Germany wants to take control of the Greek budget ?!

[angus]

How would we change the rate at which Americans save and invest?

Perhaps step one would be to stop massively promoting consumption.

Fair enough.  We have become a net importer of capital because Americans do not save enough to finance all the available investment opportunities in our economy.  Franzl and Fezzy are right about that.  Clearly, our government encourages this.  Bush, then Obama (both with the blessings of the Fed) have encouraged us to spend, rather than save.  With our leaders egging us on, you can't expect any serious change on this.

On the other hand, you could argue that the trade deficit is not a sign of economic distress, but of rising domestic demand and investment.  After all, the fact that we have become an importer of capital simply allows us to pay for imports over and above what we export.  I wasn't trying to get into a debate about whether we should or shouldn't encourage savings, but rather I was just saying that manipulating the currency (and imposing trade barriers, for that matter) will only make Americans worse off while leaving the trade deficit virtually unchanged.  When I took economics in school they taught us that the pressure normal market forces would adjust the trade deficits if left to their own devices.  (Yes, the books were all written by Republicans and Libertarians back then, but it made sense at the time.)

Personally, I like spending less than I earn.  At home we save.  My wife and I both work and we put away quite a bit every month.  I only buy cars outright, never financing them, which meant that when I was younger I always had a clunker.  I only bought a house when I had at least enough for a 20% downpayment and even now we pay an extra ten thousand each year over and above the mortgage, just to avoid interest as much as possible.  Also, I'd go into a panic if I didn't have at least a year's liquidity stashed away, but if every American lived by that motto would we be better off as a society?  I really don't know the answer to that question.

[Beet]

I was thinking more along the lines of how easily and recklessly a lot of people are given credit cards.

Ah, yes. Credit cards have definitely contributed to America's consumption habit. In the past few years, this kind of credit has been on the decline. Many of the worst credit card abuses were curtailed in the CARD Act. The total amount of revolving credit outstanding has also fallen substantially after years of fast growth. Credit card debt was recently overtaken by student loan debt as consumers' largest debt problem. So I think we have made progress on this front since 2007.

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Really? Why do you think that?

In economics, I think textbooks try to simplify concepts for students so that what is being studied can be properly focused on. Usually, the free market ideas are the most beautiful and elegant, and you can't understand the effect of government intervention without first understanding how the market would work without government intervention, so it makes sense to teach it that way. It is true that currency markets, like all other markets, adjust to supply and demand, and normal market forces in a perfectly free market should in theory self-adjust. For better or worse that is not what we have.

I am still not fully decided trade deficit is inherently good or bad for the United States, although I've been thinking about this question for years. It does make me uneasy for foreigners' claims on US assets to increase year after year as we import their capital. Additionally, it means fewer jobs. Many of the so-called investment opportunities for which we import capital, are not really good investment opportunities (the entire US housing bubble, for one). On the other hand I understand that a more valuable dollar increases our purchasing power, and that the effect of this often falls most heavily upon the working class, and that is an important consideration for any Democrat.

[angus]

Beet, I sense three questions here.  I'll take it CARLHAYDEN style,

1.  The value of a good or service is whatever you think it is.  The value of a dollar is not.  If the value of a dollar decreases, then the number of dollars you pay for a good or service increases.  Since you only have a finite number of dollars, it follows that that the utility value of the weak dollar policy is necessarily negative.

2.  To lower the value of a dollar on the assumption that if dollars cost less, then anything priced in dollars, such as Lincoln Continentals or MacIntosh 3G systems, will sell in a greater volume on the open market will benefit, at most, the few people who own those companies.  As for the rest of the public, see item #1.

3.  Trade barriers create price floors and shortages of goods, or they create price ceilings and surpluses of labor, or both.  (Yes, I understand that Price Theory is presented in a way that assumes several conditions.  Sort of like in Thermodynamics classes, ideal gas laws must be mastered before we consider deviations from ideality, such as dipole-dipole interactions and hydrogen bonding and the like, but in the end, after you do all that work to include the virial coefficients, you find that unless you have more than three significant figures to work with--and you never do in a real laboratory situation--then the assumption of ideality for atmospheric gases, except water vapor, works well over the broad range of temperature and pressure that you're likely to encounter in the course of a year on the surface of the earth.  It seems to be the same with Price Theory.)

4.  We haven't even really decided whether the trade deficit is ultimately a bad thing.  If the world ends today, and I owe you a hundred billion dollars, then I have come out ahead due to my wise decisions.  (Yes, that is probably a quintessentially a Republican viewpoint, but it is one worth considering if we're going to have this discussion.)  On the other hand, if our children our left landless owing to the fact that we have mortgaged all our assets to live comfortably, then we have two possibilities:  (a) that the value of the souls we have sold have brought our progeny greater wisdom and ability to control the Earth's resources in a way that benefits them, and, hopefully, all mankind or (b) that the value of our souls was so insignificant that our mortgaging of them only prolonged the inevitable servitude of our progeny.  I guess there's the third possibility that (c) none of us has any soul to begin with.  Only Time can ultimately answer these questions.  As I said, I'm not entirely decided on the question of the trade deficit in particular.

[Beet]

angus,

That structure does clarify things a bit. I have not much to say about #3, as I do not have a strong opinion on trade barriers; I think that in general, the assumption of ideality works well in some instances and not so well in others. My understanding is that some of the most highly developed ideal models of the free market have trouble explaining things like involuntarily unemployment. Society is generally too complicated to be explained by mathematics alone. Mathematics are relatively good at describing physical phenomenon, less so biological, still less so psychological and I think, least of all so social phenonena, which are at the very least an aggregate of psychological ones. That does not stop economists from trying, of course.

I will reflect on #4.

We are far apart on #1 and #2. On #1, I think you are missing a number of factors. Firstly, the value of a dollar to every individual is different. To Steve Jobs on October 3, 2011, the value of a dollar was nil. The dollar had nothing that he wanted, as it could not buy him an extension of life (at that point, he may well have traded his one extra day as a billionaire, in exchange for living 20 more years as a hobo). To most of us, the value of a dollar is equal the utility (to simplify) that we expect to get from it, which can be approximated as the inverse of the cost in dollars of the basket of goods that we want to consume, assuming that we are substituting wisely. It is different for every person, and it has more to do with the price level than the quantity of dollars out there, let alone the dollar exchange rate. I do concede that a lower dollar exchange rate can make you worse off; but my point is that you cannot make a 1-to-1 statement from a weak dollar policy to the dollar in your pocket. Many factors, including your own personal situation, your spending preferences, the price level, etc. come into play. Even less can you make the case that a weak dollar policy has a negative effect on your own personal utility, because your utility depends on many factors beyond even the value of the dollars you have, including your investment returns and interest income, your future wages, your employment outlook, more peripherally the condition of your family, friends and community, perhaps the availability of credit to you if you need it, the fiscal condition of your government, and the like.

To #2, I hardly even know how to respond. The first thing we point to is all the financial crises in the rest of the world that are the basis of our case. Whether one looks at Sweden, Argentina, Russia, Southeast Asia, the United Kingdom and France among others during the Great Depression, or indeed what is going on today in Greece and Spain and Germany and the like; It is clear that the main benefit of a weak currency is that it increases demand for labor and other kinds of investment that increase production in tradeable goods (as opposed to non income generating goods such as housing). It is much broader than the owners of Lincoln Continentals or MacIntosh 3G systems companies. With a strong labor market and rapidly rising wages, the public gets more and more flush every year, certainly compared to the opposite.

[Gustaf]

Angus, it should be pointed out that there are two effects going on when the currency weakens. One is that the price of American export goods fall abroad, leading to more exports. Secondly, the price of imported goods go up in the US, leading to less imports and more consumption of domestically produced goods.

Both effects lead to more domestic production. This helps keep up employment in the country. In this way, counter-intuitively as it may seem, I'd argue that currency devaluation is more fair - it spreads the cost of an economic downturn across society, mostly harming the upper echelons - those who go abroad on vacation or buy imported foreign goods.

Without currency devaluation a downturn will largely be shouldered by those who lose their jobs.

[opebo]

Had the Germans been required to return to a simple, agrarian lifestyle, and been broken into their original several dozen small countries, they would have been much less trouble.

We could have allowed the technical germans like Dr. Stranglelove to emigrate to the US as many of them did anyway.

[angus]

Beet and Gustaf,

You make excellent points.  You're probing the absolute limits of my understanding of these issues.  I had two economic courses in all my university years (macro and micro).  This is my limited understanding of the advantages and disadvantages of currency devaluation:

Advantages (most you have already pointed out): 

-exports become less expensive; more competitive to foreign buyers; consequence is that this provides a boost for domestic demand.

-more exports smay lead to an improvement in the current account deficit

-more exports and aggregate demand can lead to higher rates of economic growth.

Disadvantages (most I have already pointed out):

-inflation (imports more expensive; demand pull inflation; businesses have less incentive to cut costs because they can rely on the devaluation to improve competitiveness)

-purchasing power of US persons abroad is diminished

-it may put off potential international investors (maybe it makes them less willing to hold government debt because it is effectively reducing the value of their holdings)


I'd only add that in my own situation, which is that of a white-collar working class American who saves for retirement, enjoys spending money in the Caribbean, Latin America, and East Asia, and invests a modest amount in the marketplace, the strong dollar works well.  Think about it:  My wife and I get paid in US Dollars, so a higher value means more pay.  We do our own laundry and dishes and we rarely eat in restaurants, so I don't have to pay for this type of labor so higher value doesn't hurt me.  My house is full of foreign-made trinkets.  I own a German car and a Japanese camera and several Chinese televisions and computers, etc., and have been generally satisfied with them and would buy them again, so having large dollars compared to Marks and Yen and Renminbi doesn't hurt me.  Sure, I'd buy a US camera if I tried one out and it worked well.  One of my guitars was hand-crafted in Pennsylvania, but I also have a Mexican guitar and a guitar made in Idonesia, and they sound pretty good as well.  Our piano is a Yamaha, but I'd consider a Boston or an Essex for my next purchase.

My point is that we benefit from a strong dollar.  Like I said, common folks like me usually do.  Steve Jobs may or may not benefit from a strong dollar, but he doesn't represent the average gringo. 

[SUSAN CRUSHBONE]

Had the Germans been required to return to a simple, agrarian lifestyle, and been broken into their original several dozen small countries, they would have been much less trouble.

We could have allowed the technical germans like Dr. Stranglelove to emigrate to the US as many of them did anyway.

You do realize you are essentially advocating genocide here, right?

[Franzl]

Had the Germans been required to return to a simple, agrarian lifestyle, and been broken into their original several dozen small countries, they would have been much less trouble.

We could have allowed the technical germans like Dr. Stranglelove to emigrate to the US as many of them did anyway.

You do realize you are essentially advocating genocide here, right?

Opebo approves of genocide normally.

[Beet]

Good points, angus.

One issue that hasn't been touched on so far is how monetary policy is conducted. Today, generally when the central bank purchases government bonds it does so from a small coterie of large banks and the monetary base is expanded through these banks' deposits at the Fed. The money goes first to the innermost sanctum of the monetary system; from there, it is available to be loaned from the large banks to others; it trickles out. Inside-out, or Trickle-out, monetary policy.

One could imagine, however, the government creating money and simply mailing a $100 check to every household in America. The money would find its way back into the banking system as deposits, and eventually a portion of it would be used to cover banks' required reserves, and find its way back to the Fed. You could describe this as a more Outside-in, or trickle-in, form of easing. Of course, strict rules would have to be in place to prevent such a policy from being abused. For example, only implementing it if there is widespread deleveraging throughout the economy, to maintain the monetarist goal of a fixed growth rate in the money supply.