The product made in U.S.A. will not rise in cost like its imported counterparts, that’s what you fail to realize.
There is a reason why countries such as Korea, Japan, Italy, Germany, France etc. have all played the currency game in the past not only with us, but even with each other. Within the EU Italy was notorious for this before the Euro came along.
The problem is that foreign nations in the past have used the US market as an engine to drive their economic growth at our disadvantage by intentionally manipulating exchange rates. Indeed, post WWII the US intentionally had a policy that intended to stimulate growth in places like Germany by giving them highly favorable exchange rates as high as $1:DM4.50 which at that time were still fixed. The problem is that this makes the American factory worker making a widget more expensive than his counterpart abroad may that be in the US, in Germany or even in third party states. Essentially, despite the one of the highest per hour productivities, the low costs in water, land, energy, the low tax burden, the favorable labor laws, good infrastructure, well educated labor force, Judea-Christian work ethic, transparent laws and low corruption, stable legal environment, diverse geography offering unique abilities for certain functions - despite all this, when you have $1 = DM 3.62 (As in the mid 80s) the products made in USA are at a disadvantage even if sold in India, for example John Deer or Cummins/Caterpillar in the Middle East competing against someone like Deutz.
Again, as mentioned earlier: http://www.export.gov/tradedata/index.asp take a look at what exports are doing as a trend over the last few years.
Sometimes there are situations where some are at a benefit even if the nation as a whole suffers from this situation. My father works for the US state department in Germany. I too was stationed there for three years and from my “personal” position a high valued dollar gives my lots of purchasing power. However, what this also does is put the US as a nation at a disadvantage in trade. Again, as mentioned earlier, in the mid 80s when our deficit in trade exploded and young privates were buying new top of the line Audi’s, you had a very powerful dollar. Is it coincidence that Chrysler products are today being imported into Germany, or that all Z3’s, even those sold in Germany were made in the US; something unimaginable twenty years ago? Certain markets will be more affected than others, but when you talk about the auto, aerospace, home appliance, consumer electronics, IT, and others, these exchange rate changes long term have a profound effect.
The dollar dropping from its value of DM3.62 to DM1.86 in the course of five is a near 100% change in price; it forces the manufacturer to base production in the US. Think it’s coincidence that BMW (SC) and Mercedes (MS) opened plants during the 90s in the US? Do you think they were betting on what the trend would be?
The dollar devaluing is not a bad thing. It’s not a loss of power or prestige; rather the end of a bad situation where our currency was the sole global hard currency for trade and reserve, having many nations use our currency as theirs, and some pin their exchange rates intentionally at lower than free floating market value, which massively inflated the dollars value and hurt the US as a manufacturing base. The average American does not care about the American worker somewhere else. He’ll drive his Mitsubishi with a bumper sticker on the rear, “These colors don’t run.” The average American does not care if something was made in a sweatshop, if it was made using prison labor, if US EPA standards were violated in its production, if a vile totalitarian regime in a nation that 58,000 Americans died fighting against profiteers from the sale of these goods; all he will care about is if his kid’s toys might contain lead, then he’ll care. Perfect example is Wal-Mart. They don’t care if they are seen as an evil four headed dragon. They know tomorrow you’ll be back and buying their products because they are cheap. Such thinking is very short sighted and selfish, but conforms to the model of the rational consumer who in first place looks out for himself. The US government is not on a crusade for some self-interest, that picture is more appropriate for those profiteering from a status quo at their fellow Americans expense. What the US government seeks is a level playing field, where others are not playing games via currency to our disadvantage.
1. You’re not going to see everyone dump the dollar. Like our national debt, this is miss-characterized.
2. Actually yes, you will see more well paying manufacturing and industrial jobs come to the US as the dollar drops. You’ll see less off-shoring by US firms since these destinations become more expensive to operate from. You will even see more foreign firms set up shop in the US. But I guess that’s all bad?
3. Inflationary pressure will not be substantial as long as the dollar does not completely devalue. Outside of oil and a few strategic resources which we import in greater volume, the US is by virtue of size and resource independence in a position where even when the dollar drops, inflation won’t be as significant as you believe. Think of it like this. If we were in the position of Germany years past and the DM devalues, the cost of procuring copper, gold, cesium, platinum, helium, oil etc., all strategic resources required to fuel an industrial and high tech economy goes up. With devaluation comes an increase in the cost of resources. For us this is by far not as significant, and the shear volume of our market is also a factor since everything from rifle scopes, airplanes, to cars or MRI machines are made or at least largely made in the US. The answer is no, there won’t be some huge inflationary pressure overall. Foreign made products will become more expensive, but you won’t see the same with domestic manufactured goods.
Red6,
I think you have some great points. But I am no economic expert. Could you distill some of the basic trade stats rising for us? How much have the trends been rising?
Thanks
These are several complex ideas muddled into one here. The end of the US$ as the world's reserve currency will be the one good thing coming out of it, but for very different reasons than you have suggested.
The real problem with the US$ as a reserve currency is that whenever the US government has been running a bit short it just prints some more, and since the entire world pays into this scheme, it is not just the product of workers in the US that is stolen. It is a global theft. One might argue that this underhanded tax on world consumption is fair exchange for our guarantee of world peace, but others don't exactly see it that way, and I for one think that taking this power of the US government away will do a lot to rein in our post WWII imperialistic imperative.
Unhinged as the world's reserve currency and ceteris paribus every $ printed will result in a proportionate drop in the value of the $.
Taking up another issue that deserves much more extensive examination, you and most folks use the terms "strong" or "weak" with regard to a currency rather sloppily as if the exact numberical exchange rate between say the $ and the Euro is meaningful in itself. That $1 might have purchased $1M Italian Lire tells you nothing other than that perhaps both currencies aren't worth the paper they are printed on. It is trends in purchasing power that are meaningful, and the trend has been strongly negative for the $ for a long time, along with trade balance, debt flows, etc.
One's power and prestige are in economic terms set by the demand for your products and services abroad. A strong currency (one whose purchasing value in international markets remains releatively stable rather than declining by 50% in ~3 years) reflects that you have been trading on something like equal terms with the rest of the world.
Surely Buffett and I are not the only one's who think that borrowing abroad, mortgaging our real estate abroad to finance consumption from abroad is a sign of underlying economic weakness, you know, like the Congo or Sierra Leone or Brazil in the bad old days. That our currency is in decline is a reflection of that underlying weakness.
And as for all of your claimed experience in Germany, it must have been a long long long time ago, because in the past 20 years being stationed in Germany for married service members has been to be cast into financial hell. The Mark / Euro has been a strong and stable currency for a long time, and Germans have had one of the highest standards of living in the world for many years now.
And people buy BMW's and Audi's not because they are cheap because of their reputation for quality (reliability, design, performance, total cost of ownership over the real life of the car, etc.) Surely even you are not that much of a dolt despite your fancy perfumed finery flapping in the wind with the little MBA monogram on it.
You gave a long answer, but the first line is the very telling line — “The product made in U.S.A. will not rise in cost like its imported counterparts, that’s what you fail to realize.”
And that’s the problem. I go into stores and I look at the products that I can buy and I actually try to find products that say “Made in the USA”. And, you know what? Sometimes I can’t find even one product for what I’m looking for. I see all sorts of products from all over the place. In fact, I keep seeing China all over the place.
Therefore, I’ve got the same problem I was talking about before, in that my places where I normally go and normally shop (all the standard places that normal people go to anyway) don’t have “made in the USA” products. The rare product like that (USA) stands out like a sore thumb, if you can ever find it.
I’m afraid what you’re saying is totally out of whack and misleading in that I can hardly find any USA products (which you say won’t be affected). And besides that, I doubt that they won’t be affected (even if I could find them...).