Falling Dollar

If you're traveling to Western Europe, the falling dollar is definitely a bad thing, but as Tyler Cowen says a weaker dollar probably isn't a bad thing at all as a general matter. After all, the distributive implications of something that's bad for American tourists and purchasers of European products but good for Americans who work in the tourist industry or manufacturing are predominantly egalitarian.

The trouble, though, is that "falling dollar," like invocations of the term "subprime," is just a vague way of referring to a broader sense of big trouble in the financial markets and a looking period of bad times. Easy credit and a big trade deficit have both let people keep up very robust levels of consumption even at a time when the average person hasn't seen his wages go up much or at all.

Comments

"...but good for Americans who work in the tourist industry..."

I hate that people keep using this example. This is only true if the government lowers barriers to movement.

In fact, our tourism numbers are still below or around where they were in September 2001.

And with our national 24-esque paranoia regarding foreigners, it's going to remain ridiculously hard for foreign tourists to enter the country.

PS: How can you say something this stupid having JUST POSTED ABOUT US-VISIT!?! Are you turning schizophrenic on us, Matt?

Posted by Greg | December 2, 2007 5:32 PM

Greg : "In fact, our tourism numbers are still below or around where they were in September 2001."

So what? Matt's point is that a lower dollar is good for the American tourism industry at the margin. The fact that barriers to entry are higher does not negate the argument.

Posted by Emmanuel | December 2, 2007 6:35 PM

RE: a weaker dollar probably isn't a bad thing at all as a general matter.

It depends upon how general you want to be.

The post Breton Woods floating currency regime is fraught with distortion, manipulation and fraud driven by personal and institutional self interest. The relative 'value' of currencies cannot be explained reasonably or on a so called fundamental basis save interest rate differentials. The problem there being that interest rates themselves are subject to manipulation, the prime example being Japan with now two decades of effectively zero interest rates.

In a less general manner the weaker dollar is bad for American wage earners and citizens. It means inflation and a loss of purchasing power. It means they get poorer.

The world is awash with money. Worldwide money creation is beyond all historic comparison. This in turn is an effect of the stupendous expansion of credit. (All money is created by credit)

Posted by rapier | December 2, 2007 7:23 PM

"and a looking period of bad times."

What does that mean?

Posted by Kyle | December 2, 2007 7:36 PM

Re: In fact, our tourism numbers are still below or around where they were in September 2001.

Here in Florida we're starting to see both a trade and tourist boom due to the falling dollar. And with two hurricane-free years gone by people are loosing some of their fears that two years of four hurricanes hitting (or at least grazing) the state craeted. And yes we are getting lots of foreign tourists too. Apparently the customs guys at Miami International were left out of Jackbooted Thug training.

Posted by Jonf | December 2, 2007 8:51 PM

A falling dollar meana higher oil prices, higher wheat prices, higher corn prices, higher prices for anything that can be bought and sold on a global market. This is not a good thing for people who consume energy and food. Luckily for those people, the media doesn't count food and energy prices when reporting on inflation, so it doesn't really matter.

Posted by tabasco | December 2, 2007 9:03 PM

You know, it would be neat if, with the dollar this low, we had a real real big manufacturing sector - one like we had in, say, 1975. Or 1985. Before it became a real, real good idea to offshore manufacturing. Before the Reagan and Bush and Clinton governments actually held helpful seminars, through the Commerce department, for businesses on how they could reap big profits for their investors by moving to Mexico or China or Singapore. In Kuttner's book the Squandering of America, he reports on a company named FormFactor, based in California, that manufactured a technology to test the wafers used in computer chips. The owner of the company was having trouble with a copy of his technology being sold by a South Korean company, so he went to the Commerce Department to ask for some help, since the U.S. was negotiating another round of trade talks with South Korea. The Commerce department officials were sorry, but they couldn't help him. However, one official brightly suggested, "have you thought of moving to Singapore?"

There's your U.S. government for you - a bipartisan consensus of Republicans and Democrats that stabbing the American working class in the back by pressuring wages - and, in the case of the higher wages paid by American manufacturing, pressuring wages by sending American manufacturing overseas or to Mexico - is just what we need. After all, it is good for investors.

Posted by roger | December 2, 2007 9:27 PM

tabasco, you're absolutely right. The CPI is a feel-good measure intended on fooling people. Effective Seignorage largely depends on people's expectations of inflation and the central bank's credibility.

At this point, the Fed is trying extremely hard to destroy Paul Volcker's legacy. And, frankly, it seems to be working.

Posted by Greg | December 2, 2007 10:01 PM

I'm a Japanese pensioner with a significant stake in several small, American-owned Canadian salt mines and a home in the Florida Panhandle. I also own some stock.

I've recently been in Buffalo. Now I'm in the country soon to be formerly known as Belgium.

How do you think this affects me?

Posted by Birdy | December 2, 2007 10:35 PM

I think that the global economy makes things more complicated than has been given credit here. Although the first order response of a falling dollar may be increased inflation, there are plenty of nuances that are positive and muddy the waters in terms of inflation.

Manufacturing is on the decline here, but we still have plenty. Automation may have taken more jobs than foreign competition, leaving more global share than many assume. Domestic Automakers, for example, are the top of a large food chain within our economy. They stand to gain a more level playing ground that is unlikely to increase car prices much but may help to stop their share erosion. Domestic Auto part suppliers may gain significant share. Boeing's orders also go to a lot of companies.

The offshore manufacturing picture is also tricky. Much of China's contract manufacturing is only a small part of the cost. Much of the price is driven by US Engineering & Development. That gets more competitive, whether we are talking ipods, xboxes, razor phones, HP Computers, CAT equipment, or auto parts. Global services also stand to expand for domestic providers.

Agriculture should not see much inflation for core US produced foods. Much of that is propped up by the Farm Bill (when will we end the insanity?) and so has plenty of cushion to swap out subsidies instead of increasing prices.

Another huge piece of inflation is interest rates. As the dollar falls, our huge foreign bond holdings depreciate reducing their potential to backflow onto the market.

The effect of a lower dollar on bond demand is also complicated. As the dollar falls the bonds become less competitive. However, if they level off low, they become competitive again. In fact it is the perceived future movement of the dollar that will drive demand along with interest rates. Plenty may bet on the dollar's rebound.

The same can be said for equities. A low dollar may be more enticing for foreign investment. If stock prices climb, capital becomes cheaper and companies have profit margin to lower prices and gain share.

The bottom line is that these market movements will be decided by literally billions of individual decisions that no one can properly predict. The falling dollar is good for domestic business (just ask Asia) and bad for import consumers. The fall out will be so complicated even those lines will get blurred.

Posted by Keith | December 3, 2007 1:38 AM

Rapier:
As a resident of Japan with a mortgage, I have to ask: What's wrong with zero interest rates? ;)

You should also see Japan's Gov't debt. It spends twice what it collects in taxes each year.
http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

For some reason (trade surplus?) deflation seems like more of a threat than inflation despite the huge debt and zero interest rates.

Posted by Tim | December 3, 2007 1:54 AM

If you're traveling to Western Europe, the falling dollar is definitely a bad thing...

it's not just western europe. the dollar is falling against every currency that isn't pegged to the dollar. when i was in egypt in october, the dollar fell against the egyptian pound every day i looked. how embarrassing is that?

anyway, it strikes me that while a falling currency has its bright sides, there's general economic pain whenever things change dramatically from how they were before. the world economic system weaves its tendrals around whatever the existing situation is. if something major changes--like the u.s. dollar goes from being a strong stable currency to a weak falling on--it stresses the system in all kinds of directions. sure, eventually a new equalibrium will be established, but the long term effect of a dollar that is no longer seem as stable is that other countries will be less likely to put their investments in dollars or hold u.s. debt. OPEC is already talking about pricing oil in euros rather than dollars and china is talking about getting out of, or at least reducing, the u.s. debt it currently holds. either of those things could be devistating to the u.s. economy.

Posted by upyernoz | December 3, 2007 9:27 AM

Well the outsourced manufacturing costs are such a tiny fraction of market prices that a falling dollar really shouldn't impact prices at all. Nike still sells Air Jordan basketball shoes for $175, for crying out loud!

Maybe the price of inferior, unsafe crap will go up a little. Good. Because let's say you want to make sure you aren't giving your niece a lead-painted toy for Christmas. So you decide to buy her an American-made toy. Good luck with that.

Posted by Jalmari | December 3, 2007 11:58 AM

I am not sure the US even manufactures screws any more. We probably don't make any of the discrete components in a dvd player. We probably don't make any of the sub-assemblies. We might bend the sheet metal somewhere. Not that there is a lot of that in a modern dvd player.

How far does the dollar have to fall to actually be competitive with China? What are the odds we can ramp up the production of gillions of disposable dvd players (or whatever) in time to offset the falling dollar?

Posted by Nat | December 3, 2007 1:57 PM

RE Tim

What's wrong with zero interest rates? A zero interest rate means the market is being manipulated and distorted. No real credit market can ever set the cost of borrowed money at zero. Nobody sells anything for nothing, credit or anything else.

When credit is too cheap two things happen. Credit is misallocated and savers are punished. .

Japan's situation with interest rates and deflation is due to the stupendous real estate bubble there in the late 80's early 90's. Their banking system was bankrupted but they chose not to admit that so for 15 years now they have been trying to work off the problem, with ultra low rates to keep the banking system, and the system afloat.

Externally this has had two gigantic effects. It has kept their currency absurdly low which among other things has been terribly destructive to American manufacturing. .The low rates have allowed the 'carry trade' whereby speculators borrow at ultra low rates there and make leveraged investments (speculation is the proper term) in whatever market is hot at the time. Primarily these 'investments' are in financial assets which of course inflates them. Both fundamentally are market distortions caused by a manipulated 'market'.

The Wall Street centered financial world has LOVED the Japanese model. It's been an important source for excessive liquidity in the financial markets which in turn has helped inflate financial assets. That it has nothing to do with the sacred free market is of course irrelevant. They don't want free markets. They want governments and goverment regulated financial systems like the banking systems to allow the unrestrained generation of credit and therefore money.

The so called sub prime crisis is cut from the same cloth.

Posted by rapier | December 4, 2007 5:41 PM