11/12/2010

Big Boost from Dollar Decline

In the article, Big Boost from Dollar Decline, it indicates that the U.S. economy may experience a boost in growth from the dollar's decline in value. Bernanke signaled that the Central Bank was going to pump more dollars into the economy and the dollar fell by 4.8%. With this devaluation the trade deficit will decrease, which is an equivalent of 0.5 percentage point of growth each year. Applied in context in a real-life example, one could say that the U.S. needs to import less and that China needs to import more. When one country purposely devalues its currency then other countries want to do the same. Some countries do not like it when another country purposely depreciates its currency. China has warned the U.S. not to depreciate its dollar. I find this interesting because China does the same thing with its currency. When a country pursues this strategy it makes that nation's exports cheaper to other countries and other nations' imports more expensive to the devaluing country. Economic growth results from this principle, due in large part, because countries are spending less on expensive imports and are busy producing large quantities of exports that are bought by other nations. It makes sense for China to purposely devalue its own currency because it is known world-wide for its enormous volume of exports. MADE IN CHINA is a phrase that most Americans have seen for a long time on the products they buy.

4 comments:

als22 said...

The U.S. hopefully will see a boost from the devaluing of our currency. This combined with all of the free trade agreements that have been reached and announced should make some kind of impact. I think it will take the largest countries working together to take some of the stresses in the job markets and financially off of people to get things going in the right direction. I am anxious to see if the Fed hits a home run with this latest action.

Kimball said...

It is unlikely that devaluing the currency will provide any kind of long term sustained benefit for the American economy. It may boost it temporarily, buy only in return for more debt. It is true that the devaluation may decrease the trade deficit, but how wise is this when you are increasing our nation’s debt to accomplish it. In the same article, even Timothy Geithner pointed out that a country cannot "devalue its way to prosperity."

Baden said...

I agree with Kimball’s comment. Striving to devalue the dollar is not a long term strategic move. Why is our society so focused on short term benefits instead of long term sustainability? An article from CNN Money talks about both sides and makes an argument that a strong dollar isn’t bad, in fact it is good. Investors and manufacturers might disagree, but a strong dollar it argues forces companies to continue providing high quality, innovative products in order to compete with foreign competitors. A strong dollar provides purchasing power and helps keep prices down. A strong dollar is necessary in order to keep interest rates and inflation sustainably low. Low interest rates and inflation combined with a strong dollar encourages foreign investment which provides the necessary capital needed for long term economic growth. Capital we know is a productivity input. Something else I didn’t know before reading this article is that a strong dollar has provided the basis for essentially inertest free loans from countries that want the U.S. to provide them with a stable currency such as Panama. “Panama has a dollarized economy,” Sohn said. “We provided them with currency, and they had to give us something for it. It's like a free loan from Panama. At a 5 percent interest rate, we're [saving] $20 billion a year. That's not peanuts.” Our government policy makers should be cautious in their approach to making decisions that would devalue the dollar.

This is the link to the article I referred to.
http://money.cnn.com/2001/08/15/economy/dollar/

Dave said...

This is a statistical artifact.

What people want is goods and services.

What government measures, with GDP, is effort to produce goods and services.

A depreciation in your currency decreases the former and increases the latter.

Who - other than a masochist - would want that? This is why it is so important for the quasi-sadists to harp on this point - maybe the masochists will start to ask for it.

This sounds like hyperbole. It isn't.

Masochists are people who rationalize or enjoy being hurt. I'm not sure what else you'd call households that think making imported goods more expensive. Obviously, there is a small exception for people who make a good with a close imported substitute (that isn't many of them).

Quasi-sadists are people who like to be in control, and who are at best indifferent to the pain of others. What else would you call policy-makers and bureaucrats who want to pursue policies that hurt consumers?

Once again ... I think you've all fallen for the notion that changing a price can be beneficial on net. It can't.