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Go see Megan McArdle and Steve Sailer give Thomas Friedman's latest column the full Reginald Denny.
But that's not what this post is about. This post is about another Megan post:
Dan Drezner points out that resurgent worries about the dollar's decline are mostly ridiculous, which they are. As long as our trade deficit remains large, the dollar is going to tend to slide in order to match inflows to outgoes. Moreover, the dollar has been propped up over the last year by a global "flight to quality", aka US treasury debt. We should be glad that the dollar is declining, not merely because it makes our exports more competitive, but because it represents a restoration of confidence in the global economy.
Far be it from me to be so foolish as to debate Megan on economics, but I wonder if the causal power she attributes to treasury debt also applies to exports, and that the declining dollar reflects the relative demand for products rather than being the key to improving our competitiveness.
Megan appears to be sanguine about the dollar's decline because it's only a symptom, but isn't this akin to saying, "Oh, don't worry about all that blood on your clothing. It's just 'cuz of that bullet lodged in your spine."? Seriously, the "declining dollar" may be just a symptom, but it's a symptom of something really bad: the vote of "no confidence" by the world's central bankers in our collective decision to address the structural problems in our economy by doubling tripling quadrupling our federal deficit.
What if what Megan calls "the restoration of confidence in the global economy" is not an improvement in the prospects of our trading partners, but only the collapse of American prospects? That's all that exchange rates measure: relative economic value. Kind of like wages reflect relative productivity. But if my wages fall, I'm not going to start jumping up and down saying, "Yea! Now I'm more competitive!" This would be to get the cause and effect exactly backwards.
4 comments:
There is also the issue of the dollar carry trade, caused by our bottom of the barrell interest rates. It allows the financial powers to borrow money in dollars, sell the dollars for foreign currencies (such as Brazil's and Australia's), then get high paying returns in those foreign countries. This daily selling of the dollar by international investors is a major factor driving it down.
Is it bigger than the drive to get off the dollar as the reserve currency? I suspect in the short term, it is. At least the carry trade is potentially reversible, if we raise interest rates.
The end result seems to be very bad: high inflation without economic activity. The inflation in this case caused by collapsing dollar in our import-based consumer economy.
Will our hoards of unemployed suddenly go back to manufacturing? Nope. Have you noticed them programming us to resign ourselves to permanent structural unemployment?
Floating currencies are a defective and dysfunctional method of managing international trade balances, especially when one country is the reserve currency and other countries artificially peg. Tariffs and protectionism are the best way, but are considered taboo by the international financial elite, as it would limit their power.
A weak dollar can give U.S. manufacturing a much-needed boost. If it also means that we buy fewer imported mega-screen TV's, well, that may be a decent tradeoff.
Peter
Peter: We manufacture stuff? Really?
Justin: I wasn't aware of the dollar carry trade. It sounds awfully speculative, since the banks' investment could be wiped by foreign defaults or changes in the exchange rate.
Gosh, what would they ever do if that happened?
Kind of answers itself, doesn't it?
We manufacture stuff? Really?
More than any other country in the world. It just doesn't take as many of us to do it anymore.
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