It will not be just the Wal-Mart items, though Wal-Mart may be the most dramatically affected. Wal-Mart runs on very low margins so it will most likely see the most dramatic price changes in the event that the yuan is fixed at much above 8. If it floats, I'm curious what Bentonville's plan is. Maybe they will start their "Made in the USA" campaign again.
I was reading the 10K from Havertys, a reasonably large furniture sales company. They have dramatically increased their imports; over half of their furniture is now imported with leather goods at already 100%.
While Havertys has large margins, I didn't see anywhere in their 10K any talk about type of hedging in the event of exchange rates changing underfoot. That means to me that they have probably planned already how to spend those big margins. That means that they will either have to raise prices along with any revaluation, or they will have to cut margins and make some ugly announcements to Wall Street.
I don't imagine that most of the middle-tier companies have sufficient imagination to handle these problems, though I hope that most of the big firms do.
After a moment's reflection at the contretemps that we have seen in corporate governance in the last few years, I really hope that the big firms have thought about this already.
Likewise, with any revaluing of the dollar it is likely that interest rates will move upward more quickly than most had anticipated. Unexpected rate changes can literally destroy certain types of firms that are incautious, such as mortgage brokers that aren't properly hedged.
In general, rising interest rates put a damper on the economy. Rising interest rates and inflation due to the dollar plunging in value is not a great way to start President Bush's second term.
While we might be able to raise exports based on a weaker dollar, the planners probably should bear in mind that we import $1.3 trillion worth of goods -- and a 20% rise that now we would pay $1.56 trillion for those same goods.
The gross value of our total industrial production is currently only at $2.89 trillion of final products in 2000 dollars. We ship about $700 billion of goods overseas.
We are not going to raise our industrial production overnight to over $4.4 trillion to try to save 260 billion dollars. (Sorry that isn't as precise as I would like: the Fed only has gross production valued in 2000 dollars, and didn't put its multipliers anywhere convenient to find.)
A lot of our manufacturing businesses depend on imports for their production although we are blessed with a resource-rich country, unlike Japan which has no resource base.
While some manufacturers such as small textile companies that largely use local inputs for production may well become more competitive against the heretofore brutal import pricing, manufacturers that depend on imports for inputs are going to have to pass the costs on.
We cannot create overnight new industrial capacity. The system has about 10% slack in it right now -- we are at 77% and anything above 90% for the whole economy is war-time scale. 85%-87% utilization is about as high as we go.
In the short run, if we do have significant export growth, it will require some measure of imported industrial inputs at higher prices. These higher prices will work their way through our economic system, and we will see them as inflation -- remember the 1970s?
I am studying for my MBA and I can tell you from reading dozens of cases, they are not. The average American company is pathetically run with massive organizational problems. I can only imagine how badly the EU companies are run. From the few speeches and cases I've seen it's even worse.