As more Americans who earn high incomes continue to work longer, the gap between high- and low-income seniors tends to widen, pushing up inequality among America’s seniors, although more slowly than has been the case among working-age adults.

Evidence of growing gaps in life expectancy

Retiring earlier means workers’ monthly Social Security checks will be less than if they continued working until full retirement age. But there’s another factor at play when we consider how much lifetime income a person receives from Social Security: how long they live.

A growing number of studies suggest recent gains in life expectancy have been greater at the top of the income and education distributions than at the bottom. Bosworth, Burtless and Zhang find, for example, that the average life expectancy of man born in 1920 in the top 10 percent of the mid-career income distribution is 79.3 years. The same man in the bottom 10 percent of the distribution has an average life expectancy 5 years lower.

Worse still is that the gap has grown over time. For men born 20 years later in 1940, the difference in average life expectancy is 12 years.

The large and growing gap in life expectancy magnifies to an even greater degree the difference in lifetime Social Security benefits provided to low- and high-earnings workers. Even though the formula that determines monthly Social Security pensions is progressive, a growing share of the progressivity is offset on a lifetime basis by the growing difference between the post-retirement life spans of low- and high-wage workers.

What growing gaps in life expectancy and emerging retirement trends mean for policy

By many economic measures, America’s seniors have fared very well over the past several decades. Today’s seniors are more educated than their peers in previous generations, and many are working longer because they enjoy their jobs and want to stay in the workforce.

When they do retire, America’s elderly—rich and poor alike—have been able to supplement their income with retirement benefits from Social Security and other government transfer programs. As a group, they’ve seen their incomes rise over time while the incomes of younger Americans have fallen. They’ve also experienced less inequality, which has grown at slower rates among America’s elderly than it has for America’s younger workers.

Yet new trends are emerging that could lessen the positive effects of Social Security—and policymakers should pay attention.

While policy changes and other factors have encouraged many Americans to work longer and delay claiming Social Security benefits, the trends toward later retirement and delayed benefit claiming are much weaker among low-wage workers. Earlier retirement means low-income workers receive less money from Social Security each month compared with workers who delay their retirement and benefit application. Furthermore, later retirement by high-wage workers creates more inequality among the aged, as high-wage workers continue to receive big paychecks from their employers while less well paid workers only collect a pension. Finally, the growing gap in life expectancy between low- and high-income workers means that high-wage workers will collect pensions for progressively longer periods, even as low-wage workers see little improvement in life expectancy.

These trends deserve scrutiny as policymakers consider how to reform Social Security in order to keep it adequate for retirees and sustainable for future generations. If benefits are trimmed to protect the program’s solvency, workers experiencing gains in life expectancy would see cuts to their monthly benefits partially offset by the fact they live longer than previous generations and consequently receive pensions for a longer period.

But voters should bear in mind that improvements in life expectancy have been highly unequal, and low-income workers have experienced much smaller gains in life expectancy when compared with workers further up the income scale.

For those workers with the lowest lifetime earnings, a cut in monthly benefits results in a loss in lifetime benefits that is proportionately just as severe as the cut in their monthly pension. They will receive lower monthly payments from Social Security when compared with earlier generations of low-wage workers who retired at the same age. And, unlike high-wage workers, the gains in their life expectancy will not compensate them for the cut in their monthly benefit check.

Download the full paper by Bosworth, Burtless and Zhang, titled “Later Retirement, Inequality in Old Age, and the Growing Gap in Longevity between Rich and Poor” »

      

 

 

Bosworth examines the causes and implications from two perspectives. First, why has the United States been so reluctant to raise rates when by most standard measures the United States has returned to full employment? And second, can we explain the causes of today’s low rates and their persistence?

In addition, Bosworth dissects three major explanations of the depressed level of rates at the global level, finding problems with all explanations. The three hypotheses are:

1. Excess savings: an excess of saving above warranted investment in major regions of the global economy 
2. Safe asset shortages: a shortage of safe assets that drives up their price, and lowers the return relative to more risky investments, and 
3. Secular stagnation: the possibility that the world economy faces a situation of secular stagnation–a persistent condition of deficient demand and high unemployment. 

Following his analysis of the problems with all three hypotheses, Bosworth warns that the low interest rate environment may endure for many years.

“After a decade of sustained low nominal and real interest rates,” he writes, “it is difficult and risky to continue to rely on a notion that low rates are a simple reflection of a temporary underemployment disequilibrium that will soon pass.”

Download the full paper here >>

      

 

 

How do we reconcile the optimistic macroeconomic reports on resource utilization with the continued income losses? A more detailed examination of the data suggests that the reported economic recovery has been in part an illusion because it reflects a contraction of aggregate supply rather than a strong expansion of demand. It is most evident in the continuing fall in the labor force participation rate and very modest gains in productivity. The aggregate dimension is most evident in the comparison of actual GDP with the estimates of potential GDP published by the Congressional Budget Office (CBO), as shown in figure 1. The top line is based on the CBO projections released at the end of 2007 and extending out to 2017. However, as the sluggish recovery dragged on, the CBO cut back its estimates of potential GDP growth to the 2014 projections shown in the middle line.

Meanwhile, the weak growth in GDP implied a growing gap relative to the 2007 expected growth in potential, and all of the current reported recovery is due to the sharply lower current estimate of potential. Even the revised estimate of potential GDP appears too high and the CBO is likely to lower it further in the next budget cycle. While the gap between actual and potential GDP is still reported as a substantial 4 percent, the unemployment rate has already dropped below the rate that CBO associates with full employment. While the GDP gap and the unemployment rate do not have to be in complete agreement, the difference seems unduly large.

The continuing fall in the labor force participation rate has been an area of particular surprise. Initially, the drop in the participation rate was widely attributed to demographic change, as the Baby Boom generation entered their retirement years, and a temporary discouraged-worker effect of individuals leaving the labor force in the belief that no jobs were available as the Great Recession hit and dragged on. The latter group was expected to return to the labor market once overall conditions had improved. We can illustrate this phenomenon in figure 2 by separating the drop in the aggregate participation rate since 2000 into two components.

The demographic element is measured by holding the participation rates within 5-year age categories constant at the values of the year 2000, and allowing the overall rate to change only with shifts in the age-sex composition of the population of labor force age. As shown in the figure, the demographic change is substantial and ongoing, but the surprise lies with the growing magnitude of the perceived discouraged worker component. In terms of changing trends, it is concentrated among women aged 25-34 whose participation rate has fallen back to that of the early 1990s. The male rate has continued a decline stretching back for several decades. In addition, a pattern of rising participation rates among older workers (55 and over) has stopped. The reasons for these changes are not fully understood, but they appear to be more than cyclical.

The supply-side concerns are also apparent in the slowing pace of productivity change in recent years (figure 3). There is growing evidence of a break in productivity performance around 2005, marking the end to the information and computing technologies boom of the late 1990s, and a return to the modest gains that dominated in the interval of 1972-95. Since 2005, labor productivity has improved at less than half the rate of the prior decade (1.3 versus 2.9 percent). There was a short-term surge of productivity gain in the early stages of the economic recovery by it quickly tapered off and has averaged less than ½ percent annually over the past five years. To the extent that productivity growth has been dominated by innovations in information and computing technologies, a slowdown seems inevitable as much of the industry has moved outside of the United States (Apple Inc., the largest IT company, has no U.S. production facilities), and in the retailing sector with the shift to large box stores, which were a source of major productivity gain, and now seems complete.

With a declining proportion of Americans in the workforce and near stagnate levels of productivity, there is little room for gains in real incomes. We do not know if these trends will continue in the future, but there are no signs of a near-term turnaround .

      

 

 

Like most changes, the surging value of the dollar is creating both winners and losers. It is a blessing for American consumers and those of us who would like a spring vacation in Europe. On the other hand, in the future, it could be a bane in the lives of Americans looking for jobs in manufacturing because it causes the price of American exports to go up, and imports to become cheaper.

The stronger greenback is a reflection of the strength of the U.S. economic recovery, but maybe even more so the weakness of the economies of the Eurozone and Japan. In a global economy, it is important to focus on broad trade-weighted measures of the exchange rate that reflect the relative importance of America’s trade with other countries.

Thus, the fact that Russia’s ruble has lost half its value against the U.S. dollar means little to America’s economy since trade with Russia is minimal. It’s a different story with the euro and yen, since the U.S. considers Japan and Europe major trading partners. Adjusted for inflation differences, the trade-weighted dollar has risen by 30 % from its low in 2011—about the same increase it saw during the dot com boom of 1995 to 2002, but it remains far below the prior peaks of 1985 and 2002.

The U.S. and China stand out as two countries whose currencies have experienced the largest appreciation. Japan has witnessed the largest depreciation; the value of the yen has dropped about 30% over the past three years, as Prime Minister Shinzo Abe’s government aims to rejuvenate Japan’s economy. The euro has fallen nearly 20% against the dollar over the past year, but its trade-weighted decline is actually half that or less than 10%, as other trading partners have followed its value down.

Exchange rates are largely determined by basic forces of supply and demand, but their changing values are frustratingly hard to predict, and large fortunes have been won and lost in bets in their future values. To the extent that foreign exchange is desired for the purpose of purchasing the goods and services of other countries, exchange rates will reflect the relative strength of countries’ business activity and differences in rates of price inflation, basic determinants of the demand for exports and imports.

With the growing openness of international capital markets, exchange rates have become more reflective of perceived differences in investment opportunities and they are often dominated by developments in financial markets. That change is particularly true in recent years as innovations in monetary policy, such as various versions of large-scale bond purchases known as quantitative easing, reflect a commitment to an accommodative monetary policy stance extending far into the future, which can have strong effects on exchange rates.

Expectations that interest rates will stay low lead to reduced demand for assets denominated in the domestic currency, and as a result, exchange rate depreciation. With the shift away from quantitative easing in the United States, and its expansion in Japan and the Eurozone, the price of the dollar can be expected to rise even further in relative terms.

To date, these large realignments of currency values among the major economies have had surprisingly small effects on trade flows. Substantial increases in the real value of the dollar in the early 1980s and 2000s were both associated with the emergence of large trade deficits, and the subsequent declines moved the trade balance back toward zero. We came to associate a 10% rise in the real exchange rate with a fall in in the trade balance of 1-1½% of GDP.

The lack of change in the U.S. trade balance might be attributed to a lagging response to what has been a fairly recent turnaround — the dollar had been declining in value prior to 2012. And, the U.S. trade deficit will be held down in the short-run by the abrupt drop in the price of imported oil.

The failure of Japan to generate a larger improvements in its trade is more puzzling. More than two years have passed since so-called “Abenomics” initiated a sharp yen depreciation, yet the trade balance shows little evidence of change. Economic developments within the eurozone are also disappointing. The European Union needs a realignment of competition among its members – an effective devaluation in the South and relative price appreciation in the North. Yet, with a common exchange rate, improved competitiveness with the rest of the world brings only ever-growing surpluses for Germany, while the peripheral countries continue to struggle.

Ongoing exchange realignments and shifting trade balances could become more divisive in future months now that the European Central Bank has joined the Bank of Japan in a large program of monetary expansion. As lagged effects of the exchange rate changes work through the trading system, the negative effects on U.S. growth will become pronounced and competitive tensions over exchange rate policies will rise.

      

 

 

In a global economy, it is important to focus on broad trade-weighted measures of the exchange rate that reflect the relative importance of our trade with other countries. Thus, the halving of the value of the ruble against the U.S. dollar is actually of little economic consequence to the United States because our economic exchanges with Russia are minimal. But the Euro and the Yen represent major U.S. trading partners.  Adjusted for inflation differences, the trade-weighted dollar has risen by 30 % from its low in 2011—about the same as its rise in the IT-fueled boom of 1995 to 2002, but is remains far below the prior peaks of 1985 and 2002. The United States and China stand out as the two countries with the largest appreciation, and Japan has witnessed the largest depreciation–also about 30 percent over the past three years–as the Abe government seeks the means to rejuvenate Japan’s economy. The euro has fallen nearly 20 percent against the dollar over the past year, but its trade-weighted decline is actually half that or less than 10 percent, as other trading partners have followed its value down.

Exchange rates are largely determined by basic forces of supply and demand, but their changing values are frustratingly hard to predict, and large fortunes have been won and lost in bets in their future values. To the extent that foreign exchange is desired for the purpose of purchasing the goods and services of other countries, exchange rates will reflect the relative strength of countries’ business activity and differences in rates of price inflation, basic determinants of the demand for exports and imports. But, with the growing openness of international capital markets, exchange rates have become more reflective of perceived differences in investment opportunities and they are often dominated by developments in financial markets. That change is particularly true in recent years as innovations in monetary policy, such as various versions of quantitative easing, reflect a commitment to an accommodative monetary policy stance extending far into the future, which can have strong effects on exchange rates. Expectations of a sustained regime of low interest rates lead to reduced demand for assets denominated in the domestic currency, and as a result, exchange rate depreciation. With the shift away from quantitative easing in the United States, and its expansion in Japan and the Eurozone, the price of the dollar can be expected to rise even further in relative terms.

To date, these large realignments of currency values among the major economies have had surprisingly small effects on trade flows. Substantial increases in the real value of the dollar in the early 1980s and 2000s were both associated with the emergence of large trade deficits, and the subsequent declines moved the trade balance back toward zero. We came to associate a 10 percent rise in the real exchange rate with a fall in in the trade balance of 1-1½ percent of GDP. 

The lack of change in the U.S. trade balance might be attributed to a lagging response to what has been a fairly recent turnaround — the dollar had been declining in value prior to 2012. And , the U.S. trade deficit will be held down in the short-run by the abrupt drop in the price of imported oil.

The failure of Japan to generate a larger improvement in its trade is more puzzling. More than two years have passed since so-called “Abenomics” initiated a sharp yen depreciation, yet the trade balance shows little evidence of change. Economic developments within the Eurozone are also disappointing. The EU needs a realignment of competition among its members – an effective devaluation in the South and relative price appreciation in the North. Yet, with a common exchange rate, improved competitiveness with the rest of the world brings only ever-growing surpluses for Germany, while the peripheral countries continue to struggle.

Ongoing exchange realignments and shifting trade balances could become more divisive in future months now that the European Central Bank has joined the Bank of Japan in a large program of monetary expansion. As lagged effects of the exchange rate changes work through the trading system, the negative effects on U.S. growth will become pronounced and competitive tensions over exchange rate policies will rise.