Short post to follow up on two things that were on Baseline recently.
First of all, take James’ advice and check out this Interfluidity post:
An enduring truth about financial regulation is this: Given the discretion to do so, financial regulators will always do the wrong thing.
Steve touches on several of the themes I tried to articulate here, and he does a better job explaining the motivations of each of the players.
However, I think (as I pointed out in the comments) that it is precisely when someone has an incentive to do the wrong thing that there needs to be some sort of sanction for that act or external reward for doing the right thing. For most of human history and in much of the present-day world, public officials are regularly bribed, and it is impossible to get anything done without paying under the table. The areas that have done the best to address this tendency have combined some sort of carrot (social expectations of clean dealing) with sticks (prosecutions for bribery). They have not merely said “public officials will take bribes” and left it at that. We can make it more difficult for our regulators to act against our interests. And we should.
I would also like to touch on a fairly innocuous post on the weak dollar that seems to have succeeded in dragging out some rather extreme conspiracy theorists and gold bugs. I commented there as well, and noted a peculiar coincidence among the “strong dollar” folks: they manage to simultaneously believe:
- The economy has gone off the rails, with high unemployment masked by dodgy reporting;
- “Necessary” imports, such as oil, are going to ruin us;
- We are not globally competitive;
- We should have a strong dollar.
If you believe the first three, why would you believe the fourth? High unemployment, lack of competitiveness in the production of goods and services, and an increasing portion of national wealth going to imports are all signs that the currency is overvalued. What other indicators would you need before you believed?
A falling dollar would make imported commodities more expensive and reduce American demand for these products. An electric car looks a lot better at $250/bbl oil than $50/bbl oil. An American car looks a lot better at ¥50=$1 than ¥150=$1.
Supporting a strong dollar means trying to preserve global purchasing power for those who have already accumulated dollar assets at the expense of those who will accumulate dollar assets – anyone who will try to work in the future. It’s the hallmark of kleptocracies; the Argentine junta kept exchange rates high so that its members and its associates with connections to the country’s resource base could convert their domestic position into nice houses in Sardinia. Ordinary Argentines watched their country lose all ability to make anything, as imports substituted the entire economy.
I suspect the strong dollar folks are missing a subtle nuance: they are trying to block an effect instead of dealing with the cause. Our economic situation is not good. We have underinvested in our productivity; our people are overlevered and undereducated. We spent the past decade building each other houses. There are high-tax, high-benefit countries that still make quality items, whether automobiles in Germany, precision machines in Switzerland, even ball bearings in Sweden. When was the last time you came across a product group where the US could fairly claim to make the best in the world? Perhaps still some pharma or software…but the list shrinks daily.
So long as this is the case, our currency will be weak – and should be. It is a medium of exchange and needs to convert our productivity to that of other nations. To refuse to recognize it is about as intelligent as the Black Knight insisting he hasn’t lost. All we are doing is bleeding our national wealth to China.
When we start living within our means, when our government stops needing to borrow more money every year, when our current account gets current, we won’t need to worry about revaluing our currency. It will do so on its own.
Stop worrying about the exchange rate, and start worrying about all the things that have caused the exchange rate.