The dollar is finally not under the pressure it has been for all those years, The Euro, a self made monster is helping take off the pressure which for years was hurting our economy by pricing us off the markets. With a higher per capita productivity, lower fixed costs in electricity, logistics, fuel and so on, we have been highly competitive all along, but when we had 3.56 Deutsche Mark to $1 we were being crushed by our own currency.
Now even Russia is buying Euros (mixed with dollars) for its reserve and many Ba’athists fleeing Iraq were caught with guess what? Euros. Most used currency (For trade) in the Balkans? Euros.
For years some conspiracy theorists were coming up with ever crazier ideas of how the US had an unfair advantage because of the dollar and the fact that most trade in strategic resources is conducted with this currency. In reality, our trade was being hampered by our own currency. We ended up with a currency with had a high volume of counterfeiting and regulatory issues because foreign governments would buy money or sell it causing major monetary shifts which affected our economy.
I truly believe that a lot of the devaluation of our dollar is caused by the advent of the Euro. I think in the long run this will make us MORE competitive on the world scene. Games like intentional devaluation of currency as the Italians commonly practiced with the Lira will be difficult if not impossible with the Euro. The Euro zone will have similar issues as the dollar while taking off pressure of the dollar. Only they are not as competitive and will have a harder time dealing with the pressure in the long run. In the end, US products will end up cheaper while Euro zone products will be more expensive. Imports will sink, while exports rise. But these are long term developments. In the short term businesses will suck up the costs in the hope of this trend changing. Eventually they will be forced to cave in. This will also bring MORE business into the US since our competitive advantage is now noticeable and can be taken advantage of. So Mercedes will build MLs in Mississippi and import them to Germany to sell. BMW will build Z3s to import to Germany to sell. As a manufacturing base we become more cost effective as well.
The Euro is a great thing. Hats off, I like it.
Red6
We do tend to benefit from the stupidity of Europeans.
The most desirable market is the American market. It has the most disposable income by far. But Europe and Asia will have much more difficulty in accessing it. American companies will therefore see a return to having control over pricing their products in the U.S. market. This is all good news for the investor.
Excellent post. Thank you.
The improvement in exports is certainly welcome news, and is probably due to several factors. Your analysis of the currency exchange rates is likely the most important. Other effects should be the higher productivity of the US, particulary compared to China and Europe. The socialism of Europe is finally beginning to destroy their economy to the point that even their excellence in engineering cannot accomodate.
Of course, the major issue is the relative labor costs.
The popular refrain is that Chineese or Indian labor cost about 1/20 that of American. That sounds bad, but it isn't as bad as it seems. The reason is that China in particular has emphasized LOW productivity. That's right, low productivity. Following the inestimable lead of American unions, the Chineese attempt to reduce unemployment by keeping productivity low, so that they can employ as many as possible. The idea is that their wages are so low that they can still produce a cheap product with inefficient workers (not the workers fault, though).
The NET difference, if you include only direct wages, is only a factor of 2 on average, particularly when you include other costs, such as transportation and such. 1/2 is a lot better than 1/20.
The bigger problem is that government regulation and federal law impose additional costs to hiring people. The US Chamber of COmmerce (sorry, I don't have the link) estimates that the actual cost of hiring an employe is a factor of 2-3 above his wage level. You pay the employee $10; it costs the company $20 - $30. Most of this is federal employment law which is the basis for employee lawsuits for discrimination and such. Interestingly enough, over 90% of discrimination lawsuits are brought by present employees, rather than applicants that were not hired (as the law was putatively designed to address).
Tort lawyers to the rescue again!!
The cost of tort lawsuits for employment law cost companies directly in lawsuit settlements, but indirectly in additional inefficiencies in operating a business. When you include these effects, the difference between net, effective wage rates becomes 1/6. That is too high.
The solution?
1. Allow the currencies to float to appropriate levels (dollar weaker, China currency stronger).
2. Tort reform and simplification and reduction of employment law.
This approach won't save all manufacturing jobs and output, but remember that we are operating on a distribution; this is not a binary effect. Every bit we become more efficient and economical means more manufacturing that will move here.