In the weeks ahead, BloggingStocks will take an in-depth look at the U.S. dollar's decline, its impact on the global and U.S. economies, as well as on job creation, trade, and investment.
Remonstrations about the weak U.S. dollar are getting to be a little bit like what Mark Twain said about the weather:"Everyone seems to complain about the weather, but no one ever seems to be able to do anything about it," Twain said.
Similarly, everyone seems to complain about the weak U.S. dollar, but no one ever seems to be able to do anything about it.
This time it was former U.S. Treasury Secretary Robert Rubin, who Tuesday told Bloomberg News that relying on a falling currency to increase exports isn't a "sound approach" and said policies should be implemented to strengthen the dollar.Rubin, who served as the chief economic adviser to President Bill Clinton, said policies should concentrate on curbing government spending, increasing revenue and addressing the soaring cost of government programs such as Social Security and Medicare, said Rubin, now chairman of Citigroup (NYSE: C) executive committee. Improving education, research and infrastructure are critical to increase productivity, he added.
"You put it all together and I think we can do very well economically and then we can have a strong currency,'' Rubin told Bloomberg News. "We're certainly not on those policy tracks right now.''
The U.S.'s trade deficit, federal budget deficit, low interest rates, and low GDP growth compared to the high-GDP growth rest-of-the-world has caused the dollar to decline against the world's major currencies. The euro, once worth 87 U.S. cents in June 2001, is now worth about $1.44. The British pound, once worth about $1.42 in June 2001, is now worth about $2.06. Those are substantial declines in the value of the dollar, with a myriad of implications.
Still, while Rubin's comments accurately identified several causal factors in the dollar's fall (government spending, inadequate government revenue, soaring Social Security / Medicare costs), he did overlook one compelling factor: over-consumption / under-saving by U.S. citizens. It a nutshell, many Americans are consuming too much and saving too little. Even before low-cost China started exporting thousands of low-priced goods, Americans were not saving enough. Further, that added consumption / lack of savings has increased the trade deficit, reduced the supply U.S. capital available for investment, transferred wealth overseas, and in the process help drive the dollar down.
Hence, in addition to Rubin's recommendations, programs that encourage Americans to save more would help support the dollar. However, as you might guess, the Democratic and Republican parties differ regarding the best way to increase incentives to save. Democrats have tended to favor programs that increase the disposable income of middle/lower income groups, including raising the minimum wage, and the use of tax credits, while Republicans have tended to favor more private-based programs (401K increases, IRA increases, and lower capital gains taxes, among other proposals.)
To be sure, many economists and analysts would agree that the other factors Rubin listed have certainly played a role in the dollar's decline and merit attention, but the boost for the dollar will not be as great if the U.S. savings rate does not increase, as well.
Further, the weak-dollar issue is not something that hid from policy makers: both Democrats and Republicans have known for a very long time what's at the root of the dollar's decline, and how to correct it.
Now, to paraphrase Twain, if only our elected officials in Washington would do something about it.
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Reader Comments (Page 1 of 1)
10-31-2007 @ 2:27AM
michael schneider said...
Nearly everyone agrees that people should save more. I wonder however why people aren't saving much now when there are many incentives in place? IRAs for example are a relatively new creation and they have helped some people but have they and other government incentives done anything to improve the overall savings rate?-- It seems they haven't because people are talking about the savings issues now the same way as they were 20-30 years ago. I suspect this may be more of an education issue than a problem that might be solved with government incentives- many people with money in IRAs now probably would have saved the money anyway and just moved the money from one place to another while those who don't save won't do it anyway. Part of it is probably cultural and can be observed easily-- for example, how many TV commercials encourage saving money as compared to encouraging you to spend like drunken sailors? Businesses pour fuel on the fire when they keep coming in with ads equating savings with spending-- like, save so much by buying this or buying that. And the matter gets more complicated when you consider that many people who spent wildly on real estate ended up with more assets than those who socked away their money in savings accounts and bank CDs. I don't know if just more 401Ks or IRAs are an answer to the national savings problem-- unless they are coupled with other solutions such as public service programs and education programs that could help instill a stronger cultural value to savings. Given our system of mass education it seems like something people should already know a lot about.
Dr. Michael Schneider runs several investment oriented Web sites including http://www.Barrelomoney.com and http://www.Barrelomedia.com.
10-31-2007 @ 7:21AM
hal c said...
Michael...you said,
many people with money in IRAs now probably would have saved the money anyway and just moved the money from one place to another while those who don't save won't do it anyway.
Doesn't that mean that savings have not diminished, only relocated to better saving options?
Also, why does it surprise you that commercials advocate purchases? After all they are paid for by people who are selling goods! By the way, I'm sixty and I don't remember seeing too many commercials 30 years ago advocating savings.
10-31-2007 @ 3:17PM
The_Fox said...
Well, one other very important but less-commented upon consequence of the falling dollar and rising Euro, is that global talent and labor (in addition to capital) is increasingly flowing toward the Eurozone rather than North America. I don't know if it's an economic truism that labor follows capital, but it certainly seems to be true at least in the case of professionals. In my fields of expertise (electronics and advanced computer networks), Germany is becoming such an attractive market leader that almost a half-dozen of my old colleagues-- based (and born) primarily in the USA, Australia and western Canada (or even from the UK, where the ridiculous debt crunch and the 1929-era bank closings are rattling everybody)-- have already emigrated to Germany or are in the process of doing it. Still others are considering it and will likely follow suit.
The reasons are pretty obvious: These highly-trained, hard-working professionals in science and engineering, or computing fields, have a choice of either 1. 85-hour weeks in a place like New York or San Francisco, Melbourne or Vancouver, for diminishing returns, a crumbling currency (in the case of the US dollar), ridiculous levels of outsourcing and layoffs of even very productive workers, failing schools and a spiraling national debt that our kids will have to pay off, or 2. more like 50 or 55-hour weeks in a German tech hub like Hannover, Karlsruhe or Bochum (or a smattering of smaller hubs in places like Austria, France or the Low Countries), high efficiency and remarkable innovation, more time and breathing space available for entrepreneurial pursuits, great schools as well as safe and invigorating community facilities for raising kids, and of course most of all, an income provided in the Euro currency.
The only semi-hurdle is language, but since those of us in technical fields like this are increasingly having to be familiar with German anyway-- even if we stay in the USA or Canada, due to the high-quality tech literature produced in German, just like in the previous century-- it's not much of a jump for us. People get the German software or courses as needed, then just engage in conversation and improve when they get there.
This process is only in its earliest stages, moreover. For people in technical fields, in any case, learning the relevant language and emigrating to the Eurozone (especially to Germany) provides enormous benefits economically and otherwise, and will do so even more as the dollar drops and the Euro gains.