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.

Kevin Drum raises the specter of the trade deficit:

Maybe we really can’t worry too much about this at the moment. But the trade deficit bubble is going to pop eventually just like the dotcom bubble and the housing bubble. We at least ought to be thinking about this a little bit.

This goes back to the fraught issue of global savings imbalances. For reasons that I don’t think people understand very well, we not only have a number of high-savings perpetual-surplus countries in the developed world (Japan, Germany, etc.) but we have the odd specter of persistent trade surpluses among developing countries like China. The way this is “supposed” to work is that Chinese people, being poor but growing rapidly, consume more than they produce. The current accounts balance out because savers in rich countries should be investing money in China — building up China’s capital stock and so forth. Investments in capital-poor developing countries “should” offer a high rate of return for developed world savers, and the injection of foreign capital should speed China’s growth. And for “China” you can substitute “Mexico” or “India” or what have you. The world, however, doesn’t actually work like that. Instead, China has been running persistent surpluses. And so have various energy-rich developing countries. So money keeps getting plowed into various US investments. But the US isn’t a poor, developing, capital-poor country. And so a lot of the investment in the United States seems to be going into speculative bubbles — first dot-com stocks, then MBS. Now people are buying up no-interest treasury bonds.

Paul Krugman wrote the other day about how to achieve rebalancing:

That’s where things get complicated: a lower US trade deficit means lower surpluses and/or higher deficits elsewhere. Who’s the counterpart to our adjustment? OK, the Middle East, which no longer has its oil windfall. But China is having its own slowdown, as is Japan.

In other words, trying to figure out where we go from here is a sort of global jigsaw puzzle — and I haven’t managed to solve it yet.

So, yeah, he wrote about it but he didn’t have the answer. Brad DeLong offers this:

If it weren’t for the fact that the furshlugginer dollar refuses to fall in value, the answer would be obvious: we will have a boom in import-competing manufacturing (and exports). But then the rest of the world has a long-run problem: if we decide to no longer be the world’s importer of last resort, than what serves as a locomotive to keep it near full employment?

But if the dollar doesn’t fall, then we have a long-run problem. The only answer I can think of is for the U.S. to then become the world’s largest private-equity fund: they lend us their money, and we then invest the money back in their economies–in industries and companies that then have a very high demand for U.S. high-tech goods and for U.S. services exports.

I’ve heard some economists argue that we’re pursuing some kind of misguided strong dollar policy that’s responsible for our currency’s refusal to devalue, but I don’t actually see what policy that might be. We appear to be doing everything you would do to shake investor confidence in U.S. public finances and spark a decline in our currency.

Maybe the answer to these difficult questions is lurking inside CAP’s global new deal report. I’ll need to read it.