Tuesday, July 10, 2007

A Weaker Dollar Could Help our Economy

Before you throw tomatoes at me, hear me out. A weaker US dollar, not a completely deflated US Dollar could help America out with our wealth distribution and investment for manufacturing, which might help save the middle class from becoming razor thin. A little Econ 301, but with floating exchange rates goods and services cross borders and trade balances tip one way or the other. Eventually, a currency with a trade surplus is suppose to appreciate, making their goods & services not as competitive as the other nation's goods & services, and suddenly the second nation will be the one running trade surpluses. This is how it is suppose to work. This is not how it works in today's world because certain Asian countries manipulate the currency exchange markets so that their currencies stay the same as the dollar, keeping their labor cheap so companies will invest there and keep the people happy they get $1 a day. This is being called Bretton Woods 2 by some sharp economists. This kills our manufacturing sector, as companies will invest their capital where the labor is most cost efficient. Capital owners win (which includes you at home mutual fund owners), and labor loses. A weak dollar will make investing in the American labor force cost efficient, and spur growth.

You're reading this and ticked off. You're like "screw off douchebag". Yes, a devaluing of the dollar would hurt prices of goods we import. A major crash of the dollar would fuck everyone over, even the other countries around the world that hold our currency as reserves. Not to mention that even if the world dislikes America, in most polls, the world still wants America to lead the good side with resolving most problems. Think the Europeans can handle Iran (not so far), think anyone trusts the Chinese (no way), and who has the arsenal to lend a hand when countries need help? America. I do not see a currency crash ahead, but I think an adjustment of the dollar by a decent amount is coming. This would hurt our consumer culture a bit, but it would help things be srestored to natural balances.

With that dollar adjustment, foreign & domestic capital owners will have slightly more motivation to invest in manfuacturing in the USA. Labor in the USA will become cheap. Thyssenkrupp is a multinational corporation that recognizes the power and efficiency of American labor. TK is investing 3-4 billion dollars in a steel manufacturing plant in Alabama. More investments like this will happen when the dollar is allowed to float vs. those Asian nations. Paul Krugman wrote in 2001 "It's a good bet that the era of the strong dollar will soon come to an end. That will be no tragedy; but it will be a problem if a falling dollar distracts the Federal Reserve from its duty, which is to ensure not a strong dollar but a strong economy." This study is funded by the steel industry, but shows that manufacturing in the US is a good investment that the strong dollar hurts. Now I know a weak dollar will hurt the consumer, but if it can bring steady non-Walmart jobs to the nation, it will do some good.

There are people who say we do not "make" anything anymore. I agree that the amount of stuff we make has decreased; it is easily demonstrated by statistics. We still 'make' some things. Take a look at trade data. While our trade balance has grown to scary levels, we have also increased our exports in a major way. Take a look at the trade data for imports/exports, and you will notice a trend. Canada, Mexico, Nigeria, Saudi Arabia and Venezuela are all in the top 10 for imbalances. Our trade balance is a result of cheap Asian goods that we cannot get enough of and oil. Wouldn't you know it? Those 5 countries listed above are the biggest oil exporters to the USA. If you study the goods we import vs. the goods we export, you'd find out that we export labor intensive goods. Our specialty is in skilled labor. A cheaper dollar will make oil more expensive for us and probably force us to cut back on consumption. A cheaper dollar would also make our labor cheaper to the world, and our goods cheaper to foreign markets. Foreign capital will look at old existing structures and put machinery in them ad employ the average Joe Americans on the cheap. An exampe would be America tool & die firms. Their bids would suddenly be cheaper on a global scale vs. foreign tool & die firms. Win. If American investors can turn old warehouses and shoe manufacturing plants into condos and retail distribution centers, foreign capital can make even better use of them. It's a win-win (pay no attention to expensive price tags on gadgets from Asia).

How does this help the famous middle class? First off, it does not force everyone who wants to earn 'decent money' to have to get a 4 year degree. Seriously, a class of workers can have 2 year technical degrees or extended technical degrees and work in these manufacturing jobs. The cost for these schools is much cheaper than your average diploma mill. This factor might even slow down the rising cost of 4 year degree schools, as the return of getting a 4 year degree vs. a tech degree or no degree shrinks. If a person knew they could make $35-40K a year with a 2 year tech degree for 30 years, would they take it? With 2 years and maybe 10 grand in loans vs. 4 years and 25 grand in loans, the average American would.

Another positive factor of this devaluing of the dollar would be that as this middle class would grow, which is needed for an economy and nation to be strong. I'm going to go out on an historical limb and mention the idea that the Spanish Inquisition, which removed the Jewish citizenry from Spain and lasted a few hundred years, destroyed a middle and merchant class and contributed to SPain's downfall from world power. There needs to be social mobility and a decent spread of wealth. Yes, I do believe that Gini Coefficients do matter. From my econ 314 Intermediate Macro class, I recall learning how after the Korean War, South Korea had been decimated. With US aid and an interesting way of partitioning land, a lot of the surviving society re-started as mid-level farmers. With an increase in savings and an investment in the dducation of the nation, Korea became a major exporter. It's not that everyone received the same amount of land and were kept the same. The wealth started as distributed relatively well, and the starting gun went off. If wealth in this nation can be spread a little bit better and more people can go to further education for greater wealth and social equity, the United States will be stronger for it.

Believe me, a devaluation of the dollar would cause a shock, and the press would scream bloody murder. We'd also move from the nation that has the capital to invest in other nations to a nation of labor used by foreign capital. In some ways, we could blame the FED and the powers in control of our monetary system. In other ways, we can look in the mirror and blame ourselves for a low savings rate, a consumer culture out of whack with reality, and a me-first attitude. Rather than assign blame, we could just do something about it and move on with life. Life would suck for a while with a weaker dollar, and we would have to be a little humble for a while (while still kicking the sh*t out of Al Qaeda). With a rebalancing of dollars/euros/yen/yuan, the American strengths of innovation and a strong education network could shine.

----End note: If the US Dollar Index breaks 80, we will be in virgin territory for currency trading. Investors could rush in there for a cheap buy, as there are few 'stable' places like the US. For all the talk of the Euro, there is still only a monetary policy uniting those nations. Not much else. The Islamification of Europe does not help. A better bet: If global uncertainty continues, precious metals are the best bet.
Disclaimer: I invest in both foreign stocks and precious metals.

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