OK. From Wikipedia:
You describe IS/LM as an “objective fact”. Hicks - the guy who came up with it - describes it as a “classroom gadget”. Are you sure you understand IS/LM?
The same thing that happens any time you won’t buy above a certain price but others will, or won’t sell below a certain price but others will. Or, to put it another way; when you make exports cheaper, you’re widening the customer base for your products. When you make imports more expensive, you have more sellers interested in doing business with you.
There’s a sweet spot of price vs. customer/seller base that can go too far in either direction and hurt your cost effectiveness. Selling your old pickup for $10 wouldn’t be of much use to you, but neither would trying to sell it for $1,000,000 be.
This is from last year, but:
US oil production has been rising for years, which is part of the reason why gas prices have been so low for so long. Unfortunately, [low oil prices hurt US producers of oil](Falling oil prices may be a bonus for consumers. But it not such a blessing for those extracting oil and natural gas or constructing the pipelines to move those commodities. For producers, cheaper prices mean either less profits or even losses, which leads to a slower national economic expansion.
In other words, right now oil supplies are outstripping demand and causing commodity prices to fall. At the point in time they would dip below the point to where producers could profit, they most likely stop digging — and stop hiring, or even start firing. That’s economics 101.).
To put it differently, low oil prices are hurting American companies. When it’s not profitable to explore or drill for oil in the US, companies stop doing it.
That’s great news for the Saudis - some have even speculated that the Saudis are deliberately flooding the market, to put American companies out of business - it’s not such great news for American companies, or Americans who work at those companies. Nor is it good news for people who want America to be energy-independent. Or for environmentalists, who’d like to see people using fossil fuels more conservatively. Or for people who’d like to see the US develop alternative energy sources.
Higher gas prices might be a small price to pay, if you’d like to see America less dependent on the whims of OPEC.
I guess my bigger question is this: Do you think the US trade deficit with China is a good thing? If it’s not a good thing, why are you opposed to a policy that would reduce it?
If lowering the exchange rate of your currency is a bad thing, why is China doing it?
The highest inflation rate in the US was in 1980 (14.7%). Do you consider that “hyper-inflation”? What do you think caused the high inflation rates in the 70s/early 80’s?
And here we see affirmation of my point! Poster can perhaps be forgiven for the snotty “Did you?” since it was in response to LinusK’s own sarcasm. Still, the “why didn’t you include that in your analysis” is amusing since here LinusK has thought more than some of his detractors.
And the “US doesn’t trade only with China” suggests that LinusK’s detractor overlooked that the dollar is still way up against the Yen, Euro, etc.The Yuan is still expensive against those currencies.
Returning to OP, I don’t pretend to know what FRB policy should be, nor what future interest rates will be. But clearly the strong dollar does put pressure on U.S. employment opportunities.
Pffft. I’m perfectly willing to be convinced that we should devalue the dollar. Never said I wasn’t. But I’m not going to do his homework for him. He needs to tell us not only how great it will be for exports, but how bad it’s going to be for imports, and whatever other effects there might be. So far, he hasn’t done that. If you want to carry his water for him, you can do the analysis.
You might have a sneaking suspicion about wether the US is a net exporter or net importer and whether one of those is going to have bigger impact on the economy, as a whole, than the other.
Nice points. *What do they have to do with my reply? * Whether or not “devaluation” is a Good Thing or not, it wills hurt those with cash savings and those on a fixed income. You seem totally unaware and even doubtful of this basic, Econ 101 fact. Since you don’t know anything about the potential downsides, your idea is to be dismissed out of hand.
He has claimed to be totally unaware of basic Econ 101 issues with devaluation. How then, can he “has thought more than some of his detractors”?
If lowering the exchange rate of your currency is a great thing, why isnt the USA doing it? Why not the whole EU?
China is a Communist Dictatorship in deep economic shit. America is the greatest Capitalist Democracy in the history of the world. Hmm, which to emulate?
And so does a weak dollar. If it were that easy, every country in the world would just devalue their currency and: presto, EMPLOYMENT!! Why do you think this doesn’t happen?
The key is to find the right balance between the two, and that is going to vary depending on the type of economy the country we’re talking about has. The idea that China and the US are comparable and so whatever is good for one is good for the other is laughable on the face of it. Our economies have almost nothing in common, except that they are interdependent on each other.
China has been manipulating it’s currency for years.
What Is Currency Manipulation:
China’s economy was growing at double digits, while it was engaging in exchange rate manipulation.
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.
There is an easy solution: Fed purchases of US debt.
The Fed has already created huge amounts of US dollars. (Part of the reason why our economy has gone from 10% unemployment to about 5.3%.) I’m suggesting doing more of the same.
I’m not suggesting the Fed purchase infinite amounts of US debt… just, say, another $3 trillion or so.
China’s decoupled the yuan from the dollar because the value of the dollar keeps going up. A higher exchange rate for the yuan hurts their economy, because it hurts exports.
The dollar keeps going up because the US has such a (relatively) healthy economy. The US has a relatively healthy economy because we reacted to the '08/'09 financial panic with unprecedented Federal deficits (at least since WWII) and with huge increases in the Fed’s balance sheet, also known as “quantitative easing.”
I’m one of those people. Greece would be better off with its own currency (like what we have) rather than clinging to the euro.
The US has used it: quantitative easing. And it worked just fine: we got a 50% reduction in unemployment, combined with historically low inflation.
Other countries haven’t used it. They’ve turned to austerity, instead. Things haven’t worked out so well for them.
As for why, that’s a complicated question. I’ll try to give the short version.
One is that many western countries are burdened with an economic theory (which I’ll call economic neoliberalism unless or until I come up with a better term) that’s both harmful and wrong.
Anther reason is that, economic neoliberalism helps the rich at the expense of the middle-class and the poor. Since the rich usually have a disproportionate effect on government policy (and even academic research, since they fund it), that might help explain why so many countries continue to cling to it, despite the fact it continues to fail.
Sorry, I fucked this post while trying to fix some links. I’ll try again tomorrow.
Especially if it’s borrowing at 0% (through the Fed). Little known fact: deficits have been shrinking dramatically over the last several years. The 2009 deficit (Bush’s last year) was $1,413 billion. The the 2014 deficit was $483 billion. The strongest indicator of debt is not Federal budgets (most of which is non-discretionary, anyway): it’s the strength of the economy. With unemployment still too high, stagnant wages and 0 inflation, we need higher deficits, and more Fed purchases of US debt.
I wanted to come back to this, because it exposes a popular myth: that each dollar added to an economy automatically cheapens every existing dollar. It’s false for several reasons, but I want to focus on one: a dollars added to the economy can - and as a general rule, will - increase employment. So long as a new worker adds at least as much in new goods and services as the increase in dollars, the result will be more goods and services for everyone to consume. Inflation is not a maters only of the number of dollars, but of the relationship between dollars and the amount of stuff available in the marketplace. So long as the marketplace is able to keep up with demand, the result of adding dollars will be more employment and more real wealth - not inflation.
Sigh. But you still ignore the harm it does to cash savings and those who live on a fixed income.
False. Low oil prices are hurting American OIL companies, low oil prices are a boon for every other sector of the economy.
You still have not explained why you are missing some of the basic concepts of Econ 101.
I’m not sure what “winter mixes” are, but despite its widespread popularity, low gas prices have a definite downside.
I’m not a peak oil person (in the sense I do it’s coming anytime soon) but oil is not a renewable resource, which means it will run out someday. It’s also a major contributor to pollution, and cheap oil tends to get in the way of some some extremely worthwhile projects - like affordable mass transit, for example, and the transition to renewable energy. It also tends to add to traffic congestion, which is a massive drain on US productivity - and wastes huge amounts of our time. To the extent that the cheapest oil tends to be concentrated in OPEC countries, it makes us vulnerable to extortion from those countries - like oil shocks that happened in the 1970s. Don’t get me wrong - I’m not some crazy anti-oil person. I just think that cheap oil as some important downsides, that some people don’t seem to recognize.
Yep. I’ll try and put it another way to see if it sinks in.
Right now, old man Bob gets $2K per month from his pension and Social Security, and has saved up $50K for emergencies. He’s disabled and can’t work any more.
Let’s say that right now, the market value of chickens is $1 per chicken. Right now, we can measure Bob’s income as 2000 chickens, and his savings are worth 50K chickens. But if the value of the dollar is cut in half, then now the market value of chickens is $2 per chicken. So then his income has been cut in half: only 1000 chickens per month, and his savings too have been cut in half to 25K chickens.
And he’s disabled, so he has no prospect of working (or doing anything else) to increase his income.
LinusK, how does your plan not totally screw old man Bob and those like him?
I’m not sure it’s an accounting identity. I’m not necessarily disagreeing with you. I’m asking for some clarification of what you mean.
I disagree about point 4. I think the U.S. can influence the the exchange rate the same way China has always done it. Or, for that matter, the same way Switzerland did. The U.S. central bank can simply purchase whatever amount of yuan it takes (using dollars, of course) to change the rate. Exchange rates work the same way any market does: supply and demand. If the U.S. demands yuan and supplies dollars, the yuan will rise, and the dollar will fall.
I disagree that 2 and 3 are purely theoretical. To the extent that there’s any such thing as empirical data in economics, the empirical data supports them.
The Fed has always bought Treasuries - which it does by creating new dollars. They dramatically increased those purchases beginning in 2009. (Here’s a chart, from the Fed, showing those purchases:
The total - since 2009 - comes to close to $4 trillion dollars.
There was no panic, of any kind, nor any bank runs. In fact, during that period, the U.S. economy dramatically improved.
First of all, no one is suggesting such a massive devaluation, so maybe we can stop with the panic scenarios?
Bob is screwed with his pension, sure, but Social Security would rise to meet the increased cost of living, so that part would be good. Since the big complaint today is that low interest rates are hurting old people with savings, he might actually do better.
Others would benefit. During the '80s inflation my not very big college loans became laughable, and I paid them off early because the payment was getting to be close to the cost of a postage stamp. Those with mortgages would see a decrease in their cost of living as salaries rise with inflation. We were giving out 10% raises at this point.
I’m not saying this is a good thing, but you can’t just focus on one segment of the economy who gets hurt while ignoring those who get helped.