Mark Weisbrot for CEPR makes the case for a cheaper dollar, arguing that when the Great and the Good like Bob Rubin and Hank Paulson argue for a "strong dollar" policy they're arguing the interests of firms like Goldman Sachs and Citigroup rather than those of the majority of Americans.
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Brother, Can You Spare a Suddenly Not-so-Valuable Dime?
10 Nov 2007 02:06 pm
Comments (19)
The last sentence should read:
Therefore, the strong dollar not only favors the financial sector (which is the more rational thing to do), not only it boosts economic growth, but also because it favors imports, it makes many goods (which are produced more efficiently abroad) cheaper; since we re all consumers, but only a few of us belong to the export oriented manufacturing sector, the benefits reach more people and are spread proportionally.
PS. I would love to have an editing function. My posts certainly need some polishing...
I agree Nick, Weisbrot's opinion misses the mark with what's going on in the consumer's wallets and bank accounts. A falling dollar doesn't only affect imports since all the domestic production is part of the international markets.
The valid point I saw is that this re-balancing is necessary because American politicians and consumers refuse to live within our means. So the "invisible hand" will reduce our wealth and buying opportunities until its more in line with the financial reality we've dug ourselves into by continuing to spend spend spend when we should have been tightening our belts and saving for the future.
If our government could run balanced budgets, if the voters could tolerate some roll-backs in programs (and wars) that are essentially wasteful anyway, and if the nation had some sort of investments and savings worth talking about, the dollar wouldn't have to fall so hard.
I don't think we can simply borrow and inflate our way out of the economic cycle's downturns. Not forever, anyway. Artificially low interest rates are going to encourage more foreign debts, discourage savings, etc...I'm no economics Ph.D., but I have studied a fair share of political economic history. I can't think of any financial powerhouses that were built on massive debt, a lack of investment, and falling currency - but a few market panics and economic crashes do come to mind.
Besides, the weak dollar makes travel abroad a real downer. At least we can look forward to plenty of foreign tourists flooding our attractions to take advantage of the favorable exchange rates! Oh, wait ...
Nobody could have known that massive trade and budget defecits would devalue the dollar and rob the elderly of 1/3 of their retirement wealth.
The comments above understate the continued importance of manufacturing in the US economy. The last numbers I saw from late 2006, the financial sector constituted 6 million jobs and 8% of the US GDP. Manufacturing, while declining, accounted for 14 million jobs and 14% of GDP. The manufacturing sector also spends the most money on capital goods at $165 billion annually. (Finance and insurance is slightly lower)
I consider it an inalienable right of all Americans to buy stuff from Canada at cut rate.
Nobody has mentioned it yet, so I will. The declining dollar also limits foreign investment in our economy, which will limit future growth.
Re: Either way, America is a closed economy, i.e. a mostly self-sufficient economy with exports comprising a small percentage of it.
An economy that must import most of its oil, and a number of other raw materials, is not a closed economy, nor is it remotely self-sufficient.
Here's a question for those who know more about these things than me:
How much is the recent increase in oil prices attributable to a weak dollar? I possess only a limited understanding of international oil markets but my understanding is that most of the international oil market is denominated in dollars.
Correct me if I'm wrong, but if the dollar is sliding relative to say, the Euro, and oil is transacted in dollars then oil prices for Americans will be skyrocketing while oil prices for Europeans (in Euros) may be relatively stable.
Reason I ask is because the financial press keeps talking about the falling dollar and rising oil prices as if they were completely unrelated factors.
By the way, Mark Weisbrot is a fairly accessible guy, so if Matt wanted to invite him or his colleague Dean Baker to address the various objections, he might be able to.
Weisbrot is brilliant: just look at Argentina. Since its currency dropped from a 1 to 1 dollar peg and floated down to being worth 1/3 of a dollar, Argentina's economy has averaged 8% economic growth. Let's follow Argentina's example!
"How much is the recent increase in oil prices attributable to a weak dollar?" ...Kent, 5:50
Does Dollar Weakness Cause High Oil Prices Menzie Chinn, Econbrowser, 10/31/07
Hardcore & Technical, but it is not a simple question. Good commenters there.
Making a "case" for either a stronger or weaker dollar is irrelevant. The dollar is going to continue to fall and anybody who thinks that's "good" for the economy is whistling. It's falling and we'd all better watch out.
Hey! I don't work for Goldman or Citigroup, yet I'm feeling the pain every time I go to the grocery store, where I have to pay in pounds.
And it's funny, but with the strong pound, the economy is booming here.
Weisbrot is focusing exclusively on the current account. The US dollar is the preeminent reserve currency in the world i.e. foreign central banks hold most of their foreign exchange reserves in US dollars. For example, China holds hundreds of billions in US currency. If there is a sustained fall in the value of the US dollar, at some point foreign central banks may be unwilling to bear further losses and start offloading dollars en-masse. That would lead to precipitous fall in the dollar and every US citizen would see a fall in their living standard (of course the poor would suffer more). The only thing might be for the Fed to raise rates, but with the housing market and sub-prime mess, I doubt they could do that. Of course, as Weisbrot says a lower dollar should boost exports and make imports expensive i.e. improve the current account. But I don't think given the erosion of the US manufacturing base, that the current account gap will close fast enough. Another mitigating factor might be that US assets will be cheaper and foreigners will snap up US assets. However investment decisions depend on other factors (e.g. the relative attractiveness of US investments verses investments in China/India) and there are political/social implications to a wholesale purchase of dollar assets. There might be immeasurable harm to the US economy in the long run if another currency (e.g. Euro) becomes the preferred reserve currency of the world.
Just to clarify, I think the dollar was overvalued and should decline. However it should have been gradual. I am alarmed at the speed of the decline and the apparent lack of interest by our political masters.
This guy is half-right. An expensive dollar has indeed been killing pushing our economy out of anyjob that can be done overseas, not just manufacturing, and towards low-skill crap like food service.
But a falling dollar will also hurt us. It hurts when we do it and it hurts when we stop doing it.
The interesting question is if trade movements will survive. They help other countries more than they help us, but they do enrich our elite.
For Nick Kaufman, Great Britain's slide from a manufacturing economy to a financial-services economy was the precedent to its economic collapse between 1930 and 1960.
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Comments closed November 24, 2007.
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Heads in the Sand
I am sorry, but Weisbrot's analysis is wrong.
First of all, Paulson is paying lip-service for the strong dollar. It's the standard statement by any secretary of the treasury. What Paulson and the Fed had been doing - correctly- has been to let the dollar slide, hoping that the slide would be gradual and orderly.
Second of all, Rubin's statement that "the problem isn't the strong dollar, but implementing a sound policy" is correct. That's what Democrats should emphasize right now. The strong dollar wasn't a problem in the nineties when the fundamentals were sound; it is now, because it became overvalued. With the government running deficits of all kinds, and the economy getting weaker having an unsoundly overvalued dollars multiplies risks and puts the treasury and the Fed in a position where their policy options are double-edge swords. For example, if you want to fend off the pressures of an overvalued dollar, you better get the interest rates high; otoh, you want the interests rates low in order to boost a flailing economy.
Third of all, the interests of the American people don't identify with that of the manufacturing sector. Why should they? This is really an old fetish of an idea that somehow manufacturing is more important than other sectors. In fact it isn't. Either way, America is a closed economy, i.e. a mostly self-sufficient economy with exports comprising a small percentage of it.
On the contrary, America is primarily a service economy; since it's so advanced, its finance sector -like England's who was the original industrializing country- is one of the pivotal sectors in both attracting and distributing capital at home and abroad. Having a strong financial sector comports much more with what the comparative advantage of the US actually is. Also, because the US is a closed but dynamic economy, having a strong dollar policy that attracts capital from abroad, it helps fund the growth of the economy.
Therefore, the strong dollar not only favors the financial sector (which is a more rational thing to do) and the growth of the American economy, but also because it favors imports, the benefits are spread proportionally among all consumers and not only the producers of the manufacturing sector who comprise a very small minority.
Posted by Nick Kaufman | November 10, 2007 2:45 PM