Palin vs. Krugman on the Dollar -- Who Is Right?
The other day I wrote about how the dollar is falling - but not against the Chinese Yuan. A falling, or "weak," dollar is great for American manufacturers and therefore American jobs, because it makes American goods cost less everywhere else. This means our exports should rise, reducing our trade deficit and helping us pay off the huge amounts that decades of conservative budget policies forced us to borrow from other countries.
Conservatives, though, are trying to use the complexities of the relative value of the dollar in currency markets as an anti-Obama political issue. They must have polling that shows people reacting to way the words "strong" and "weak" are used. This misunderstanding of "strong" and "weak" reminds me of how I used to be confused by "debit" and "credit" when I learned double-entry accounting. (Sorry, I probably shouldn't mix corporate finance humor with blog posts.)
For example, earlier this month Sarah Palin (or someone) wrote on her Facebook page that a falling dollar makes us "vulnerable." This is a brilliant play on the "weak" theme, and is used to further scare people. (Republicans like to scare people - remember how Iraq was going to spread smallpox?) She earns her Exxon check, writing that we need to "Drill, baby, drill" for energy independence to solve this. She writes nothing about conservation, alternative energy sources like wind or solar, or about smart grids, or developing a 21st century economy -- Exxon wouldn't like that.
Palin's ghostwriter confuses several issues at the same time. This is brilliant agitprop but terrible, terrible policy.
Paul Krugman, America's other master economist, writes in the New York Times today that the problem is China, not Obama. China "pegs" their currency to the dollar so when the dollar drops the Yuan drops along with it. This keeps goods made in China at a nice, low price relative to everyone else, reducing any advantage we might gain from market forces. Krugman writes:
If supply and demand had been allowed to prevail, the value of China's currency would have risen sharply. But Chinese authorities didn't let it rise. They kept it down by selling vast quantities of the currency, acquiring in return an enormous hoard of foreign assets, mostly in dollars, currently worth about $2.1 trillion.
Many economists, myself included, believe that China's asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China's insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.
Krugman says it is no time to be timid. We have to confront China on this manipulation.
The thing is, right now this caution makes little sense. Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive.
A a Bloomberg story demonstrates why we need to bring the dollar down relative to the Yuan,
"The stable yuan helped us increase sales by about 20 percent this year," Cody Hu, a sales manager at the Yongkang- based company, said at the China Sourcing Fair in Hong Kong. ...I'm with Paul, not Palin. A lower dollar means jobs.
"Competitors in China are doing good," said Suresh Sranavasan, a distribution manager at the company. "They have pricing advantages from the government's stable yuan policy."
Take a look at the agenda for the Building the New Economy conference, Thursday, October 29, 2009 -- 9:30 a.m.-3:30 p.m. at the Washington Court Hotel in Washington, D.C.
This conference sounds the call for the new economy we must build out of the ruins of the old. It focuses on the need for a new agenda to revive manufacturing in America. It's free. But you have to RSVP.
This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture as part of the Making It In America project. I am a Fellow with CAF.
Follow Dave Johnson on Twitter: www.twitter.com/dcjohnson
Bloomberg.com: World Currencies
IndustryWeek : The Face Of American Manufacturing
FTD - Statistics - Country Data - U.S. Trade Balance with China
Euro Zone Posts First Trade Deficit Since February - WSJ.com
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
PLEASE!
Stop giving this ignorant woman any more air time or coverage of any kind. She has nothing to add. She is thick as two short planks and is completely, totally, unequivocally not worth the powder to blow her up.
ENOUGH ALREADY!
Another failure of the conservative movement is their tendency to listen too much to the messenger but not so much to the message itself. She spoke, therefore she must be right? Where's the logic in that? What's her credentials to be able to say that? What's her ghostwriter's credentials to be able to make her say that?
Doesn't a horse race between Palin & Krugman foretell a foregone conclusion?
Aftver reading the comments it appears to me that a sudden devaluation of the dollar at this time could be counterproductive. We need to get more of our people back to work in new manufacturing and rein in our predatory financiers first. Before we can benefit from a weaker dollar, we have to be ready to produce goods that the rest of the world will want to buy We need to have a new stimulus package, but it has to be financed. The only way to do this is to tax the very rich. I originally thought that a return to the 70% tax on the top bracket would be fair to everyone. The more I hear about the predatory practices of the super rich, the more I think higher tax rates on the super rich are justified. Lets confiscate some of those excess profits and put our people back to work.
It will take awhile to develop new green products and a new manufacturing base. In the meantime we need to get people back to work building a new and better infrastructure. This will stimulate domestic demand and help our manufacturing base rebuild. We need to think big. Why shouldn't we be the world leader in high speed rail? That would be expensive, but we have a lot of super rich. Our Governor Richardson in New Mexico is thinking big with plans for a commercial spaceport. We need more leaders with imagination.
You are going to get your weak dollar.
Until it costs well over a hundred dollars to fill the tank, and then it starts moving towards a thousand bucks to fill the refrigerator. Then the government will do something about the weak dollar and we will really see a market crash--the last one being nothing near as bad as the next one due to this insane weak dollar policy.
That seems realistic.
The weak dollar will eventually bring manufacturing back to America, though- when people start tearing the beams out of foreclosed homes and manufacturing them into clubs to fend off looters or the banks' asset grabbers.
I am amazed at how all the commentators, most of whom probably never even took Economics 101, let alone advanced courses in monetary theory and international trade, know so much about this complicated subject ,as well as how to use this knowledge to set policy. Ain't America great. :)
Sorry, forgot to add...
Would The United States be able to afford Single Payer Healthcare if the financial sector's liabilities of $24 trillion were not threatening to bankrupt The United States?
Yes. Yes, we would. Congress has to consider what would happen if those liabilities came due. So, not so much money for health care. Which is why Congress is trying to limit the scope and financial impact of Universal Healthcare.
We cannot afford health care reform while $24 trillion in Wall Street liabilities are being backstopped by the taxpayer.
I am going to side with Palin on this one, even if she is less than desirable. Paul wants a manufacturing driven recovery. However, consider this statistic when considering Paul. Since the onset of the recession, manufacturing in The United States has shed 2.1 million jobs. The very sector needed to produce a recovery. Any recovery will not be driven by manufacturing. Without massive investment, of course. $700 billion sounds good. That money, instead, went to the bankrupt financial sector of the economy.
Now, consider the falling dollar. Devaluation of the dollar, which is the unofficial policy of The Federal Reserve, makes imports more expensive. Cost of living for Americans increase as a result. Main Street suffers. Businesses find imports of materials and finished goods more expensive. Main Street suffers again as businesses increase prices and lay off workers to compensate as consumers no longer can afford to buy their goods. The dollar has declined in value over twenty percent in the last year.
True, imports of goods and services are down. However, so are exports. The United States is still running a deficit in trade with no sign of letting up.
(cont... below....)
If the yuan were suddenly to triple in value and we had vacant factories ready to be restarted, and the Chinese benevolently bowed to market forces and began importing our fiaished goods----what a wonderful display of international free enterprise that would be. But that is dream works of the present Administration.
The painful solution is not risking the death of our currency by using dollars to attempt to revive a bankrupted financian-economic system. Or wishfully begging our Chinese masters to reevaluate the yuan that will miraculously make everything all right.
The solution is to change the rules of the game. Presently, predatory domestic monopoly and trade mercantelism are literally destroying the economic bases of our nation. Together these unfair, deadly processes make impossible a business milieu that permits fair enterprise and business practices. The manufacturer or small business can not get a foot hold to fairly compete against foreign and domestic monopoly and ruthless mercantelistic domination. Our people have no worthy jobs or occupations, except service and servitude of traditional organizations.
Therefore, we must place draconian import duties on all but those essential manufactured goods for emergencies. Second, we must break up the financial monopoly and retail and manufacturing monopolies while we establish crash programs of energy independence and new cheap energy sources and methodologies. Last, we must put the 20-30 millions idled Americans back to work rebuilding our cities and countryside.
Our gilded class must pay for this effort to preserve our Republic.
Krugman changes his stance every 2 weeks or so. You can't even compare Krugman to Krugman, much less to anyone else.
Nobel prize winning economist or the "thrilla from wasilla"? I think I'll take Krugman.
Oil is over 50% of the US trade deficit.
How are you going to fuel this suggested 'expansion of US exports' to 'balance the trade deficit' ( keep dreaming ) if the energy costs of running your factories and delivering your goods to port keep going up because you keep allowing your dollar to be debased???
The falling dollar punishes those who live without borrowing, because inflation strips away the incentive to save. The banking cartel does not want their fiat dollar to be a storehouse of value. The banking cartel wants their fiat dollar to be a tool of consumption only, because that creates a permanent captive consumer class in America for all the products made in the factories transplanted overseas.
We don't have the production capacity to really decrease our deficit, regardless to how "weak" our currency is. Sadly our currency will be so weak, we won't be able to afford anything. Weimar Republic style inflation is at hand after the world drops the dollar from oil purchases and when oil prices skyrocket, so will everything that we buy. Everyone will flee the dollar and put there money else where.
But at least people will have more jobs thanks to a "weak" dollar. Oh joy!!!
This isn't a partisan issue. This a "Federal" Reserve issue. Our politicians on both sides have allowed it to exist for too long with our proper oversight. If your not going to End the Fed, you need to at least Audit it. HR1207 has over 300 cosponsors. Stop worrying about the healthcare bills. If we don't save our currency, we won't be able to afford anything, let alone healthcare
Hello 1990's RUSSIA!!!!! Selling family heirlooms on the street for two days of food!!!! YEAH, THE AMERICAN SPIRIT!
I give up. I'm gonna have to go back to college.
The root of our economic Depression is "Fair Trade" agreements that are not fair nor are they balanced. The Depression will only get worse until balanced trade enforced by tarriffs becomes the law of the land.
Too simple, only part of the cause. Corporations have a tax break to ship jobs overseas and our agricultural goods (subsidized by Uncle Sam) have bankrupted tens of millions of Third World farmers. Hey! At least some of them have (had?) a call center job dealing with angry Americans! Got to love it?
My opinion on this issue is best expressed by Paul Krugman.
"Attempts to reduce the trade deficit might even lead indirectly to a fall in unemployment, at least for a while, as the govt either drives don the exchange value of the dollar or restricts imports, both of which are inflationary in their own right. To keep inflation under control would therefore take a little extra tightening on the domestic side. So we would probably have slightly fewer jobs without the trade deficit than we do with it."
Paul Krugman, "The Age of Diminished Expectations" p 39.
Krugman understands that a weaker dollar means high import prices. This would mean higher prices for oil, which makes up over half the total US trade deficit, and higher prices for US businesses and consumers, meaning less consumer buying power and smaller margins for business.
With unemployment currently so high, I believe that workers would not be able to demand higher wages to make up for the higher prices. Companies will simply cut more workers as their margins contract. So the policy would just result in lower real wages and higher unemployment. Inflation would hit the construction and auto sectors the hardest, not to mention the banks that hold commercial construction loans.
You must be logged in to comment. Log in or connect with
