Request: The Dollar

The people want discussion of currency prices: "I'd like a bit of coverage on the policies that have made the U.S. dollar so weak, what either candidate has to say about those policies and the dollar, and the impact that the weak dollar has had on the price of a barrel of oil." And also, because it's actually related: "I'd be interested to see more attention given to the future structure of the US economy, particularly whether we will continue to do any manufacturing at all. Everyone talks about specific policies like NAFTA or the FTA with Colombia, but a wider perspective would be worthwhile."

My understanding is that the right way to think about the currency situation is that for a long while the value of the dollar was being kept high by the fact that foreigners were eager to invest in American assets. This strong dollar was good for Americans looking to take a vacation in Europe, and also made it cheap to buy things made abroad. Consequently, we found ourselves running a large trade deficit. Usually a trade deficit leads to a weak currency which leads to a reduction in imports and a rebalancing of the deficit. But because foreigners were buying American assets, it didn't happen, and Americans kept buying foreign-made goods (indeed, this is part of the reason the PRC was investing in so many American assets) and the deficit stayed high.

More recently, this process has halted. The dollar has declined in value, our imports of manufactured goods have slowed down, and we've started exporting more. Indeed, employment in the exports sector has offset a ton of the lost jobs in the building trades and prevented our economic problems from being worse than they were. Our trade deficit remains large mostly because we import so much oil (oil-exporting countries tend to plow the money back into western assets):



In the long run, I think we should expect Americans to continue manufacturing goods. The idea that manufacturing was shedding jobs primarily because of trade with low-wage countries is something of a misunderstanding. There's less cheap labor in Europe than in the USA but there's plenty of manufacturing over there -- rich countries just tend to manufacture higher-end goods. Even during the manufacturing drought, Americans were still "manufacturing" plenty of buildings. But the economics of cheap mortgages + construction boom + strong dollar + large trade deficit weren't sustainable over the long run and now we need to rebalance toward manufacturing fewer buildings and more stuff to sell abroad.

That will be fine over the long run. The problem is that the short-run involves lots of foreclosures, unemployment, income drops, etc. and the policy challenge is to make the short-run as short and painless as possible.