The Case for Reducing the Value of the Dollar

Great Debates
1

Today I heard a story on NPR about China’s recent move to lower the value of the yuan.

Apparently, China linked the value of the yuan to the dollar a while back. The dollar, however, has been moving up against other currencies for some time now, which means the yuan has been getting more expensive too.

According to the story, that’s bad for China, because it hurts its economy by hurting exports. The US, however, has a trade deficit with China, and a cheaper yuan is likely to make the deficit worse.

Ordinarily, if a country wants to reduce the international value of its currency, it reduces interest rates. But interest rates in the US have been at or near zero for some time now.

The other way to reduce exchange rates is by making more dollars, a process the Fed calls “quantitative easing.”

It seems to me that if the US were to reduce the value of the dollar, relative to other currencies, US products would be more competitive on international markets: in other words, people in foreign countries would buy more of them.

Reducing the value of the dollar, then, would:
1.) Reduce the trade deficit;
2.) Stimulate the US economy;
3.) Create jobs in the US; and
4.) Reduce US government deficits.

The last (#4) needs a little explaining. When the Fed engages in quantitative easing, it creates dollars and uses them to buy Treasury bonds (US debt). That, in itself, does nothing to reduce US debt. But - unlike other owners of US debt - the Fed pays back the interest it gets from US debt to the Treasury. The Fed paid close to $100 billion to the US Treasury in 2014, for example.

Now, $100 billion is not a lot of money, but it does help. The US government deficit was $483 billion in 2014, for example.

The Fed has been hinting at raising interest rates for some time now. But wouldn’t it be a better policy to leave interest rates alone, and purchase more US debt?

2

Please stop. You’ve posted dozens of threads indicating you do not understand the New Neoclassical Synthesis of economics. Quantitative easing now would almost certainly increase inflation and any economic growth now would be at the cost of reduced economic growth in the future.

3

What happens to the cost of imports if we devalue the dollar? Which is the bigger number for the two countries (the US and China): imports or exports?

4

And, dudes on a fixed income, seniors living on their savings etc, would be broke. It’s a crappy idea, used by governments who are in deep shit.

5

Really? Because the Fed has been engaging in QE years, now, and the result has been historically low inflation. Here are the inflation numbers for the U.S. this year:

Given that the Fed has been engaging in QE for years, and the result is low inflation, how did you arrive at the conclusion that QE causes inflation?

From the New Neoclassical Synthesis of economics?

Could explain what you think that is?

Also, if you can’t engage substantively, please stop posting in this thread.

Thanks.

6

Imports cost more. I would have thought you would have known that.

If you look at the OP, you’ll see the answer to your other question: the U.S. has a trade deficit with China.

7

OK. Do you have any reasoning or sources to back that up?

8

The IS-LM model says that QE causes inflation. That’s an objective conclusion; either QE will cause inflation or the model (which is accepted by every mainstream school of economic thought) is wrong.

Inflation was historically low as a consequence of the failing economy. QE likely raised the rate of change in the money supply from substantial deflation to mild inflation.

9

Huh? It’s basic math and a basic part of Econ 101. You have X old dollars worth X. New dollars are worth .5 X.

Thereby savings are halved.

Reducing the Value is also called “devaluation”.

T*he result is hyper inflation. Many Americans don’t remember this type of inflation unless you remember the 1970s. I do remember it, and it’s not pleasant.

Many people will see their lifetime savings wiped out. This will primarily hit seniors and those living on fixed incomes.

Even those who have built up a nice nest egg for retirement will be hurt. As the prices for goods and services soar, they will find that they haven’t saved enough money to cover their accelerating costs.

But inflation will hurt all of us. Because of the coming dollar devaluation, the price of imported goods will rise. That means that we will be paying much higher gas prices at the pump.*

I dont see how you can suggest devaluation without knowing that basic facts.

10

Which has definitely not made many people either inside or outside China happy. China is basically grasping at straws with this move, so I don’t think we should necessarily be wanting to use them as a model for how to tweak our economy.

That said, certainly a high US dollar is an issue and is going to hurt us both in exports and in our short term forecast economic growth. I don’t believe there is an easy, silver bullet solution to this, and certainly haven’t heard anyone suggesting, seriously, that what the US should do is to create a huge amount more US dollars to essentially print our way out of our problems. Even leaving aside the internal issues of this, I’d have to go out on a limb and say that globally it would definitely be negatively perceived, and would probably set off a global recession. Also, it wouldn’t really help us wrt China because they have tied their currency to ours…if ours drops, their drops as well, the exact same amount. Obviously, if ours got so low as to be nearly worthless then the Chinese would most likely decouple their currency, but I’m guessing this would be rather like cutting off our nose to spite our face at that point. :stuck_out_tongue:

Certainly, if the US dollar dropped relative to other currencies (it’s not JUST the Yuan that’s the issue) it would help some of these things, but not doing it artificially the way you propose. You have to look at WHY the US currency is so high relative to other currencies right now, and why, say, the Chinese have done what they are doing…and whether, at this time of global economic issues it would be a good idea for the US to do something similar for our own short term (supposed) gain.

Right…this is a similar argument that folks who wanted Greece to leave the Euro and go back on their old Drekmah (that’s a load of Drek, ma!). Sadly, this is not a get out of jail free card, and it has real world ramifications.

Let me ask you something here…if this were a good idea, why doesn’t every country use it to fix these sorts of problems and issues? Seems like if it were the silver bullet you make it out to be then every country that has a strong currency would use the exact same things to fix it and get all those great benefits you listed earlier. Why don’t they? Are they just stupid? Or do they know something you don’t, perhaps? It’s a serious question btw…I’m curious what your thoughts are on why they don’t use this mechanism.

11

There are always swings and roundabouts. A high dollar not only makes imports cheap (thereby improving everyone’s quality of life though also reducing employment), it also makes government borrowing easier. In theory, this would be a good time for the government to issue new debt (though in practice it does that more or less constantly).

12

Yeah, it’s probably a good time to look into a longer term loan or maybe refinancing. Coupled with the expected large drop in the price of gasoline (well, until Peak Oil™ finally rears it’s ugly head and we all go back to hunting and gathering :eek:) when we switch over to winter mixes there are some benefits we get from a high dollar to go along with the down sides.

13

Point 1 is an accounting identity. A high dollar means a trade deficit.

I think 4 is also an accounting identity, except a high dollar implies either low personal savings, low public savings, or some combination. A lower dollar may mean more personal saving, but not necessarily more public savings. Or vice versa.

2 and 3 would be purely theoretical, no?

14

Wouldn’t devaluation lead to panic buying and the end of every incentive to have savings, invest in stocks, bonds, IRAs or funds(short term)? Wouldn’t the loss of trust in our economy be irreparable?

No one would ever want to be paid in dollars ever again. Wouldn’t banks make TRILLIONS just off of currency exchanges to other country’s currencies? Wouldn’t all their branches have 1930s style Bank Runs?

National economic policies led by bleeding its citizens and its investors completely dry seem… suicidal…

15

If you devalued the dollar to Zimbabwe levels, sure. I’m pretty sure that’s not what the OP is proposing.

16

I know just based off reading the news that China has been artificially manipulating their currency for years, keeping the value lower than it really is so the U.S. Will keep importing Chinese products at massive levels. Has this action been attributable to the problem the Chinese economy is having now or is it completely unrelated?

17

The U.S. trade deficit continues to be a severe long-term problem. The reason China is accumulating so much U.S. Treasury debt is not so much government borrowing as the fact that U.S. consumers are playing borrow and spend. U.S. imports exceed exports by more than $700 billion per year; total U.S. individual debt exceeds U.S. government debt actually held by the public. A devaluation war is a “normal” response to such. U.S. stocks (perhaps measuring how the market feels about the future yuan/dollar ratio) have fallen as the yuan falls.

Recently, the Dollar has risen against the Euro, Canadian dollar, and Japanese Yen. China’s yuan is still up compared with these other currencies; the idea of U.S. devaluation is not illogical. Certainly it would tend to reduce U.S. unemployment. (I don’t explicitly endorse OP’s suggestion. I have ignorances and more questions than answers.)

Still, with the above background it entertains to see many of LinusK’s detractors, as so often, show much less insight than he does, almost not seeing beyond “Cheap Chinese goods – Good!” and even confusing one-time devaluation with inflation. :smiley: Someone even had to [del]Godwinize[/del] Zimbabweize the thread. :smack:

ETA: Looking back I see the Zimbabweization was parody. nevermind.

18

Of course I knew that. Did you? If you did, why didn’t you include that in your analysis.

No, I don’t see the answers.

The thing is, the US doesn’t trade only with China, so the you need to look beyond that. What is the net effect on the economy of devaluing the dollar at this time? You only looked at one end of the spectrum.

19

What’s the point of making imports more expensive, and exports cheaper?

When you make exports cheaper, you’re selling the stuff you make at a discount to foreigners. When you make imports more expensive, foreigners are selling you stuff at a premium.

What’s in it for us to make our purchases of foreign goods more expensive, and our sales of goods to foreigners cheaper?

Whatever happened to buy low, sell high?

20

It increases the jobs in our export sectors (while, potentially decreasing them in our import sectors…what people never seem to grasp is even if we are buying goods from China it’s still mainly American companies doing the logistics, especially in the country, and selling the stuff as well). It’s all about tradeoffs really…there are good and bad points to having either a high currency or a low one. From what I gather, the current high for our currency is not a good thing, overall, for the US…but the factors that have put it there are pretty complex, and a simple solution such as the OP is touting doesn’t seem like it would be a good idea for the country, overall. Of course, if it was that easy then we’d have done it already, but as other posters have mentioned it’s not a single vector problem, i.e. we don’t just trade with China alone and our currency wrt other currencies are factors as well. At any rate, the OP hasn’t made a very compelling case for his simple, easy and silver bullet like solution, but personally I’m hoping that Hel or one of the other economics 'dopers wanders in and gives us their more knowledgeable take on this…or at least goes into some detail that’s currently missing.