It's The Dollar, Stupid
I just caught an item this morning in the Financial Times that reported that Senators Charles Schumer and Lindsey Graham had decided to postpone the bill they've wanted to push that would have imposed tariffs on China if it did not let its currency, the renminbi, rise faster in value. In theory, a rising renminbi would reduce China's trade surplus with the U.S. because goods made in China would then be more expensive.
Well, I've made the argument here before that the U.S. has in its power the ability to accomplish the same thing: by lowering the value of the dollar, which has been quite high. There are three groups that benefit from a high dollar: tourists (when they travel abroad the dollar buys more), retailers like Wal-Mart (because a high dollar means they can get cheap goods from abroad) and Wall Street (a declining dollar would likely increase inflation, and those Wall Street types hate inflation--even a half a point difference means a lot of dough there).
But, for regular people and those tourists, too, lowering the value of the dollar would save jobs here because it would reduce the amazing cost difference between goods manufactured in China and here. I'm not ignoring the Chinese labor system that forces tens of millions of people to work for dramatically lower wages--that's a serious moral issue, as well as economic challenge. But, a decline in the dollar would reduce a significant advantage posed by those low wages.
There is no question the dollar will have to fall at some point: the huge trade deficit cannot be financed forever without the dollar coming down. The issue is how fast and how much that will be felt here. If we keep putting this off, the fall will be much harder and severe.
Comments
I agree with you in theory, but how do you propose we do this?
Actually, it's quite simple. The Congress can pass legislation requiring the U.S. Treasury to seek a target for the dollar exchange rate. The U.S. Treasury intervenes in foreign exchange markets and it can do so with the mission of lowering the value of the dollar. The legislation would calculate the target to be at least at a level that will reduce the trade deficit over time i.e., a gradual reduction, rather than the sudden one we will likely experience without action.
It's not that simple on a couple of levels.
(1) Devaluing the dollar means that dollar denominated interest payments are worth less. Thus, U.S. interest rates would need to rise to compensate foreign purchasers of U.S. debt. Rising interest rates would harm, among others, middle class families with adjustable rate mortgages and student loans.
(2) In addition to hurting Wal-Mart by making cheap overseas goods more expensive, it will hurt the purchasers of those goods, on which poor and middle class people spend a disproportionate share of their income.
Tasini,
(2) If you're shopping at Wal-Mart, you are part of the problem.
(1) Devalued $ = Inflation. Inflation is good for the masses of consumer debtors so long as their debt is not variable interest. Of course, variable interest is a tool of capitalist enslavement and should be abolished.
I completely disagree with this whole line of thinking. China is a very poor country, their currency SHOULD be worth much less than the US dollar. It should slowly and gradually rise as conditions there improve. Depreciating the dollar is just a form of protectionism which will hurt us in terms of higher prices and hurt many poor Chinese when they lose their jobs because their products are no longer competitive. It is convenient to blame China and big business but completely unfair.
We need to fix a lot of our own structural problems, such as out of control medical and legal bills. We should push China more to open the door to more US imports, that is a win-win situation. There are other things as well, for example we need to make it easier for Chinese tourists to come to the US.
People also need to focus less on manufacturing. If you lose a factory job, it's not the end of the world, there are plenty of other opportunities. For example in Vermont, there is a severe shortage of good carpenters and plenty of money to be made. If people really want to work hard there are plenty of opportunities out there.