Fat Steve's Blatherings

Wednesday, March 16, 2005

Economic Golden Oldies

      One of the problems with our great country is that people don't pay enough attention to history.

      An example is all the worry about how the dollar may fall, and how that will supposedly cause a great business crash in the U.S. . . .

      Bosh!  The "falling dollar" has been a great story of the U.S. since the late 'fifties, early sixties, when it was known as the balance of payments deficit.  You could look it up.  The dollar "fell" in the sixties (mostly, other currencies rose), it fell in the seventies, it rose and fell in the eighties, it got battered in the nineties -- and the country has gotten more and more prosperous throughout, despite rough patches here and there.

      One thing seldom mentioned in all this is that the dollar has become an unofficial second currency in many parts of the world.  We send dollars overseas, and they are held and used in various third world countries as a hedge against their own politicians' irresponsibility.  Those dollars are unlikely to come back suddenly.  Another thing to remember is that the world's figures for imports and exports don't cancel.  That means that we're either selling a lot of stuff to Mars, or the economic statistics aren't very accurate.  So the alleged problem is not nearly as big as some would have us believe.

      But pass those points by.  Suppose the Asians suddenly start dumping dollars and dollar-denominated securities. What would it mean?  It would disrupt the housing market for a while, as interest rates rose.  It might throw us into a mild recession.  It would certainly stimulate U.S. exports tremendously, as well as creating a great buying opportunity in bonds.  It would have mixed effects in world markets, because oil and other raw materials are priced in dollars -- the lower dollar would hurt European exports, as their prices to us and other countries that are pegged to the dollar rose suddenly, but Europe's raw material and import costs would drop, which would lower the manufacturing costs of their exports.  When Japan went through this in the seventies, the factors roughly cancelled each other out.

      One group of people who would really suffer would be the OPEC countries and some other raw material exporters.  They import huge amounts of stuff, and suddenly everything would be more expensive for them.  But the non-OPEC export economies would see their energy costs drop, helping their situation somewhat.

      OPEC could try to compensate by raising oil prices, but that would depress their sales, and stimulate oil production in the U.S. and elsewhere.  My heart bleeds.

      The other big losers would be the dollar dumpers themselves.  They'd have bought high and sold low, the classic prescription for bad investments.  That's because dollar dumping is a zero sum game.  This or that person, company, or country can refuse to hold dollars, but the world as a whole can't -- unless it buys immense quantities of stuff from us, recycling the dollars to the U.S. while stimulating our exports.

      The bottom line is that dollars are just pieces of paper that can be produced cheaply, plus numbers written in bank ledgers.  If the rest of the world doesn't want to buy things from us, but does want to sell to us, it can choke on the greenbacks while we send paper currency abroad in exchange for real stuff.  If foreigners do buy from us, they either purchase goods and services, or they buy assets.  Right now, they're buying assets, and suddenly dumping them will hurt their economies far worse than ours.   If they don't want to buy assets, they'll have to buy goods and services.  No matter which of the three alternative they choose, we can live with it.



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