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Should we be happy with the low U.S. dollar?
Here is my latest column:
A low dollar simply looks bad. We are, after all, used to judging ourselves against others — comparing our salaries with the earnings of our peers, and our homes with those of our neighbors. We’re used to thinking it is a big advantage to stand at the top of a numerical list.
But when it comes to currencies, a higher value neither brings national success nor predicts future prosperity. The measure of a nation’s wealth is the goods and services it produces, not the relative standing of its currency. Take a look at 1985-88, when the dollar lost more ground than in the last few years. Those were good times, and the next decade was largely prosperous as well.
Most of the piece is standard economics, not far from recent writings by Krugman or DeLong. The more interesting question is which measures of a national economy we, for reasons of pride, inefficiently attach too much importance to.
A second interesting question is: if we should not be worried about a low dollar, what should we be worried about? I see two answers at the current time. First, if a negative shock hits China, or perhaps some other negative shock hits the U.S. or Europe, we have precious little room to maneuver. Second, there remains some chance of a cascading credit crunch.
Addendum: Here is Brad DeLong's new piece.
Posted by Tyler Cowen on December 2, 2007 at 11:34 AM in Economics | Permalink
Comments
"A second interesting question is: if we should not be worried about a low dollar, what should we be worried about?"
Why do we have to be worried about something? I'm certainly not.
Posted by: David at Dec 2, 2007 11:42:27 AM
If you travel frequently, spend a significant amount of time outside the US, or earn dollars while living abroad, you are very worried about a low U.S. dollar.
Posted by: caped crusader at Dec 2, 2007 11:58:17 AM
As long as we have our health...
Posted by: John Goes at Dec 2, 2007 12:17:21 PM
Travel may not be all that bad. The US is still the biggest market in many areas so if we stop spending as much then prices will drop. There'll also be specials aimed at US travelers.
Those that bother to shop around will find good deals and less crowds.
Posted by: MikeW at Dec 2, 2007 12:37:23 PM
As Tyler notes, the measure of a nation’s wealth is the goods and services it produces. But let's see what how the value of those goods and services is affected by a devaluation.
A fall in the dollar, ceteris paribus, means that our wages are lowered relative to those in other countries, and the value of our land, structures and other assets is lowered, relative to others'. In other words, everything we do or own here can buy less in world markets. To the extent that we don't trade with other nations, this doesn't matter. However, it does, obviously, make us poorer when trying to purchase goods and services from other nations. The value of the goods and services we produce, the measure of our wealth, is reduced relative to those in other nations.
Typically, when people in a nation needs to lower their relative wages and asset prices to remain competitive with workers and capital owners in other nations, that's not a sign of a successful economy. It means more hours of American labor must be traded for the output from each hour of labor of a person from France, Germany, Japan, India, Canada, Mexico, etc.
Posted by: A student of economics at Dec 2, 2007 1:23:43 PM
What should we be worried about? As always, we should be worried about stupidity. First, that of some economists that are looking for a position in a new Democrat administration and are willing to say anything to impress on the candidates. Second, that of most politicians to the extent that they want to get or maintain power just by promising great solutions to new problems. The latter is not limited to US politicians; actually we should be specially worried about the reaction of European politicians to a persistent low dollar.
Tyler, the dollar is already low and the dollar may still fall to a lower level, but any rational theory predicts that it won't. I suggest that you leave the talk of a falling dollar to economists looking for a position in a Democrat administration. (Note: in your post, you don't talk about a falling dollar, but in the column you refer to it several times.)
Posted by: Edgardo at Dec 2, 2007 1:39:22 PM
Tyler:
I’d have to disagree with you on this.
You wrote “Today’s lower value for the dollar reflects the success of other regions.” While one could frame it as such, another way would be to argue that the lower dollar reflects the world’s desire to be holding less of it. Countries throughout the ECB, the Middle East and Asia are all moving to reduce their dollar exposure.
They fear that the only way that the U.S. can continue to enjoy both guns and butter is to print money to pay for them. This, in turn, places downward pressure on sovereign dollar-based holdings.
Here at home, a falling dollar is patently not good for the average citizen. Everything that they buy that is imported from Europe or Japan or China (as examples) costs more because the dollar is worth less. Since we now manufacture so little and must import so much, this is not a trifle.
Government statistics notwithstanding, consumers are already feeling the pinch of this price inflation and I would suspect it will only worsen unless we make a fiscal course correction.
Posted by: Healthy Skeptic at Dec 2, 2007 1:45:15 PM
Tyler:
I’d have to disagree with you on this.
You wrote “Today’s lower value for the dollar reflects the success of other regions.” While one could frame it as such, another way would be to argue that the lower dollar reflects the world’s desire to be holding less of it. Countries throughout the ECB, the Middle East and Asia are all moving to reduce their dollar exposure.
They fear that the only way that the U.S. can continue to enjoy both guns and butter is to print money to pay for them. This, in turn, places downward pressure on sovereign dollar-based holdings.
Here at home, a falling dollar is patently not good for the average citizen. Everything that they buy that is imported from Europe or Japan or China (as examples) costs more because the dollar is worth less. Since we now manufacture so little and must import so much, this is not a trifle.
Government statistics notwithstanding, consumers are already feeling the pinch of this price inflation and I would suspect it will only worsen unless we make a fiscal course correction.
Posted by: Healthy Skeptic at Dec 2, 2007 1:45:49 PM
"Why do we have to be worried about something? I'm certainly not."
That's possibly the most amazing thing I've ever read. Are you the buddha?
Posted by: josh at Dec 2, 2007 1:59:03 PM
So these economic nationalists finally get what they want. We will, be importing less and hopefully exporting more. Now they can complain about the low value of the dollar. It's always something.
Posted by: Stan at Dec 2, 2007 2:36:57 PM
People really need to get some perspective. Anyone remember the scene from Crocodile Dundee? That's not a knife. Now that's a knife he says, pulling out a serious Aussie hunting knife, contrasted with a now suddenly small looking switchblade.
Same thing goes with the allegedly large move in the US dollar lately. That's not a large move, it is normal variance. If you want to see
what a large move looks like, check out the British Pound, and the Swiss Franc, and the Japanese Yen.
Over the long haul currencies will oscillate around PPP, thus there is no currency debasement going on unless one is inflating the currency in question, in which case the metric to look at is inflation, not foreign exchange.
In my opinion the only thng to fear, aside from fear itself of course, is a rapid currency movement, in either the strengthening or weakening direction. Or a prolonged stay at one end of the PPP "rubber band". Such a stay would be highly inefficient and destabilizing precisely because the rubber band will inevitably bounce back, but in the meantime everyone has to deal with some severe displacement that is only temporary, and assets will inevitably be seriously misplaced.
Similar logic goes for sudden large sudden movements, they fit the classic definition of (seemingly) exogenous shock. Such a shock can be awfully hard to adapt to ASAP, while the gradual changes can be dealt with a bit at a time without the same deleterious effect since most everyone plans for some degree of "noise" and are flexible enough to handle it.
Posted by: happyjuggler0 at Dec 2, 2007 3:29:51 PM
That's the problem with tinkering too much with monetary policy. That has become an end in itself. We would be better off worrying about more fundamental things like productivity, skill-sets, education and innovation. That is an improvement valid in the long run without recourse to the whims of monetary fluctuations. If Intel produces and sells a new chipset that the whole world wants it is a gain no matter if you measure it in a weak dollar or a strong Euro! Ultimately a nation is a black box that must produce more than it consumes in order to be "on top"
Posted by: Raul at Dec 2, 2007 4:33:46 PM
This is some charming, Rationalizations to set off Hyperinflation... I hope it works out for you, because it is doubtful it will be anything but bad for anyone else. I'm still wondering if it's just some sick sense of humor you have.
Should the end of the story said "Disclosure Long Gold, and Swiss Franc."
Mr Cowan you're either a crazy imbecile, or an epic profiteer Hoping to capitalize on the Financial destruction of the lower and remaining Middle classes. With no moral regard for the Human cost of a Collapsing Dollar.
This was my favorite part:
The American economy has its problems, but so far the low value of the dollar has proved more a benefit than a cost.
Let me add the Caveat... Unless you eat food and energy, or buy things in dollars(Costs that have doubled in past years), Or live in a global economy.
Mr. Cowan, I do hope you can live with yourself, living in such a way: As babies start to die, of malnourishment and lack of health care in a super cycle recession. The lower class decays into civil war and drug addiction. Baby boomers Crush what little economic strength we have left.
You will know that you did your part, to be more a part of the problem, than the solution. Helping to bring about the great Libertarian Revolution... Being a Zealot works out so well for the Taliban and PETA and the Militant Christian Right.
I ask a hypothetical question of you? is the real problem that you just haven't received enough hugs in your life?
In fact I feel dirty just taking the time to acknowledging, your existence.... It's embarrassing to even challenge you.
Posted by: Eric Davis at Dec 2, 2007 5:41:26 PM
In fact I feel dirty just taking the time to acknowledging, your existence.... It's embarrassing to even challenge you.
erik davies,
Next time feel free to write nothing at all if the only thing you are going to do is engage in an ad hominem attack.
Maybe you could come back when you have something constructive to add, or a question?
Posted by: happyjuggler0 at Dec 2, 2007 6:21:49 PM
A “weak” dollar, if it were permanent, would obviously be bad for the US. It would diminish our worldwide purchasing power and ultimately reduce the rate at which we acquire the world’s assets and accelerate the rate at which they acquire ours. At the very least, that will reduce the long-term growth rate of our future tax base and likely the broader economy. Even a temporarily weak dollar is a setback in this regard, despite being able to concoct unlikely scenarios where that’s not the case.
It’s hard to believe, however that it’s permanent. Permanent, would mean that real US productivity had diminished relative to the world. That seems unlikely, except perhaps slowly over time.
A high labor cost economy like ours doesn’t manufacture products and ship labor hours on boats (unless it’s necessary to sell our intellectual capital). Selling low cost labor is what the Chinese do. It’s far more logical for us to shift our low skilled labor to local services and support for our knowledge workers, and invest our money aboard if we need to manufacture things to sell our intellectual capital. And of course, that’s exactly what we do.
In 2004, for example, we exported $1.4T and imported $1.7T. Meanwhile, foreign subsidiaries of US corporations sold $3.8T (while US subsidiaries of foreign corporations sold $2.3T to the US). Given our relatively high corporate tax rate, it’s unlikely that much of the cash flow from those foreign sales was repatriated to the US but was used instead to fund international growth or simply held offshore to avoid taxes. With a conservative set of assumptions, the value of gains to our stock market from these foreign sales were greater than the trade deficit but these capital gains were neither counted as trade or as savings. Why is that relevant, because exporters, like China, need to buy US assets, not US goods, with the trade dollars we keep shipping them.
Because the world has asymmetrically bad information relative to us locals, much to our advantage, they have logically preferred to buy debt rather than equity, even debt with historically low spreads and poor credit standards. That’s cheap money we’ve put to good use to grow our assets. It's true they woke up one morning and came to their senses. That had to happen. Foreign flows have dried up driving the dollar down as they have reassessed and searched for alternatives.
But it's hard to believe that can continue for long. The Chinese and other exporters can pull back temporarily, but in the long-run, if they want to keep their populations employed supply US consumers, they have to buy dollar denominated assets with their dollars. Otherwise they can stop taking dollars... and lay off the people. That seems unlikely.
And why shouldn’t they want to own dollar denominated cash flows? Email and spread sheets have increased the productivity of the smartest 20% at least threefold. The “Chinese” have flooded or markets with cheap labor and debt which we have wisely put to work on our behalf. Unlike our European brethren, who puzzle over how to keep high cost labor employed manufacturing products that can be shipped on boats, our thinkers are wisely finding creative ways to redeploy the labor into local service and support for our smartest thinkers. As such, US productivity used to be about 10% better than Europe, now it's closer to 20%.
So what if we upped consumption a couple percent of GNP in light of this success. You don’t get rich by saving money; you get rich by earning it.
Posted by: EWC@BC at Dec 2, 2007 7:24:17 PM
Eric Davis,
Please address Tyler as Dr. or Prof. Cowen when you attack him. He's earned that.
I'm not referring to you as Mr. Davis. You haven't earned that.
Posted by: Brennan at Dec 2, 2007 8:17:47 PM
Come on people, lighten up... This Derek Baves comment can only be a joke.
Posted by: Phoebe at Dec 2, 2007 8:47:14 PM
Phoebe: Did you check out his blog? I could only wish you were right.
Posted by: Swimmy at Dec 2, 2007 9:18:41 PM
Oh, not only he blogs, he also trades stocks using graphical analysis. I hope he's kept his day job.
Posted by: Phoebe at Dec 2, 2007 9:33:56 PM
Eric Davies,
I understand why you trade stocks, since I cannot imagine you interacting with human beings in real life. What a vile person. Thanks for shocking me out of my complacent studying for finals and reminding me why social cooperation is so extremely difficult. It is a great thing that in the market economy your vileness can not effect me through force, and is inevitably transformed into productivity as you are forced to engage into mutually beneficial activities. That is, if you can keep your job.
Your post might also be a reminder for economists who think they can safely stay in the realm of positive analysis -- obviously economic activity goes to the core of human existence and people are extremely passionate about it, and often unable to approach it with a rational mindset.
On the Dollar: as Dr. Cowen says in his column, if the dollar would have increased by the same amount people would have been complaining about falling exports and lower competitiveness. All that matters is the real sector -- supply and demand will figure things out as long as volatility doesn't turn crazy, and the market is probably too big for that.
As for the Euro area becoming politically more stable and thus causing the Dollar to weaken vis-a-vis the Euro, I don't know. I am always bullish on America, and bearish on the EU. The cars have started burning in Amsterdam.. But the market knows more than I do..
Posted by: ralph r. emmers at Dec 2, 2007 11:12:49 PM
Don't let Eric Davies divert you from serious discourse. If you do, his mission is accomplished instead of yours. It's time to get back to the issue at hand.
Posted by: EWC@BC at Dec 2, 2007 11:20:16 PM
Using the late 80s as an example of how things are OK during a declining
dollar is not such a good example. The early 80s were a period when the dollar
rose to ridiculous heights on a speculative bubble, accused of contributing to
the "hollowing out" of US industry due to foreign competition.
So, sure this is part of the old Phillips curve stuff. Lower currency, higher prices,
but more exports, whoopee! Indeed, there are many in Europe who are unhappy about the
rising euro, despite some pride in it. Among those is President Sarkozy of France, who
has been browbeating the European Central Bank to halt the rise of the euro to save jobs.
Posted by: Barkley Rosser at Dec 2, 2007 11:26:42 PM
Tyler,
Given that the more rapid fall in the dollar corresponded with the Fed cutting rates 0.50% in one day, and commodity prices also spiked on that day, don't you believe at least some of the dollar's fall is more the result of Fed policy than market transactions? Don't you worry over the shocks these distorted prices will have on the rest of the economy?
I worry over how well the economy will react to what appears, to me at least, to be a Fed-induced shock. I worry how rigidities in the economy (Keynesian menu costs or Hayekian capital, whatever you want to call them) will react to non-market forces having such a profound effect.
Posted by: G at Dec 3, 2007 12:13:40 AM
So how fast and how far must the dollar fall before you think the falling dollar causes harm?
Posted by: Chris Rasch at Dec 3, 2007 2:30:13 AM
Healthy skeptic: "Since we now manufacture so little and must import so much, this is not a trifle."
I do not understand what you mean. U.S. manufacturing output is at an all time high, both in real dollars and as a percentage of GDP. Exports are growing: U.S. exports in 2006 were 12% higher than in 2005.
Healthy skeptic, the U.S. still leads the world in production of aircraft, motor vehicles, medical equipment, chemicals, pharmaceuticals, and much more.
Posted by: John Dewey at Dec 3, 2007 4:40:25 AM
