Posted on 08/20/2024 9:19:30 AM PDT by Red Badger
Donald Trump’s running mate, Senator J. D. Vance of Ohio, maintains that a weaker dollar is necessary for creating more manufacturing jobs. Additionally, in April, former U.S. Trade Representative Robert Lighthizer and other Trump advisers floated a proposal to “devalue” the dollar, arguing that a cheaper dollar would boost U.S. exports and reduce the trade deficit.
A dollar devaluation would be a radical change in U.S. exchange-rate policy, which, for decades, has been to let the value “float” and be determined by market actors in foreign-exchange markets. It’s far from clear whether a new Trump administration would actually pursue devaluation once in office, but with both the Republican and Democratic Parties drifting toward protectionism in recent years, it’s worth exploring the tradeoffs.
The U.S. dollar has often been considered “strong” since it became the world’s reserve currency after World War II, but the Fed’s steep interest-rate hikes in 2022 and 2023 have caused its value to surge over the last two years. Higher rate hikes have led to higher yields on dollar-denominated bonds. Since investors need dollars to purchase these bonds, the dollar’s value has greatly appreciated. A strong greenback is a double-edged sword. On the one hand, it makes imported goods cheaper and attracts foreign investment. On the other, it makes producing goods domestically more expensive relative to other places in the world where raw materials and labor cost less.
A dollar devaluation might temporarily boost exports, but it would do little to help U.S. manufacturers beyond the short run. Moreover, it would almost certainly lead to either high inflation, international backlash, or both.
To start, it’s important to distinguish between the nominal exchange rate (the price of a foreign currency in terms of the domestic currency) and the real exchange rate (the nominal rate adjusted by the price level in each country). Though the nominal exchange rate matters for a country’s trade surplus or deficit in the near term, the real exchange rate is what matters over the long haul.
Monetary policy can always affect the nominal exchange rate, but it only affects the real exchange rate in the short term. When a country’s central bank aims to reduce the value of its currency relative to another, it buys the foreign currency and sells its own. This raises the demand for and value of foreign currency, while expanding the supply and lowering the value of the local currency. To weaken the dollar substantially, the Fed would need to create many new dollars.
All else held equal, this will spur inflation, something Americans have little appetite for. Further, while the increase in the supply of dollars would reduce the nominal value of the dollar, it would not permanently affect the real exchange rate, so the policy would do little to help domestic producers.
Another strategy that Lighthizer is considering is to threaten other countries with tariffs unless they pursue policies aimed at appreciating their respective currencies. As economist Noah Smith observes, some precedent exists for this. In 1985, the U.S. negotiated a deal called the Plaza Accord with several European countries and Japan to weaken the dollar, which, like today, was very strong. Unfortunately, the United States’s trade deficit is about twice as large in real terms as it was in the 1980s, and China, which runs massive trade surpluses against the U.S., seems unlikely to agree to a Plaza Accord-like deal.
The tariff threat strategy is also risky. Since 2018, the U.S. has been fighting a trade war with China, as each country has imposed several rounds of tariffs against the other. If America levies tariffs against countries for failing to appreciate their own currencies, it should expect further retaliation. A recent Tax Foundation study found that tariffs from the Trump and Biden administrations have amounted to a $625 annual tax on Americans and have cost the U.S. the equivalent of 142,000 jobs. A new wave of tariffs would add to this pain.
Finally, tariffs strengthen the dollar, which would undermine the goal of boosting exports. Since a tariff makes imported goods more expensive, it raises the demand for domestic workers to produce goods. Assuming the economy is at full employment, this excess demand for workers would lead to excessive total spending and inflation. To prevent any inflation, the Fed would normally raise its target interest rate. With interest rates rising throughout the economy, investors will buy up more dollar-denominated bonds because those bonds will now earn more interest. This raises the demand for dollars and pushes the value of those dollars up.
Devaluing the dollar, either through foreign-exchange interventions or the threat of tariffs, comes with many risks and few upsides. Other options are available for producing more jobs at home and reducing the trade deficit that don’t entail such tradeoffs.
When a country runs a trade deficit, it consumes more than it saves, so it needs to borrow the difference. By the same token, a country running a trade surplus saves more than it consumes. For a clear example, consider again the U.S.’s trade deficit with China. China produces more than it sells domestically, so it sells many goods to the U.S. With dollar-denominated profits from the sale of those goods, the Chinese can invest in dollar-denominated bonds. This is why a country’s trade surplus is equal to its level of saving, minus its level of investment. A trade surplus means that a country saves more than it invests; a trade deficit means that it invests more than its saves.
Therefore, if U.S. policymakers want to reduce the trade deficit, they should pursue greater fiscal discipline. Another option for reform would be to liberalize services exports. Though many people think of trade in terms of physical goods, the U.S. has a comparative advantage in producing services, ranging from information technology to finance to health care. My Mercatus Center colleague Christine McDaniel has noted that many countries restrict cross-border sales of services and suggests that the U.S. should work with its key economic partners in removing these barriers.
J. D. Vance and Robert Lighthizer reasonably want a more productive American economy with good-paying jobs. Rather than resorting to dollar devaluation or other protectionist measures, they should work on structural reforms, which would make the U.S. more competitive in producing goods and services.
Patrick Horan is a research fellow at the Mercatus Center.
Buy gold. That’s the only take away from this insanity.
One of the biggest challenges in the political world is that candidates cannot win unless they feed the delusion that most voters have — that they can have $35/hour wages, Walmart prices, and steep tariffs on imports … all at the same time.
More importantly than the exchange rate between countries and governments, who seem to try and out-central-plan each other - is the “exchange rate” between the government currency and your individual labor and savings.
And that is declining relentlessly.
I think the motor vehicle trade should be financially balanced along the lines of American/Canadian method used about 60 years ago.
American-made internal combustion engines and EV batteries might flow to Mexico in exchange for Mexican-made auto parts and wiring assemblies.
Another thing is to have simple things that can be made by machine be made in the USA.
“they can have $35/hour wages, Walmart prices, and steep tariffs on imports … all at the same time.”
A lot of things can be made by automated machinery in the USA.
Walk through a Walmart.
I’m not sure who’s to blame- the candidates or the voters. Perhaps both need to be better educated on economic matters.
Holy dollar hurts all the idiots and traitors who outsource their factories to other countries.
the dollar has already lost over 90% of its purchasing power in my lifetime....
1 percent
2 percent
....
48 percent?
Come 2029.
WIKI
The first ships required about 230 days to build (Patrick Henry took 244 days), but the median production time per ship dropped to 39 days by 1943. The record was set by SS Robert E. Peary, which was launched 4 days and 151⁄2 hours after the keel had been laid, although this publicity stunt was not repeated: in fact much fitting-out and other work remained to be done after the Peary was launched. The ships were made assembly-line style, from prefabricated sections. In 1943 three Liberty ships were completed daily.
Class overview
Name Liberty ship
Builders 18 shipyards in the United States
Cost US$2 million ($43 million in 2024) per ship
Planned 2,751
Completed 2,710
Active 2 (Traveling museum ships)
Preserved 4
General characteristics
Class and type Cargo ship
Tonnage 7,176 GRT, 10,865 DWT[2]
Displacement 14,245 long tons (14,474 t)
Length 441 ft 6 in (134.57 m)
Beam 56 ft 10.75 in (17.3 m)
Draft 27 ft 9.25 in (8.5 m)
Propulsion
Two oil-fired boilers
triple-expansion steam engine
single screw, 2,500 hp (1,900 kW)
Speed 11–11.5 knots (20.4–21.3 km/h; 12.7–13.2 mph)
Range 20,000 nmi (37,000 km; 23,000 mi)
Complement
38–62 USMM
21–40 USNAG
Armament Stern-mounted 4-in (102 mm) deck gun for use against surfaced submarines, variety of anti-aircraft guns
https://en.wikipedia.org/wiki/Liberty_ship
In fact, in some ways we did sixty years ago when a new car on average cost three month's gross wages. We gave it all up in exchange for "free trade," a bloated administrative state and mass immigration.
Really laugh out loud funny. The US has the most bloated, inefficient, and costliest healthcare system on the planet. You can get comparable healthcare in Europe for 1/8 to 1/10 the cost. In fact, my old insurance would pay to fly you to Europe to have certain procedures like knee replacements done.
The end result is that you end up with the government subsidizing non-productive citizens just so they can buy the things produced by the productive ones. This is exactly where we are in 2024.
You are making the common mistake of assuming that the economic landscape sixty years ago was anything remotely resembling “normal.” In fact, it was the opposite. The post-WW2 period was a brief anomaly when the U.S. was the only major power to emerge from the war with its infrastructure and industrial capacity unscathed. Things began to unravel quickly in the 1960s when the rest of the world got back on its feet.
Three things actually happened:
First the US government bought the support of foreign governments by allowing unfair trade. The best example is the US consumer electronics market. In the early 60s, US manufacturers were right up there with German and Japanese producers. The Johnson administration then allowed unfair Japanese competition in exchange for Japan's support of the Vietnam War. The Japanese closed their market to American imports, MITI heavily subsidized Japanese exporters and with a few years they drove most American TV manufacturers out of business. Even now, the State Department is perfectly willing to trade US jobs for diplomatic advantage. It's easier to do that than get foreign aid through Congress.
Second, in 1971 Nixon dropped the Bretton Woods gold exchange rules for international trade. Gold exchange automatically limited trade deficits because a big deficit meant a big transfer of gold and a big transfer of gold meant your currency went down and the exporters went up. Then Nixon also bequeathed us the EPA at the same time as import limitations fell, so US heavy industry was faced with enormous new costs that its foreign competitors did not face while many of them were also subsidized my their own governments. The result was the slow collapse of American heavy industry and their high-paying union jobs.
Third, the immigration reform act of the mid-60s and Reagan's amnesty meant the increasing trickle of immigrants became a flood, reducing American wages and displacing American workers.
Saying we are good at services like this article does is like saying a boxer has a good left hook after his right arm has been amputated.
The dollar is rapidly devaluing without being officially “devalued.” That’s what inflation is.
Devaluation will not lead to high inflation. It IS high inflation you dolts.
Well,at least someone here understands what makes things tick.
“The only downside is that with fewer and fewer people working in productive industries, the customer base for those things produced with automation gets smaller and smaller.
“The end result is that you end up with the government subsidizing non-productive citizens just so they can buy the things produced by the productive ones. This is exactly where we are in 2024.”
The cost of the automatically produced products represents labor + material cost + machine cost + profit. Each of those four items go to people who need to buy services.
A shareholder might need a lawn mowed. A machine operator may need a new roof and car repairs. A refinery worker may need legal services and nursing care for his mom. An oil rig worker might need a root canal and a kitchen remodel for the wife.
Most of the non-food manufactured stuff Walmart sells might come to $200 billion a year. Most of the non-food manufactured stuff Amazon sells might come to $450 billion a year. The wholesale cost totaling for the two $450 billion or so. That’s a now minor part of the $15 trillion(?) per year US economy.
The only reason to hand out money is because some people are incapable of work. Much of Social Security is pre-collected.
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