The Strong Dollar
Pete Davis reports from yesterday’s Senate Budget Committee hearing:
Budget Committee Chair Kent Conrad (D-ND) and Ranking Republican Judd Gregg (R-NH) commiserated that they were almost alone among their colleagues in their concern for the long-run credit worthiness of the United States. He also expressed concern for maintaining the value of the Dollar. Conrad drew attention to the “wall of debt” that Americans face in his opening statement and detailed the economic challenges we face, not only in reviving credit markets and in overcoming recession, but in getting control of the massive debts we’re incurring once the economy starts growing again.
Concern for the long-term creditworthiness of the United States is well-taken. But though I’m open to correction on this point, worrying about “maintaining the value of the dollar” seems misguided to me. Beyond the short-term problem of the recession what we need over the long-run is structural adjustment of the international flow of goods and capital. We need to export more and import less. A weaker dollar isn’t, strictly speaking, a necessary condition of that re-balancing process but it’s the most likely way for it to come about.
Language can get a little misleading here. A “strong” dollar sounds like a good thing and a “weak” dollar like a bad one. But it’s perfectly normal for trade deficits to wax and wane and for the relative value of currencies to rise and fall as part of that adjustment process.
51 Responses to “The Strong Dollar”
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January 16th, 2009 at 9:48 am
We should start calling it “high dollar” and “low dollar.”
January 16th, 2009 at 9:59 am
This debate misses this fact: the dollar has already fallen, is already low. Six years ago the dollar was almost twice as valuable in euros. How much lower can it really get?
January 16th, 2009 at 9:59 am
A strong dollar is helpful if you want to continue benefiting from massive amounts of cheap imports. The fact that this is unsustainable as a long-term policy seems lost on strong dollar fans.
Of course just about everything humans have been doing for the past century is unsustainable over the long term, so I guess if you are going to be delusional about everything else, you may as well be delusional and imagine the international trade fairy will continue giving you presents forever too.
January 16th, 2009 at 10:00 am
How much lower can it really get?
Much, much lower.
January 16th, 2009 at 10:04 am
Go ask the people of Argentina what “capital flight” is , Matthew.
What that stupid fuck Milton Freedman and his ass-kissing, right-wing acolytes never realized was that that constraint was what keep the Fed from cutting interest rates more in the early days of the Great Depression.
The big fucking problem we have is what John Kenneth Galbraith identified as one of the prime causes of the Great Depression: a maldistribution of income/wealth. The people who badly need to buy the essentials for survival don’t have the money and the people who have the money are sated from a Gilded Age and are stuffing everything under the mattress for the oncoming Depression they Superrich caused.
The only variation this time around is that the Democrats are helping the Republicans steal $Trillions from the Poor and give to the Rich.
January 16th, 2009 at 10:05 am
A “strong” dollar means that we can repay our debts with valuable money. It enables us to retain our credit rating.
To the extent that we need to borrow funds – especially from abroad – we need to retain our credit rating.
And we need to borrow funds – especially from abroad.
And we will continue to need to borrow until and unless we can adjust our balance of payments.
Which we will not be able to do because of the strong dollar.
January 16th, 2009 at 10:07 am
The dollar’s strength is not a good measure of our “creditworthiness”. That is the likelihood of default on T-Bills traded, which has gone from practically nill to 6% on a 10 year note. That is troublesome. Our perceived creditworthiness is what distinguishes this systemic collapse from what you see in a developing country where there is substantial capital flight and the currency goes to trash. Obviously the best strategy is to avoid another collapse of this magnitude, but better yet is avoid another collapse and rebuild our creditworthiness so in the event a financial collapse like this does occur we can roll over our debts and attract new capital (or stave off capital flight).
January 16th, 2009 at 10:14 am
Sorry, but what the people who are advocating a weaker dollar are really saying is: “In the long run, the dollar might get weaker, hurting our standard of living. In order to counteract this, we should make every effort to weaken the dollar, in order to hurt our standard of living.” It’s like the sheriff in “Blazing Saddles” holding a gun to his head and threatening to shoot himself. If other countries wish to accumulate dollars and subsidize us in the process, why should we stop them?
January 16th, 2009 at 10:16 am
I invite eveyone concerned about the debt and dollar destruction to view Chris Martenson’s Crash Course presentation on the economy: http://www.chrismartenson.com/crashcourse. He does a brilliant job breaking down the current economic crises and explains why a ‘recovery’ won’t be forthcoming. Essential viewing for all Americans. Mathew, if you’re reading this please give Chris’ presentation a view. I’d love to get your take on it.
January 16th, 2009 at 10:18 am
Well, generally speaking, you want the dollar to fall somewhat in recessions to make your exports more affordable abroad and grow GDP. Although net exports are a small part of GDP, so it’s not the most important thing in the world.
The larger problem with the trade deficit is that it didn’t really wane much, and th worry is that we don’t make anything. I’m not sure I really buy it, but that’s the worry.
January 16th, 2009 at 10:24 am
A weaker dollar isn’t, strictly speaking, a necessary condition of that re-balancing process but it’s the most likely way for it to come about.
But it’s the worst way for our particular situation. There’s no way to devalue the dollar against Chinese currency enough – without seriously impoverishing everyone – so that cheap manufacturing is competitive again. And as mentioned above, the US dollar is already relatively ‘weak’ against industrial economy currencies, (Euro, Pound, Yen) albeit, except the against the Yen, not quite as low as it was before the flight to quality to T-bills in the Sept meltdown And as also mentioned, a *deliberate* effort to weaken the dollar will be inflationary, and not the ‘good’ kind that helps people pay back debt, but the kind that raises energy and food prices.
January 16th, 2009 at 10:30 am
I get paid in dollars. I’d prefer they be as valuable as possible.
January 16th, 2009 at 10:35 am
A weak dollar is good if it can stimulate exports – as our goods become cheaper than those of other nations. However, this only works if other nations are actually buying. And nobody’s buying.
January 16th, 2009 at 10:37 am
Re DTM’s comment “A “fashionably thin” dollar can increase exports,”
—————
1) As someone pointed out, Exports are a relatively small percentage of our GDP. Given that most of the world is below our standard of living, I don’t think we’re going to make a lot of money that way.
2) The way to raise the standard of living is to create and build things. Develop new energy resources that you can sell to China.
2) But if you’re trying to startup a company, it’s easier to do it with a pile of Euros than with a pile of Zimbabwe currency. Capital is capital. You can’t build a valuable product if you can’t afford the machinery and personnel to construct it.
3) But the thing that really DOOMS the UNited States is that we have a government more fucking corrupt than Mexico’s. No businessmen can survive in such an environment.
Our politicans are taking $Trillions of capital and giving it to the very incompetent shitheads who caused this disaster. Money that is needed to sustain real business that feed and support people is instead going to pay off gambling debts and into the mattresses of Superrich crooks.
January 16th, 2009 at 10:44 am
I’m likely to find many here who disagree with me, but:
The good which defines all other goods is the expansion of human potential.
In the economic and material sphere, this means, for many, an open market — the opportunity for entrepreneurship — but for most of us, means simple prosperity, entailing economic security (a stable enough supply of material goods that one can live without dependence), and a capacity for material self-expression (consumption).
Now, it is my understanding that a nations high savings rate (and a low consumption rate) is an integral part to its having an export lead economy. If this is the case, I would argue that, speaking in the long term, a free society should look to means of economic stabilization that have the smallest negative impact on the prosperity of its citizens.
Meaning that instead of seeking higher exports, perhaps the US should seek a balanced budget long term instead.
January 16th, 2009 at 10:47 am
Actually, aren’t we the largest exporter of raw materials in the world. I would say we need to export not more, but different, for starters.
January 16th, 2009 at 10:50 am
I’m suprised Conrad as a Senator from North Dakota, a state that still has vestiges of populism in its politics, is for a strong dollar. A strong dollar has always been bad for farmers. It’s not for nothing that Conrad’s fellow midwesterner William Jennings Bryan made such a big deal about using silver and gold, thus inflating the currency and “weakening” it. Kent Conrad listen up: “You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.”
January 16th, 2009 at 10:57 am
1) If you want to see where our politicans are taking us, read this account by a resident of Argentina re life there after their economy collapsed in 2002:
http://www.frugalsquirrels.com/cgi-bin/ubb/ultimatebb.cgi?ubb=get_topic;f=1;t=044387;p=1
Note that FerFAL appears to be upper middle class by Argentina standards.
January 16th, 2009 at 11:04 am
Well, my debts are in dollars, and my assets have a lot of gold and foreign currencies, so let the dollar fall!
January 16th, 2009 at 11:05 am
I wonder what is going to happen to the stock market when they release “The Road” in the theaters in early 2009?
http://en.wikipedia.org/wiki/File:The_Road_bleak_scenery.jpg
January 16th, 2009 at 11:09 am
Of course, after several decades of the Bush-Clinton dynasties, some parts of the country might not even notice the Apocalypse:
“Pennsylvania, where most of the filming [of The Road] took place, was chosen for its tax breaks and its abundance of locations that looked post-apocalyptic: coalfields, dunes, and run-down parts of Pittsburgh.[2] The abandoned Pennsylvania Turnpike was used for much of production.[4] The director also said of using Pittsburgh as a practical location, “It’s a beautiful place in fall with the colors changing, but in winter, it can be very bleak. There are city blocks that are abandoned. The woods can be brutal. We didn’t want to go the CGI world.” Filmmakers also shot scenes in parts of New Orleans that had been ravaged by Hurricane Katrina “
January 16th, 2009 at 11:17 am
We should call it an importer’s dollar and an exporter’s dollar.
flounder, January 16th, 2009 at 10:47 am:
… at least in terms of spot prices, most raw material prices are set in flexible markets, and the exchange rate does not have much impact.
And, yes, we have gone from an importer of raw materials and exporter of finished products to an importer of finished products and an exporter of raw materials. Most countries that do that are considered Third World Countries.
January 16th, 2009 at 11:29 am
America should make more stuff but America should buy less stuff because consumerism is bad.
January 16th, 2009 at 11:35 am
DTM,
No, it is correct. Exports are a real cost: people here work and make stuff, and sned it to other people so they can use it. Imports are a real benefit: people somewhere else work and make stuff, and we get to use it. The only reason to export is to pay for imports. The only way “increasing exports can increase standards of living” is if they make possible greater imports. What you want to do is export more and import less. By definition, that is reducing our real terms of trade and reducing our standard of living.
By your logic, if I work twice as many hours for the same pay, I am increasing my standard of living.
January 16th, 2009 at 11:42 am
Re Jimbo’s comment “What you want to do is export more and import less. By definition, that is reducing our real terms of trade and reducing our standard of living.
By your logic, if I work twice as many hours for the same pay, I am increasing my standard of living. ”
—————
Yep, it sucks. But that’s what you get when you let the Globalization advocates and their whores in Congress run up $Trillions in trade deficits and undermine the competitive ability of the nation.
The Chinese have been selling us the economic equivalent of crack. Ask the junkies how that turns out.
January 16th, 2009 at 11:43 am
I have never understood this strong dollar vs. weak dollar stuff. It just seems like a fairly self centered way of interacting with the rest of the world.
January 16th, 2009 at 11:55 am
Don –
The Chinese have been selling us hundreds of billions of dollars and getting nothing in return. They could have spent the money on consumer goods, or on capital equipment to increase their economic potential. Instead, they have done the equivilent of running up the score on a video game.
The “competitive ability of the nation” has nothing to do with it. the foreign sector has listened to it’s DTMs and Don Williams’ and impoverished themselves in order to subsidize us and build up depreciating electronic balances in their dollar reserve accounts. You wish us to do the same, and your logic is: “We have to impoverish ourselves, or else we will become impoverished.” Look, I don’t mind if you want to work harder for less, while getting nothing to show for it – just don’t take the country down the same path with you…
January 16th, 2009 at 12:09 pm
Okay to a lot of this but you know #1) manufacturing jobs have declined worldwide in recent decades because of robots and what not #2) lots of the American stuff now being made abroad is for companies that operate at the lowest rungs of their particular market (nice American guns and grills tend to still be made in the US but cheap ones tend to be made in other places; stuff that competes on quality tends to still be made in the US but I’m not sure that even with a cheaper dollar other countries won’t be able to make cheap junk cheaper) #3) this whole way of looking at things ignores the fact that American companies (for a bunch of reasons) tend to make stuff for foreign markets in or near the countries they sell the stuff (much as Toyota makes cars for the American market in America despite the cheap yen and pricey dollar) #4) the value of the dollar vis a vis other currencies isn’t just up to the US and #5) you can have a strong dollar and more stuff being made in the US (if that’s what you want) if you’re willing to slash taxes to nothing and take on health care and entitlement obligations (which is just a backhanded, probably-WTO-okay way of subsidizing these companies [and hell why isn't currency manipulation against WTO rules? {watch all the mainstream economists who spent the last 30 years dissing the notion suddenly discovering it |watch us all have to help prop up manufacturing interests for a piddling number of jobs while our own businesses and the ones we work for get zilch|}]).
January 16th, 2009 at 12:11 pm
I could see how the dollar’s relative value would affect competitiveness for manufacturers (e.g. Boeing vs. Airbus); but aren’t our bigger export numbers generated by food, intellectual property and services, areas in which we have fewer competitors?
If that’s the case, a weaker dollar just makes importing stuff that we need but no longer make — electronics, clothing, textiles, steel — more expensive.
January 16th, 2009 at 12:15 pm
“I get paid in dollars. I’d prefer they be as valuable as possible.”
I get paid in yen, so I’d prefer the dollar be as weak as possible. Not to mention the online master’s course in Australia I’m doing costs AU$13,000. The Aussie dollar has tanked as well. I’d rather pay $3k less for the course, Toyota be damned. That’s my self-interest right there.
January 16th, 2009 at 12:59 pm
Re Jimbo’s comment “The Chinese have been selling us hundreds of billions of dollars and getting nothing in return. They could have spent the money on consumer goods, or on capital equipment to increase their economic potential. Instead, they have done the equivilent of running up the score on a video game.”
————-
Bullshit. Bullshit. Bullshit.
They have not been running up the score on a video game. They have been building factories and developing their economy at several times the rate of the USA. The difference between a rich country and a poor one is the difference between factories cranking out products that have value vice a wasteland. Look at a lot of places in America and you see wasteland. Those Chinese factories can produce products for Chinese or European consumers if Americans can’t afford to pay. That wasteland doesn’t produce shit.
And those “video scores” seem to buy a lot of oil in the Middle East. Which means we have to come up with some “video scores” of our own. Yes, we can run the printing presses. But that is leading the rest of the world to look for a different video score –which we will be able to acquire only with pain and difficulty.
I could see importing low tech items from China if we were plowing capital into R&D and developing high tech ones. But we’re not. We’re pissing $Trillions away in the Middle East for military operations that let us buy $38 per gallon gasoline. Our human capital — our geniuses — know that the way to real rewards is to become a con artist in Washington or on Wall Street. That only dumbfucks become physicists or engineers.
We can either further develop via investments in Science and Technology to travel into a Star Trek future — or we can slide back into primitive Third World poverty. Guess which way I see us going?
January 16th, 2009 at 1:29 pm
allbetsareoff writes:
According to the stats at census.gov, US exports of goods from Jan-Nov 2008 were about $1.2 trillion (of which about $107 billion was foods), and exports of services were about $507 billion.
January 16th, 2009 at 1:30 pm
“The Aussie dollar has tanked as well.”
Yeah, that’s pissing me off. I made some good money on the Australian dollar. And I still own some of it. But, hey, I still think it will come back. Eventually, the uranium market will come back again, and that should push the Aussie dollar back up. The good news is that our new Energy Secretary wants to build more nuclear power plants. Woohooo!
January 16th, 2009 at 2:59 pm
I don’t know of any country that weakened its currency to prosperity.
January 16th, 2009 at 3:19 pm
Don:
Bullshit. Bullshit. Bullshit.
Truth. Truth. Truth.
Yes, they have been building factories and developing their economy. But not with the money they have sitting in Treasuries, which by definition they have not spent on either capital or consumption goods.
That money has instead been used to keep their real terms of trade artificially lower, making capital goods more expensive, preventing from developing even faster. Is this a good strategy for them? I dunno, maybe they are at the physical limits of how fast they can develop. Maybe keeping food high priced has prevented even more peasants from overwhelming the cities. I’m not really interested in whether its good for them or not. What I do know is that it’s good for us. There is nothing stopping us from maintaining full employment, investing in high tech, reducing our bloated financial sector by 95% to something approximating sanity, etc. without killing the golden goose that the Chinese, Japanese, etc. present to us every day.
Again I say: your solution to the possibility that we may be poor tomorrow is to become poor today.
January 16th, 2009 at 7:28 pm
The dollar isn’t pegged to oil like it used to be.
January 16th, 2009 at 7:57 pm
Re Jimbo “There is nothing stopping us from maintaining full employment, investing in high tech, reducing our bloated financial sector by 95% to something approximating sanity, etc. without killing the golden goose that the Chinese, Japanese, etc. present to us every day.”
————
Well, something is stopping us. Because our GDP growth has been stagnant for 2 decades once you discount for population growth due immigration. Our trade deficit has been over $500 billion for year after year. Our lead in technology is declining in several areas.
The reasons why are obvious. We soak the taxpayer to support our univerisities –both via federal grants to students, R&D direct grants and tax-exempt status. Yet 25 percent of the seats in our engineering schools are occupied by foreign students. Our corporations take tax-payer subsidized research and hand it over to foreign nations. Plus our people have to bear most of the burden of the world defense budget –since the dirty secret of globalization is that it requires massive US defense expenditures to maintain law and order and keep the sea lanes open.
Our economists and politicians bleat about “comparative advantage” — and then systemically hamstring the US in the course of whoring for rich elites. Wall Street’s investment banks buttfucked the American workers with their advocacy of “free trade” and now want $Trillions of our tax dollars to shield the banks from their mistakes. Our Superrich demanded $2 Trillion in tax cuts to “grow the economy” — and invested much of that tax cut in China.
January 17th, 2009 at 7:53 am
Re: it requires massive US defense expenditures to maintain law and order and keep the sea lanes open.
Keeping the sea lanes open doesn’t require anything like our current stratospheric defense budget: if that (plus defense of our own borders) were all we wanted to do with our armed forces, we could probably achieve that goal for less than a third what we are spending. It’s the pursuit of our interests by military means on land (notabkly in Iraq) that is really gouging us.
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