Brad DeLong's Semi-Daily Journal: A Weblog

What is the expected impact of rising consumer prices for imported goods?

"Other countries have got to find some other source of growth to make up for the loss of exports or they will grow more slowly as a result of their appreciated currencies," says Stanley Fischer...

"They have got to ...." hummm. Or else .... what? How are they going to and/or who is going to make them. And what if they don't.

It seems to be saying that Americans are going to run out of money soon and quit bying so much foreign goods. Then foreigners are going to have to find other people to buy their stuff or buy it themselves to keep their economies functioning.

If they don't or can't then ... what?

Then their ecomomy collapses because the Americans who were bying their ouput with borrowed money have finally run through the inheritance and are now bankrupt.

You can find a time-series of our current account history below, with major events like the Plaza accord indicated. The trend is rather obvious.

http://infoproc.blogspot.com/2004/12/current-account-history.html

From the article below you can see that the Europeans and Japanese are still committed (for domestic economic reasons) to preserving the current dollar trading range.

http://nytimes.com/financialtimes/business/FT20041201_6538_160981.html

"Previous Japanese intervention campaigns have drawn criticism from the US. But the Japanese official was defiant. "We don't care what America says. We will defend ourselves," he said. He also criticised US pressure for China to float its currency, now pegged to the dollar, saying that it made "no sense" to blame China for the US current account deficit and that growth in many Asian countries remained dependent on exports to the US.

His remarks follow a blunt warning from Li Ruogu, the deputy governor of the People's Bank of China, that the US should not blame other countries for its economic difficulties."

But what about inflation? And higher interest rates? Does this gradual fall prevent those? I just don't see how interest rates don't go up when other countries buy fewer treasuries. And imports are to be more expensive, too, so inflation seems likely to follow.

Also, the comments look funny. There's no left margin at all.

Still, Japan has been trying to spur domestic demand for a decade with remarkably little to show for the dramatic lowering of interests and massive public works spending. How is Japan to trade places with America? Will we finally save and will they take to spending?

http://www.nytimes.com/2004/12/02/business/worldbusiness/02euro.html

Dollar's Fall Drains Profit of European Small Business
By MARK LANDLER

FRANKFURT - To get a sense of how fast the falling dollar can ruin a European businessman's day, talk to Udo Pfeiffer, the chief executive of a small German machinery maker in the industrial Ruhr Valley.

Mr. Pfeiffer's company, SMS Elotherm, builds machines that forge crankshafts for cars. He exports many to the United States and Mexico, selling them for dollars to manufacturers like DaimlerChrysler.

In recent weeks, the euro has been rising so rapidly against the dollar that Mr. Pfeiffer lost $10,000 in profit in the three days between shaking hands on a $1.5 million deal for a machine and signing the contract. The profit on these machines, he said, will be no more than $30,000.

As the euro and other currencies climb into rarefied territory - the euro reached another record on Wednesday, settling in New York at $1.3319, and the British pound rose to $1.9327, a 12-year high - exporters are expressing more and more fear about how it will affect their businesses.

For every familiar name like Mercedes-Benz or Louis Vuitton, there are scores of much smaller enterprises, making everything from crankshafts to concert pianos, that are being buffeted as shifting currency values make their products more expensive in the American market.

Some are even more dependent on the United States and other dollar-dominated markets than Daimler or LVMH of France. And they do not have the financial resources of these big companies to engage in complex currency hedging.

And dont forget that this has to happen in the context of a fairly major expenditure reduction. We are now spending a huge percentage of GDP more than we produce. If we reduce this gap gradually it wont hurt too much. But recent evidence supports the view that only pain, possibly severe financial pain, will make Americans and the US government spend less and save more. That means we could be looking at an adjustment of 2 or 3% of GDP over a relatively short time in order to make it work if things dont adjust "nicely".

This has implications for expenditure switching. As several developing countries could tell you, looking for a job in the sector expenditure is supposed to be switching to in the midst of a major depression is not easy. That J curve could look mighty deep if businesses are spooked enough not to want to invest. Standard models of this posit an economy small enough that the home country recession doesnt affect export markets. For the US that probably isnt true.

All of these are speculative problems though because there are no examples in history of the country with the world's reserve currency acting this irresponsibly. It is one thing for Argentina to do it. It is quite another for us. And what is worst is that the people in charge seem to have no clue that these are even issues.

In this whole discussion I have yet to see anyone mention the fact that US wages are stagnant, while costs continue to rise ( the inflation figures are a joke ). Perhaps the key to more saving might be some meaningful increases in wages, as well as reasonable prices rather than price gouging where ever one looks (hardware store price of a roll of painters masking tape $6) drug prices that have gone from a $5 co pay to a $40 copay in 5 years. There is nothing to save you idiots.

Brad,

Do you have a source for the 8 million workers figure?

Thanks.

What is interesting about Japan, is that the economic slump goes on and on but the Japanese people fare decidedly well. Japanese middle class families have come through the stock market crash, a decade of declining real estate prices and a consumer product price deflation, with little dislocation. Employment stayed high, wages sufficed to support families, families had large savings cushions, families stayed together and helped. The is health care support and pensions are intact. Besides, the declining prices made Japanese wages and savings worth all that more more.

In thanking about the inflation impact note that before you can have import substitution import prices have to rise enough to allow domestic producers to undercut foreign producers. At anything near current prices that can not develop. It will require much higher prices for imports before US suppliers will be competitive.
So, the adjustment in more likely to show up un a drop in consumption first and only with a long lag is the increase in production likely to emerge.

Economists generally do a very poor job of factoring these type of factors into their models, so no one can have much confidence in economic forecasts of how the adjustment will develop.

Note the chart at the bottom of the WSJ article.

It clearly shows the emergence of the Balance of Payments deficit was associated with the emergence of the federal deficit.

But, the people who came up with the "starve the beast" strategy never thought of looking at the US as an open economy. Of course, Bush is just like in Iraq-- do not bother me with the facts.

[By the way, this pop-up window looks v. odd. Small & with a huge banner at the top.]

Mandelbrot thinks that "market time" varies. If that's so, I think the market in US currency has probably begun to accelerate; the speed may defeat attempts to control the shift.

I wonder if currency traders have any intuitions about this they would be willing to share?

" eight million American workers have to move from working in construction and consumer services to working in import-competing and export manufactures and services. If this takes place over five years, few will notice--and those who notice will be pleased as they will be pulled out of their current jobs into ones that are likely to be high paying in industries that are already rapidly expanding."

However, that move bucks the wind of off-shoring. Now, it *may* be that few Americans have *lost* jobs to off-shoring, but it's got to be harder to increase job totals in categories which are more vulnerable to it.

Alternative view: a little economic nationalism?

The Bushies get a lot of grief over the budget deficit, and the US fiscal imbalances are obviously creating large problems, but some of the blame for this impending currency crisis has to lie with other countries.

Emerging markets want all to follow the East Asian Tiger model of export-driven development, and Japan and Europe want exports to save them from the costs of poor economic policies (corporate/banking reform and labor markets, respectively).

Well, they can't all export unlimited quanities of stuff to the US indefinitely. It simply wont work - but they've tried. Their tool is artificially suppressing their currencies, impoverishing their own citizens while keeping wages low. It means lots of easily-created jobs in countries where corrupt elites want to avoid financial transparency and reform, allowing those elites to postpone the day when they have to clean up the books and start delivering real liberalization (or where the elites lack the political will to enact necessary reforms).

US consumers plowed through all their savings, but interest rates haven't risen much. Why not? Easy credit - foreign countries have been unloading their dollars and suppressing US interest rates. We've got persistent unemployment and wages are stagnating (blunting the recovery), yet the trade deficit keeps widening? We had the biggest stock market bubble and crash in our lifetimes, destroying significant wealth and value and misallocating vast amounts of capital for at least five years, but the dollar only tanked in late 2003? It doesn't make sense.

We've spent the last year or so thinking that Chinese, Japanese, and other Asian interventions to hold up the dollar were doing us a favor. But that's absurdly altruistic - they were doing themselves the favor. What they've really done is increase our pain by prolonging the market distortions that are keeping US rates low, inflating the housing bubble, and preventing an employment recovery.

Ralph (first post in this set of comments) - it's not really clear what the consequences of higher prices for imported goods will be. A couple of economists from the New York Fed did a study several years ago indicating that Japanese exporters were willing to keep prices steady, sacrificing profits in order to maintain market share. Carl Tannenbaum, economist at ABN Amro Bank here in Chicago, spoke some time ago at a CFA breakfast and suggested that the next time we get some honkin' big fall in the dollar's value, American firms will use higher prices for competing imports to raise their own prices. Like the old Chinese curse says: "May you live in interesting times."

Economists prefer to think in terms of price adjustments rather than income adjustments. The presumption of full employment is a big part of this.

If we look at how these sorts of adjustments have happened elsewhere -- in the Asian crisis of the 90s say -- we don't see the type of expenditure shift Brad is describing so much as a rapid decline in incomes.

The structuralist approach still has a lot to recommend it.

There were 2 important items to consider today in addition to currency policy or lack of: 1. The firing of the President of the California state pension fund; 2. The use of a new hedge fund tactic that allows voting power in corporate affairs with no financial risk.

http://www.nytimes.com/2004/12/02/business/02calpers.html?pagewanted=all&position=

Calpers Ouster Puts Focus on How Funds Wield Power
By MARY WILLIAMS WALSH

The ouster of the president of California's public pension fund has raised questions about whether pension funds, endowments and other big activist investors will be able to keep wielding influence in corporate governance campaigns.

The change at the top of America's largest pension fund also underscores a growing awareness of the political and economic power lying largely untapped in the nation's retirement money - roughly $6 trillion - and an escalating dispute over how that power should be used.

The fund president, Sean Harrigan, was removed yesterday from the $178 billion California Public Employees Retirement System, known as Calpers, America's largest pension fund. He said his ouster was retaliation for the campaigns that he and others had been leading to change behavior at companies like Disney, Safeway, the New York Stock Exchange and Kohlberg Kravis Roberts.

Even when the initiatives failed they often pitted Mr. Harrigan, a union official, against business groups.

Mr. Harrigan, who had expected to lose his job, remained defiant. 'Removing one person will not reduce the strength, the commitment nor the resolve to fight for our members,' he said in a statement.

But other activists saw a much broader effort under way to change the leadership of many pension funds, which in the last few years have struggled because of market losses and increasing obligations to retirees.

Richard Ferlauto, director of pension investment for the American Federation of State, County and Municipal Employees, said Mr. Harrigan's ouster was an early success in a campaign to wrest control of pension money from a Calpers board now controlled by Democratic trustees and put it to work in projects more in keeping with Republican ideals.

'Clearly, we're seeing a Republican attack on public pension systems,' Mr. Ferlauto said. 'And California has been targeted in a very strong way.'

The 13-member Calpers board has been dominated by Democrats in recent years. Mr. Ferlauto said he thought that if Republicans could regain control, they would seek to make two fundamental changes: put an end to the corporate activism of Calpers and reshape the traditional defined-benefit pension fund as something more akin to a 401(k) plan.

'There will be a legislative attempt this spring to mandate that all plans in California become defined-contribution plans,' he said. 'This mirrors what's happening nationally, around Social Security.'

http://www.nytimes.com/2004/12/02/business/02place.html

Nothing Ventured, Everything Gained
By ANDREW ROSS SORKIN

A new trading tactic that could tip proxy fights and takeover battles has emerged from the shadows of the hedge fund industry, igniting outrage among some investors and corporate governance experts.

The tactic is a complex hedging technique that allows an investor to buy a voting stake without actually holding an economic interest in the company. While Wall Street has long speculated about such a tactic, it was not until this week that the first signs of such a strategy were disclosed amid a takeover fight for King Pharmaceuticals, a generic drug maker, by its larger rival, Mylan Laboratories.

The Perry Corporation, a New York-based hedge fund, owns seven million shares of King, hoping to profit from the spread between the price Mylan offered for King shares, $16.49, and King's actual share price, which closed yesterday at $12.42. If the deal is completed, Perry stands to make over $28 million, based on figures in a filing with the Securities and Exchange Commission on Tuesday.

Perry appears to have set up a sophisticated swap trade with Bear Stearns and Goldman Sachs so that it now controls about 10 percent of Mylan's votes, with limited or no exposure to fluctuations in Mylan's share price. While the language in the filing is opaque, Perry seems to have accomplished this by buying 26.6 million shares of Mylan while having Bear Stearns and Goldman Sachs sell the same number of shares short, removing any risk for either side.

The move, which leaves Perry as the largest, if indirect, shareholder of Mylan, could help ensure that Mylan receives enough shareholder votes to approve the deal for King at a time when the next-biggest shareholder of Mylan, Carl C. Icahn, is trying to block the merger.

If other investors were to employ the same trading method, it could have far-reaching implications on corporate elections and shareholder votes because sophisticated investors could effectively buy shareholder votes without putting money at risk. There has been talk on Wall Street that similar tactics may have been used in the 2002 proxy fight over the $24 billion merger of Hewlett-Packard and Compaq Computer and the $1.5 billion acquisition of MONY by AXA of France this year.

'It's a little scary what is going on here,' said Nell Minow, editor of Corporate Library, an independent research firm specializing in corporate governance. 'You're allowing someone to manipulate the market. It undermines the whole concept of linking ownership and control. It is not illegal, but the question is, 'Should it be?' I say, 'Yes.' The vote should accompany some kind of underlying interest.'

A few people here have mentioned that the prices for imported goods will rise. I just wanted to point out that rent, food and health insurance are BY FAR the biggest expenses for most individuals.

Umm, Silent E, did you just now figure out that no country is altruistic? Or that other countries might have different economic interests than us? It's precisely because other countries can not be assumed to be willing to take one on the chin for us that we should never have allowed such a massive increase in the federal defecit. We've kept to a strong dollar policy for a long time, we've moved a ton of manufacturing jobs offshore (remember Springteen's songs on the subject from the Reagan era), and other countries responded by increasing their export sectors. Now we need to move to a weak dollar from all the debt we have, but the people who hold that debt are the last ones who want that to happen. Blaming China and Europe for not willingly losing a lot of money to help us out only shows how little you understand the market. The first assumption for operating in a free market is that everyone is out for themselves - that's where Smith's invisible hand comes in.

Er, uh, there's just one teeny problem in all of this: The U.S. essentially has NO manufacturing left. Import prices can rise to the stratosphere, and the price of U.S. exports can drop to half that of good produced anywhere else, but since we don't PRODUCE anything here, what difference does it make?

The most likely outcome would seem to be spiraling inflation followed by global recession/depression. If the U.S. appetite for imported goods collapses as prices skyrocket, the remaining markets for China, Japan and the rest become vanishingly small (by comparison). Their manufacturing bases will have to lay off millions as demand for their goods collapses. At that point, even if the U.S. manages to crank up some home-based manufacturing, who's left to buy it?

Thanks, Bush! Amazing how one asshole can bankrupt an entire planet.

If this takes place over one year, it becomes a big problem: you can fire eight million people in construction and consumer services in an instant, but creating and expanding the organizations to employ eight million more people in a particular slice of industries takes a long time.

There is no way in hell that 8 million exporting jobs can be created in the US as long as there is 100 million unemployed Chinese & lord knows how many unemployed/underemployed Indians/Pakistanis.

PS. who is going to buy our export goods?

The biggest problem is that there IS no possible domestic substitute for our biggest import: oil. The problem is that as the dollar declines in value, the cost of oil will go up. Since oil is necessary in order to manufacture goods, this means that the cost of manufacturing goods will go up, thus offsetting the increase in the cost of imported goods caused by a weaker dollar. There is a crossover point somewhere in this equation due to the lower (relative to the world) relative costs of other inputs to the manufacturing process, but that crossover point is pretty low (i.e., the dollar would have to fall WAY low before it becomes more economical to manufacture goods locally than to import them).

Note that this same equation also applies to the Chinese, since they buy their oil in dollars also, but the Chinese are already swimming in dollars. Indeed, the Chinese get back most of the dollars they spend on oil because the Arabs send the dollars right back in exchange for Chinese manufactured goods. And because China does not have a market economy but, rather, a slave labor economy, they can price their goods arbitrarily, as long as they get more dollars from the outside than they need in order to buy the outside inputs (primarily oil) for the goods.

The end result: Goods will become more expensive, the American standard of living will fall (more), and the sheeple will go "Rah Rah G.W.B.!" and vote Republican.

- Badtux the Oily Penguin

Uncle Jeffy, thanks for addressing my question. It seems clear that even in recent "normal" times, overseas firms do indeed sacrifice profits to keep market share and accumulate dollar balances. However, I assume there has to be some limit to this, especially if there is a serious prospect that the dollar might lose its international place of honor as a "reserve currency." Many people seem to believe that will just NEVER happen. But it seems to me that, on the contrary, Bretton Woods and other such turning points ALWAYS eventually happen. Is it reasonable to assume that the basic status quo will continue approximately forever?

It's as if we are in a group of people stumbling around in the dark, and if anyone dares to turn on a flashlight, there's a sudden reaction: "Get that guy!" and they rush to jump on top of him and put out the light, instead of using the opportunity to look around and get their bearings.

That kind of attitude just can't be a good sign, and it makes me wonder if we really are in serious trouble.

Bucker Head: "A few people here have mentioned that the prices for imported goods will rise. I just wanted to point out that rent, food and health insurance are BY FAR the biggest expenses for most individuals." ---

That's right (and you can subsume utility bills in rent, and out-of-pocket healthcare expenses with healthcare insurance). But note that a number of foodstuffs and energy sources (oil!) are "imported materials" that figure into the categories you quote. Fuel prices correlate quite well with utility bills, and with goods distribution cost. General inflation caused by rippling effects of import cost increases will affect rents and healthcare, and other non-discretionary price categories, also quite soon.

"Our models are not very good at incorporating the disruption caused by the sectoral shifts created by rapid expenditure-switching, so we have a hard time thinking about this. But it is a serious worry."

Next discussion on free trade, I'll try to remember to post this quote.

Um, oil is a small part of the price of most goods except motor fuels and plastic. Shipping stuff around uses much less diesel than laborers burning gasoline commuting to work. Recreational users are the primary uses for oil.
Oil and energy don't have that much to do with each other, really they don't. Look at the breakdown of products at refineries. Even the oil powered concrete kilns have mostly switched to used motor oil and natural gas and the resid used for some power production and ship bunker fuel is not otherwise usefull.
Coal production (electricity production) can be increased dramatically using relatively small quantities of oil as diesel. Only a small fraction of the percentage of oil consumed in the US is used in coal production, and only a slightly larger small fraction is used in coal transport.
To put oil use in proportion, reducing highway speeds to 55 miles per hour will offset the entire nontransport sector for oil. Reducing recreational transport use to reflect a higher gasoline price will offset far more oil consumption than reducing highway speeds.
Oil imports becoming much more expensive is an economic and political problem. It is not an industrial and military problem.

Derelict: It is simply untrue that the US has no manufacturing (capacity) left, or that it doesn't produce anything. Sure, it produces (ever?) less, and by virtue of that diminishes its capacity to produce if ever so slowly (by way of people, business ties, "institutional memories", actual facilities etc. getting out of shape and breaking up, making it difficult to restore prior production processes and quality). That not only in physical manufacturing, but also "manufacturing" of science and "soft wares" -- software and other R&D products.

The shorter-term problem that I see is not that of manufacturing competence, but the dollar cost of imported material & energy inputs, and how they will compete with the staples the population needs to sustain itself.

I'm glad to read concern about massive shortrun dislocation in labor markets, i.e., huge layoffs.

I'm more concerned after reading the post at Liberal Politik, which argues that liberals should favor the national sales tax instead of a progressive income tax because it will reduce federal tax revenues and force the GOP to reduce defense spending.

This scheme was tried during the Reagan administration, as explained by an indiscreet David Stockman in his infamous interview with William Greider. The Reagan strategy was to crowd out social spending by shrinking the federal budget. This would work by keeping pressure on Congress to maintain high defense budgets to allay heightened public fears of the "Evil Empire", fears which Reagan was all too happy to aggravate and which the nefarious "TEAM B" intelligence bureaucracy fed with bogus reports of Soviet capabilities.

Reagan proceeded for the rest of his administration to submit budgets that eliminated social programs or reduced spending on them to the point of futility. Fortunately, Congress restored much of the social program spending loathed by the GOP, but under Bush II, with solid Republican majorities in both chambers of the Congress, the results won't be so kind to the poor, the sick, the elderly, the injured, the unemployed, and the uneducated.

Other 'reforms' proposed by the Bush/Rove administration will shift overall taxation from capital to labor, continuing a trend from the Bush's first term.

As many Republicans have frequently and indignantly pointed out, a tax on any activity is a disincentive to its continuance. But in the case of payroll taxes, people still have to work to eat and to buy what was called 'stupid toys from China' for their children, and other foolishness, like health care, school books, and gasoline for their cars so they can drive to the two and three jobs they hold down to make ends meet.

Meanwhile, George Bush, Karl Rove, and their friends pay no tax on their investment income while enjoying other riches free of the pesky 'capital gains' tax. Buy rare wines, sell them at substantial profit, pay no tax. Nice work if you can get it.

Meanwhile, the average working family, which hasn't seen an increase in their real purchasing power in thirty years, and now has both parents in the workforce to earn what one did in 1972, and can only buy 'stupid' products from China because the dollar is dropping like a stone, have to pay a national sales tax of 23% in addition to the same (or higher) state and local taxes as they've always paid for the bulk of the government services they 'enjoy' at home: paved streets, inadequate schools, police and fire protection, etc., etc.

This is NOT a policy which I consider forward-thinking, compassionate, responsible, or effective. It will not curb federal spending on defense, which is the only form of Keynesian policy the GOP will tolerate (it is profitable to certain quarters in ways which social spending can never equal), and will increase the burden of public service costs on those who have seen the least improvement in their real purchasing power or living standards since 1970.

No thanks. I've seen this crap before and I didn't like it then. I like it even less now.

"The biggest problem is that there IS no possible domestic substitute for our biggest import: oil."

Conservation, which is easy for the USA because we are so inefficient, would make a big difference.

Brad and Derelict both seem to think of export industries as industries. But as I understand it, our main exports are services. Given the lack of unions in office work, the prevalence of temp work, and the routinization and de-skilling of many traditional professions (bookkeeping, customer service, even typing), I don't see why these industries will necessarily pay any better than WalMart.

Thinking more broadly, the U.S. also "exports" via tourism (at last, more German tips for our highly paid dishwashers!) and our educational system (overseas students to pay my teaching assistant salary). Problem with these is that in the Ashcroft era, the U.S. has become considerably worse for travel and study.

One high-paying American export is primed to boom in the current environment. I expect DynCorp's mercenaries to be happy with their improved capacity to compete against the British, South African, and Nepalese who have run the industry in the past.

There are plenty of substitutes for oil, many with additional permanent side-benefits. With a low enough discount rate, energy efficiency is almost always cheaper in the long run than energy generation. Building and industrial energy efficiency is pretty good in the States, but not compared with Canada or Japan. As I sit shivering in my uninsulated apartment with leaky, single-pane windows and an unblockable fireplace, I wonder what ever happened to the federal aid for low-income housing energy efficiency. Then I remember that it's been slashed year after year.

Passenger vehicle energy, which uses over a third of our nation's oil supply, is ridiculously inefficient. Aside from the well known difference between a Prius and a Hummer, there is also the fact that most vehicle trips are mandated by our anti-free-market land use policies, not by inherent consumer demand. If our cities and towns were allowed to develop to accommodate the number of people who want to live in dense, walkable neighborhoods, we could eliminate millions of vehicle miles a year. Urbanist planner Peter Calthorpe claims to have done a study a few years back (I've never seen it) that found people on the urban side of the Berkeley hills drove 8,000 miles per capita per year; on the suburban side they drove 32,000. Regardless of whether his numbers are exactly right, it's clear that urbanity alone could save a huge amount of fuel.

Then there are other efficiency strategies. The single biggest energy user in the country is the U.S. military. My source on this is suspect, but I've read that jet fighters can use up to 16 gallons of jet fuel per mile when running afterburners. If that's even the right order of magnitude, it shows that our government's use of the military for every project is among other things a huge waste of gas.

Feel free to check out my blog for more rants about oil and energy more generally. Lately, like many people, I've been hung up on currency. But mostly from an energy point of view.

If previous history is an example, it will be VERY abrupt, like Soros "breaking the bank of England".

Figure under 6 months, and maybe under three.

Any mathematicians familiar with something called "Catastrophe Theory", and its application to economics?

I under stand the folded paper analogies, but as they apply to economics, I am unsure.

Uh, can someone explain how the current decline is "gradual"? There's a legitimate argument that it's not DISCONTINUOUS, but 10% over 3 months against the major currencies isn't exactly "gradual."

Padraig, no I was not born yesterday.

The dollar is going down. Several commenters and blogs have pointed out that foreign purchases of US assets (mostly government obligations) are holding up the dollar, and that but for those purchases, we would have seen sharper devaluations already. The Administration says it is committed to a strong dollar policy (although it does nothing to support it).

My point was that those foreign interventions are NOT good for us. American value and wealth has already been lost in the bubble; propping up the weak dollar will only make the eventual adjustment that much more painful. The dollar SHOULD fall - the markets pissed away a huge pile of money in the tech bubble and Bush pissed away the rest with the tax cuts.

My point: So why isn't there more outrage over these foreign currency interventions? (Beyond the pro-forma jawboning for China to float their currency, that is.)

And, on a related note, if someone offers you a loan at an absurdly low rate, why not take advantage of it? That's what the US is doing now: if you think the dollar should be (and will be) 30% lower, then every day that it remains high (and inflation and interest rates stay low) is another day to borrow far more cheaply than any sane person would let you and to buy foreign assets and goods. Recall, foreign central banks are the ones setting the price now, not American consumers and businesses. It's not our expectations about currency values that are misalligned, its theirs, and perhaps the best response is to take advantage of them?

spencer: it's nice to see you back. I've always enjoyed your comments.

Aah, it's Polanyi and the Great Transformation again.

Matthew, Mandelbrot has looked at it some; see his *(Mis)behavior of Markets* for a relatively non-technical introduction to his work; the more technical work, which I haven't read, is *Fractals and Scaling in Finance: Discontinuity, Concentration, Risk*. But it is all still very uncertain, so far as I know, and far from large-scale application; Mandelbrot ends *(Mis)behavior* with a call for research funding. I suspect we are shortly going to know much more than we want to about it.

Extended list of cites at: http://www.math.yale.edu/mandelbrot/webbooks/wb_fin.html

For slothrop:

No. of new entrants into labor market = 140,000 per Month (Approx.)
Time Horizon = 5 Years (from Brad's argument)

140,000 * 5 * 12 = 8.4 Million (Approx.)

It's not our expectations about currency values that are misalligned, its theirs, and perhaps the best response is to take advantage of them?
Posted by: Silent E at December 3, 2004 07:59 AM

would it be wise?

what happen if china says 'we will dump the treasuries in the market. The entire half trillion worth and make your economy sink at the cost of little pain in our side. Now hand over Taiwan'

I think everybody is watching china now, they are the biggest player that can shove around dollar.

What are the current models for sectoral shifts and (rapid) expenditure-switching?

Brad says the models aren't very good, but I don't even know the models he's talking about.

Can someone please point me in the right direction?