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How can a weak dollar be beneficial?
I'm still receiving email pushback on my view that a falling dollar can be good for the U.S. economy. The critics charge: why not just let the dollar fall close to zero or at least hope for such? A few points:
1. I'm not asking for a specific weak dollar policy (we've already done enough on that front!). The point is that if the market brings a falling dollar, this outcome can be part of the equilibrating process.
2. You don't have to approve of all the policies, or private sector practices (e.g., a low savings rate) that produced the weak dollar. A weak dollar is still a healthy response, given those constraints.
3. Never forget the difference between real and nominal exchange rates. That answers the conundrum about wishing for a dollar of near-zero value.
4. A falling dollar will (often, not always) increase employment in the export sector. Supply-side, production-based multipliers are the best kind to have and they can outweigh the economic costs of higher import prices. When the dollar falls, a big chunk of that shift is born by foreign exporters like a tax rather than being passed along to U.S. consumers. The net effect is that Mercedes-Benz subsidizes job creation in the United States. And sometimes a falling currency is in fact an efficient form of lump sum taxation in this regard.
5. Free traders are usually economic cosmopolitans, which is good. A weak currency in one country means a strong currency in another and the distribution effect, at least at the first-order level of analysis, is a wash. So cosmopolitanites shouldn't object to weak currencies per se. From a global point of view, a lot of currency movements are close to a net wash in efficiency terms, although they may be good for at least one of the countries in the equation. As a rough rule, weak currencies do the most good where resources are unemployed and there is a realistic elasticity of exports, though it is more complicated than that.
6. A weak dollar poses the biggest problems for the EU and other foreign regions. Still you can see those as real problems and think a falling dollar is OK for the U.S., taken alone.
7. Again: blah-blah-blah caveats about the difference between a currency falling as a pure thought experiment and a currency falling as associated with some particular cause. Blah, blah, blah, etc. Blah.
Daniel Drezner offers related commentary.
Posted by Tyler Cowen on October 22, 2009 at 10:04 AM in Economics | Permalink
Comments
I disagree vehemently with point 7. Blither blither blather, ditto ditto. Except in the case where blather garble needless pedantry. So there!
(Thank you for your sense of humor. It is delicious throughout.)
Posted by: D. Watson at Oct 22, 2009 10:26:26 AM
Helps export related industries. Raises some prices. On balance seems to be a good thing, absent extremes (close to zero).
Posted by: fusion at Oct 22, 2009 10:27:00 AM
Maybe the solution is to call it something else entirely, like the "strong export, positive job creation dollar."
Posted by: Brian J at Oct 22, 2009 11:17:49 AM
I hold US dollars; therefore a weak dollar is a bad thing. QED
Posted by: Harkins at Oct 22, 2009 11:24:10 AM
Are exports at the expense of internal division of labor? Don't you have to know if the dollar should be lower? Doesn't that imply you have a target and will know when we've gone past it? Don't you need to have a view on what our export levels should be? If not, then it will fall (especially with active encouragement), only to rise only to create an export bubble and future recalculation (and pain). I'm not sure how you can be sure that just because we have a trade imbalance that it should be balanced with the current mix of goods. China will eventually want to buy our stuff, but maybe not right now. Or, it doesn't matter and the imbalance itself is the evil to be addressed. I tend to think that it is modulated by the interest of the decision-makers and not so much the general welfare. Could they fight it if they wanted to? Or is it just a matter of acceptance and serenity?
All that said, the solution is obvious. Stop checking your e-mail.
Posted by: Andrew at Oct 22, 2009 11:39:51 AM
yeah i keep all my savings in a duffel bag. what are people like me going to do when the dollar is weak? i cant by my cheap chinese made goods at a discount, and my luxury goods from europe become super expensive!
dont you people have common sense???
Posted by: eh.nonymous at Oct 22, 2009 11:59:33 AM
I'm just saying "Yay" and order tons of books from amazon.com. The dollar has fallen more than 23 % against my local currency, the Norwegian krone -- from its March peak at 7.22 to today's 5.54. That's great for me.
And I guess it goes for anecdotal evidence in favor of your point no. 4.
Posted by: Sigve Indregard at Oct 22, 2009 12:00:24 PM
yes, but do you favor a rising or falling weak dollar?
Posted by: babar at Oct 22, 2009 12:17:04 PM
"I hold US dollars; therefore a weak dollar is a bad thing. QED "
Only if you are prodigious consumer of imported goods over domestically produced ones. Remember the dollar isn't falling relative to goods and services (that would be inflation), but relative to other currencies. Since domestic prices are basically flat, a falling dollar hits you only if you buy a lot of imports. What's more, if you work for an industry that exports its goods and services, a falling dollar makes your product cheaper to consumers, increasing sales. Try to actually READ the agrument rather than distill it to a seemingly simple but factually innacurate string of words next time.
Posted by: wlu2009 at Oct 22, 2009 12:32:54 PM
Bzzt. Still unsatisfying. You don't seem to understand that "Mercedes-Benz subsidizes job creation in the US" is just a different way of saying, "The US becomes Germany's Mexico."
Do you envy the Indian professional in India who earns $500 for a month of his full-time labor? No? Then why do you want a currency policy that puts you in his position?
Seriously, why is this so hard to see?
Posted by: Silas Barta at Oct 22, 2009 12:46:30 PM
Do you envy the Indian professional in India who earns $500 for a month of his full-time labor?
I know Indians that make less than my income, yet live in big houses with servants, have a chef that prepare them delicious food, and generally live a higher standard of living than most Americans or Europeans. I envy their lifestyle, sure. The only drawback seems to me they can't afford imported luxury goods.
The problem with India isn't the poorly paid (by our standard) professionals... it is that only a tiny fortunate minority fall into the Indian professional class. If the U.S. becoming Germany's Mexico increases the standard of living of Americans, why not?
Posted by: Vehical Driver at Oct 22, 2009 1:02:17 PM
"I hold US dollars; therefore a weak dollar is a bad thing. QED" - Harkins
Buy US made products instead of importing (or more specifically, products with primarily US sourced inputs). Problem solved. QED
Posted by: Norman Maynard at Oct 22, 2009 1:12:07 PM
A weak dollar implies higher prices. That means lower real income. Which means a lower living standard.
Posted by: jorod at Oct 22, 2009 1:13:30 PM
Seems to me an energy cost consideration is being missed, but overall I don't have many criticisms to make.
Posted by: Ryan Vann at Oct 22, 2009 1:26:27 PM
"A weak dollar implies higher prices". That turns out not to be the case. A weak dollar implies we pay higher prices **for imports**. It also implies that we can either *charge* higher prices for *exports*, or keep the same price to sell a greater volume, or some combination. Weak dollar doesn't affect domestic sales.
"There are no stupid questions", but any economics statement which a medieval literature major can instantly refute ...
Posted by: Laserlight at Oct 22, 2009 1:30:46 PM
Americans having been living beyond their means. The combination of price level and import-consumption of the past was a mirage and created this crisis. Higher import prices are only the reflection of reality.
Posted by: Tony at Oct 22, 2009 1:33:58 PM
Also... the dollar is weakening against the yen and the euro but it is NOT weakening against the Chinese yuan, critically. Until the yuan is allowed to appreciate nothing will happen.
Posted by: Tony at Oct 22, 2009 1:37:08 PM
This is ridiculous. Obviously a correctly valued currency is optimal, it should be neither undervalued nor overvalued.
Posted by: IWantCookieNow at Oct 22, 2009 2:04:05 PM
How well could AI predict moral hazard?
The S&P 500 Index is now selling at 26 times operating earnings. (more than at the five year bull market top in 2007)
Official debt is $11.95 trillion, $150 billion below the debt ceiling.
While 7000 people lose unemployment benefits daily, the Senate delays extending benefits in an effort to finance them with bailout funds -- at the sime time they debate the debt ceiling issue.
Could these be the experimental conditions that reveal fundamental weaknesses in models such as the FHFA House Price Index whose 2nd largest contributing factor is (in todays' report) consumer expectations?
How much of the consumer expectation factor is influenced by the model's treatment of relative improvement in jobless claims, stock prices, and supplier delivery responsiveness?
How much of the consumer expectation factor is influenced by the model's treatment of the relative decrease in the manufacturing workweek and the dip in building permits?
In the future will these models use related external data (particularly data indicating bubble potential) to establish paramaters that will inform their own bubble potential prediction axioms?
Will the model be able to predict when consumer expectations become irrational?
For the model to accurately predict these distortions, would it need to include data such as dollar volume of stock market trade versus capital value?
Will measuring relative trade volume involve evaluating the computer models used by investors to drive high volume trading?
Will the predictive accuracy of the index hinge on effective methods of evaluating the predictive power of algorithms developed for investors by humans, artificial intelligence, and combinations of the two?
Is this one of the paths being cleared by the bayesian revolution?
Will improved indices lead to more defined, easier to predict W's, or will they improve markets?
Posted by: RP at Oct 22, 2009 2:06:47 PM
I WOULD LIKE TO ASK A QUESTION.
Currency trading is essentially a zero sum game. One traders gain is another traders loss. Essentially the only thing that makes it a positive sum game is that some firms are willing to pay a premium to hedge their positions. But this is extremely small in relation to the volume of currency trading.
Yet, essentially every large multinational bank and brokerage house claim that their currency trading desk is a profit center.
These two points seems inconsistent to me. What am I missing?
Posted by: spencer at Oct 22, 2009 2:08:44 PM
Spencer,
You are making a few incorrect assumptions. Brokerage houses make money on currency spreads. That is, they execute trades for clients by selling at a higher price than they buy. Most of the money made is not from takign proprietary positons in currency.
Also, i don't know the number but I would venture that currency hedging by international firms is probably the a huge component if not most of all currency trades. GM sells cars in China, needs to convert its yuan to dollars, and needs to engage in a forward sale of yuan to hedge fluctuations. Hundreds of thousands of companies are doing this daily, that is a huge volume of trade, and probably the biggest motivation in the currency market.
Posted by: wlu2009 at Oct 22, 2009 2:13:48 PM
A weak dollar also assists foreign creditors who had debt denominated in US dollars.
Also, weak or schmeak, the real issue is whether currencies are being manipulated to increase the dollar relative to a specific foreign currency.
I would be worried more about the dollar if major exporters were to have freer market based exchange rates. When some currencies are manipulated, adopting of policy of deliberately weakening your own currency to make the trading partners currency practices more costly and risky to them is not a bad idea.
Posted by: Bill at Oct 22, 2009 2:33:28 PM
"A weak dollar implies higher prices. That means lower real income. Which means a lower living standard."
I count three mistakes in logic in these three sentences.
1. "A weak dollar implies higher prices" - At the moment, domestic prices are not increasing. This would make the imports more expensive so it this would only be true if your purchases are dominated by imports.
2. "That means lower real income" - Well, if #1 is wrong, then obviously #2 doesn't follow. If you are an exporter (eg. work for a company that sells products overseas), but buy domestically, your real income would increase.
3. "Which means a lower living standard." If #1 and #2 are wrong, then #3 does not follow. EG China. Their artificially low-valued currency has led to an increase in their living standards as they are net-exporters.
------
"This is ridiculous. Obviously a correctly valued currency is optimal, it should be neither undervalued nor overvalued."
But what is "a correctly valued currency"? The value determined by the market? The value that leads to balanced trade? And couldn't this be subjective? The American commenter purchasing a foreign camcorder might have a different answer compared to Americans who benefit from that foreigner commenter buying more American books on Amazon.
Overall this strikes me as a meaningless statement - "it is neither too big, or too small." Well, duh, but that doesn't really pin things down very well, now does it?
Posted by: Nylund at Oct 22, 2009 2:46:26 PM
"At the moment, domestic prices are not increasing. This would make the imports more expensive so it this would only be true if your purchases are dominated by imports."
Based on what figures, and including or excluding goods that are primarily attained via importation (namely energy sources)?
Posted by: Ryan Vann at Oct 22, 2009 3:07:53 PM
This is stupid, it matters not the value of the dollar or the other currency. What matters is the first derivative of the value, because of price stickiness.
Money is fungible so the actual value doesn't really matter, just the changes in value, because of lags in the economy,
Posted by: Anonymous Coward at Oct 22, 2009 3:10:44 PM
