July 11, 2014
Paul Krugman took off the gloves in his column today. He said that much of the opposition to the Fed’s low interest rate policy stems from the narrow interest of very rich people who earn lots of interest on their money. While we hear arguments, often from prominent economists, that low interest rates and other expansionary policies from the Fed risk hyper-inflation and other evil things, these arguments have repeatedly been disproven by the evidence. Krugman argues that the reason the argument against low interest rates continually reappears in different forms is the money that the 0.01 percent have at stake in protecting their interest income.
On its face this is a plausible story. Certainly the very rich have been especially prominent in making and backing absurd arguments that hyperinflation is just around the corner, or even already here, but we just can’t see it because the government is hiding it.
While we are on the topic of interests determining views on monetary policy, let’s take a step over to a different, but arguably more important issue: dollar policy. The key point here is that the value of the dollar is the main determinant of the trade deficit. The basic point is simple. When the dollar is highly valued in terms of foreign currency (i.e. it takes a lot of euros, yen, or yuan to buy a dollar) our goods and services become more expensive relative to the goods and services produced by other countries. This means we will import lots of items from other countries, because they are cheap to us, and they will buy few of our exports, because they are expensive to them. In other words, we will have a large trade deficit.
That is a big deal, especially now that even respectable economic types recognize the problem of secular stagnation. If we have a trade deficit of $500 billion (@ 3 percent of GDP), which we do, this is demand that we are generating in other countries rather than here. We have no simple mechanism for replacing this demand.
We could have large budget deficits, but that route is prohibited by the bi-partisan cult of balanced budget worshiping. We can try to have the Fed boost the economy with low interest rates, quantitative easing, and other such policies, but these paths have a limited impact on growth, at least as we have seen to date.
This means that we have no good route for filling the demand gap created by the trade deficit. This might lead us to believe that a lower valued dollar should be item number one, two, and three on everyone’s economic agenda. Yet, it rarely appears on anyone’s to-do list.
There are powerful interests who clearly do not want to see a lower valued dollar. Walmart has spent decades establishing low cost supply chains in the developing world. It doesn’t want to see the price of the goods it imports rise by 15-20 percent. The same is true of big manufacturers like General Electric who now have much of their capacity overseas. The Wall Street crew also like a high dollar, which makes it a bigger actor around the world.
The power of these groups explain why it is difficult to actually push through a lower dollar policy, but they don’t explain why dollar policy doesn’t even rate mention in most economic debates. To answer this question we have to turn to the fellow travelers.
These would be people who take vacations in Europe, or anywhere overseas. It’s not just any people who go on such vacations. It’s people who write news stories and columns, produce television and radio news, staff congressional offices, and who in other ways play major roles in public debate on economic issues. These people would see the cost of their vacations become more expensive if the dollar were to fall by 15-20 percent against other currencies.
Is it plausible that a congressional staffer would nix discussions by her boss of a lower valued dollar and smaller trade deficit because she doesn’t want to pay more to stay in a hotel in Paris or London? Is it plausible that someone who is richer than God would go ballistic because he can only earn 0.5 percent interest on his billions?
It might seem pathetic that millions of workers may go unemployed or underemployed, and tens of millions will lose the bargaining power to secure higher wages, because upper middle class professionals want cheap vacations overseas, but that is politics in America today. Hey, at least you can get a good deal on a vacation in Spain.
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