Could the Answer be to Devalue the Dollar?

[louis c]

Here's my question to the economically savvy DUers. Could we get out of this economic disaster by devalueing the dollar by half. In other words, tomorrow what if gold was $1,500 an ounce instead of $750?

What if exports were half as much. What if imports were twice as much, thereby making American goods more competative here at home and abroad. Chevy's would still sell at $23,000 but Honda's would be $60,000.

I know energy would jump to double, but $80 a barrel for oil doesn't seem so bad now, if we can put people to work. Wouldn't our debt be cut in half if we devalued the dollar by that much?

Wouldn't housing prices double and give Americans a feeling of wealth? Couldn't we then pump huge amounts of money into fixing our electric grids, roads, bridges and infrastructure. Couldn't the government then partner up with the auto companies to make fuel efficient cars and save jobs? Couldn't the feds send enough money to the states to balance their budgets? Couldn't we then start down the road to health care reform and a single payer, government subsidized health care system, thereby taking the burden off of cities and towns, states and big and small businesses?

I know some of the pitfalls. Food costs increase by huge amounts. Savings are cut in half. Fixed incomes are hit, but social Security has a COLA, so that might save them. I'm just thinking of a way out of this and maybe this is food for thought.

Am I all wet on this are is this a viable option?

[nebenaube]

1. how does that not translate to a 50% paycut? n/t

[louis c]

3. Because American products shouldn't increase

The current drop in prices doesn't seem like a wage increase now, does it?

[msongs]

2. penalizing people who work and save their money - whatta killer concept nt

[Idealism]

4. We are not a self-sufficient country by any means

If we devalue the dollar, I assume you mean by printing massive amounts of dollars, you will have to pay way more for commodities (like you mentioned) but they won't necessarily be linear to the value of the dollar. Food prices will skyrocket as well and we do not have the agragarian base like we did in the 1930s to sustain us. Even our domestically assembled cars will have to pay more for the raw materials they have to purchase to put the car together. Assembly plants outside of Fords Brazil factory aren't vertically integrated factories, with everything happening in-house start to finish. They have to get parts from outside sources, and those sources make those parts from raw materials, largely bought from abroad which will drive the price up. The US dollar is a reserve currency, and if we devalue ours, it will screw our debts to other countries, which will in turn devalue theirs to level the playing field. Its pretty pointless.

[louis c]

6. What's the difference?

If we run a trillion dollar deficit to spend money on the things I've listed, isn't that tantamount to devaluation?

[Idealism]

11. Theres a differance between inflation and hyperinflation

You can live with one, the other is unsustainable

[amandabeech]

39. We export a lot of food.

So long as our population doesn't get bigger, I believe that we really could be self-sufficient in food.

The difference would be in fresh, out-of-season fruits and vegetables, and in specialty products like French cheese and wine.

Our dollar is currently the reserve currency, but that could change since we'll be flooding the world with treasuries to pay for the stimulus packages as well as the two wars that we've been fighting.

Since the U.S. dollar floats and is not directly controlled by the gov most of the time, it will likely seek its level against other currencies that are not ordinarily manipulated terribly much, like the Euro, the Canadian Dollar, and probably the Brazilian real.

However, the Chinese manipulate their currency like there is no tomorrow in order to keep their export-led economy afloat and it is totally obvious. We've been complaining for years, along with the Europeans, but the Chinese ordinarily will not cooperate. The Japanese and Koreans do their fair share, too, but the Japanese yen has risen from $125 to the dollar to $93 to the dollar within the past year and a half, which is someone reasonable.

If the dollar fell, it would encourage using U.S. sources to the fullest (three shifts) and building new plants here. We might even *gasp* export parts elsewhere! Gee, what a thought?

If we depreciated, our outstanding debt would be worth a lot less because it is denominated in dollars. Frankly, that's how I see us paying the stuff off. The Chinese will be pissed, but I don't see how they can be much worse than they have been. They are getting a reputation for failing to understand that a deal means that both parties get something, not that the Middle Kingdom gets it all.

[rurallib]

5. So I am a person who saved and played it straight all my life

and you are asking me to accept that my savings and investments be worth half tomorrow? Is that what you are saying?

[marketcrazy1]

7. this would be called a DEFAULT

think WORLDWIDE DEPRESSION INSTANTLY!!!!! we may be forced into default if we keep going on they way we have in the past six months but to do it ON PURPOSE would be INSANE!!!!

[louis c]

8. 533,000 Americans lost their jobs last month

and another 200,000 revised for September and October. We are 10 trillion dollars in debt with a budget imbalance of nearly a trillion dollars a year. I'm open to suggestions.

I'm not saying this is the answer, I'm opening a dialog for suggestions.

To put it bluntly, I'm fucking scared.

[rurallib]

13. Yes I am also. And as the next poster notes it may happen anyway

I am thankful that my kids have been raised and in the workforce in pretty stable jobs for a while. Oddly, my wife is disabled and therefore will continue to get DB and medical care. So if anything can come out of a DB this is the silver lining.
But for me, I have never been more scared. I don't want to go into details, but I see nothing but shit in my road ahead.

[marketcrazy1]

14. glad to hear it

more people should be FUCKING SCARED! it is way past time to stop these insane bailouts but they wont stop until WE THE PEOPLE demand it EN MASS!!! and I am not talking about the Auto makers, thats small change, we are wasting TRILLIONS on these fucking INSOLVENT BANKS! and all that money IS GONE!!! there are other ways to deal with this ( or at least there were ) soon the momentum will be too strong to stop! this is all going to end VERY badly unless we get the FED and Treasury to reverse course soon!!

[natrat]

9. i'm thinking something like that is going to happen anyway unfortunatly

[MazeRat7]

10. The only upside I know of in that is

for companies that sell capital goods internationally. Companies like CAT. They do really really well when the dollar has low value in relationship to other currencies.


That being said, until this country actually produces something that other countries want (other than entertainment), we are "screwn"

Peace,
MZr7

[TexasObserver]

12. a couple trillion dollar deficit will devalue the dollar

naturally

[w4rma]

15. The answer is tarriffs. Big ones. Salaries and wages have dropped too low. Jobs are scarce. (nt)

[marketcrazy1]

16. trade war

yep! that will do the trick!!!

[w4rma]

17. Yes. Actually, it will. Because the tarriffs won't be against nations that pay well. (nt)

[marketcrazy1]

18. a trade war now

would utterly destroy America, how well do you think we would handle 50 percent unemployment???

[w4rma]

20. A trade war now will open up gargantuan business opportunities and thousands of small businesses

would spring up over night to take advantage of the ability to actually manufacture things in America, again.

[Trajan]

25. Really ? .. how so ?

America doesnt produce SQUAT anymore .... We wouldnt lose sales because we dont HAVE sales based on US manufacturing anymore .. and that is the problem ....

Trade war my ass ..... WTF are we trading ? ... Jobs ?

We gave away our manufacturing base, and corporate America has moved production OFFSHORE ....

To lose sales of those products would put INDIA and CHINA out of work ... Not American workers as in the past ...

Anyways .. Something needs to be done .... I object to the idea of gross protectionism because, historically, it had a negative effect that traditionally worsened economic problems (Smoot Hartley ???)

It is a different world now than it was then .... Perhaps some protectionism would be helpful this time around ....

Explain WHY you think it is bad ....

[Idealism]

32. Smoot Hawley was too high of a penalty

The real problem occured when other countries raised tariffs back, which today we won't have that problem anyways. China, the biggest emerging market on the planet, already has high taxes on all imported goods. Some higher than others, but in the auto makers case its over 20% on whole cars, around 12% on car parts. By contrast, we have around 2% taxes on imports. Welcome to free trade. Smoot Hawley was a bit overzealous in its efforts, it raised tariffs to record levels. We don't need 25% on imports, but I am sure we can do 8%, which will be all the help out domestic industries will need to offset cheaper labor costs elsewhere when quality is factored in.

[amandabeech]

42. There was a great post here debunking Smoot Hawley the other day.

You guys should google for it.

Really.

If you want to talk about the current situation, fine, but please don't drag that thing in without taking a look at some of the stuff that's out there. Our foreign trade at the time that Smoot Hawley was enacted was something like 3-4 % of our GDP, and went down to something like 3%. It was hardly something that caused or exacerbated to any significant degree, the great depression.

If you want fairer trade, just slap a tariff on incoming goods from countries that manipulate their currencies. Chuck Schumer is a big advocate of the policy, although it is a bit of a blunt instrument.

[Trajan]

48. If we didnt mention it ....

You would not have had a chance to provide this information ... What would be the good of that ?

Geeez ....

To think I could have already known all the right answers, if I had just read your mind ....

[RoyGBiv]

49. Here ...

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=114&topic_id=48462&mesg_id=48462

True story: I was sitting in a class what seems like years ago, and a fellow student brought up the "fact" that Smoot-Hawley worsened the Depression. (This was the same guy who had earlier referred to the Rehnquist Court as an "ultra-liberal" court and incited me and a friend to unleash all hell and damnation at his rambling idiocy. The professor hated the guy.) When that discussion got distilled down to its essentials, with references forced and such, it turned out he'd heard this from one Ben Stein ... and I'm guessing you can guess where.

Ferris Bueller's Day Off.

I have a feeling -- can't prove it of course, but it's a feeling with at least anecdotal evidence -- that a not insignificant proportion of our population got its sum knowledge of Depression era economic history from Ben Stein and that movie.

And that is just terrifying.

[louis c]

56. Good Info, Thanks (NT)

[amandabeech]

59. Thanks for your late-night energy.

It is terrifying.

[Odin2005]

29. You've been consuming too much right-wing Free-Trade Fundamentalist propaganda.

n/t.

[Idealism]

21. Protectionism should be revived but it won't

We need to either eliminate barriers to trade in other countries, which we don't have influence to do, or raise taxes on imports to our country- which we can do, but won't. The best thing America can do is to seriously create a new sector for jobs and economic growth, the green energy revolution must occur soon. Energy cannot be outsourced to China, and if we lead the way in creating the technology we can set the prices for such a thing. Wages will be high in the field because there is not a globally qualified work force and demand for such a thing will be higher than any other industry. It will singlehandedly help solve global warming, marginalize the importance of the Middle-East, raise wages, and greatly increase our national security. Thomas Friedman calls is "energy technology" and it will create the next boom.

[w4rma]

23. That will not help us in the immediate future, however. Tarriffs need to be set up, right now. (nt)

[Idealism]

26. Nothing will help us in the immediate future, lets be real

We can either let these industries all collapse, which will lead us into depression for sure, or inflate our currency a bit to save them and lessen the years of growth we will lose. Either way, its not going to be rosy. Tarriffs won't matter much because consumer spending has fallen off a cliff, the entire world is in a recession. Tarriffs should be enacted the second we see some recovery, just to help safeguard our domestic industries. Right to Work should be given the axe,too, its just a codeword for Right to Fire.

[w4rma]

30. How does inflating currency help these companies? They will still be running deficits because we

have no money to spend at those companies and the wealthy internationalists are hoarding it all. No, huge tariffs plus quick passage of universal health care is our only shot from what I can tell.

[Idealism]

33. You are missing the point

Tariffs only work if you have people are buying goods. Consumer spending is way down, and many retailers are bankrupt because of this. After the holidays, you will see many more declaring chapter 11, too. The best shot we have to create a new industry that cannot be outsourced, whose goods are in demand the world over, and a sector that America can be at the forefront of: Alternative energy technology. Health care would greatly increase our ability to compete globally, coupled with a green technology revolution, America will charge out of this world wide recession in a much more dominant position than any of our competitors.

[w4rma]

55. But you are missing my point. Tariffs allow businesses to exist, jobs to pay well and people who

work those jobs BUY GOODS. It's very easy when you think about it and don't try to wade through all the ideology. Logic.

[snot]

19. that's already happening, big-time.

i don't expect any deflation to last long given the massive injections of fiat dollars we're seeing. (note Treasury is already having trouble selling T-bills.)

devaluation will, of course, also have the effect of vitiating the savings of those of us about to retire.

[lumberjack_jeff]

22. Because our 12trillion debt is an ARM.

If our money becomes half as valuable, no one will loan us theirs.

[Democrats_win]

24. Devalue the dollar? That would be the worst solution for the American people.

Can you see people purchasing a slice of bread with a bucket of cash?

It would be better to:
1. keep only a minimal military--sell off all the rest. They have never protected us.
2. sell the White House. Our president is not a King.
3. try to get all of the money back from the banker bailout.

[marketcrazy1]

27. a trade war

would spiral out of control very rapidly as other countries cut prices to compete, a deflationary spiral in a country with a zero percent savings rate that has a 70 percent service economy supporting GDP with NO CREDIT would implode ( thats us!! ) shooting wars start this way!!!

[w4rma]

31. As opposed to the inflationary spiral that you want to put us in? (nt)

[Irish Girl]

47. I like that plan!

[RainDog]

28. isn't this deflation?

deflation, as far as I understand it, is the WORST possible situation. people who are in debt would be forced to pay off that existing debt with dollars that are worth less - so you would be making it harder for them to get out of debt.

Letting the value of the dollar fall is a typical Reaganomic maneuver. He ran deficits and tried to get away with it by letting the dollar fall - instead of raising taxes. even so he had to raise taxes at least 3 times while he was in office.

bush has done the same thing, and you see how well that has gone.

sadly, I think we are facing deflation anyway. which will be followed by inflation because of all the money that is printed to bail out the rich.

the middle class and poor, in other words, will face the worst of all worlds.

[marketcrazy1]

34. if the FED

keeps pumping money into the system inflation is what we will get, the only reason we dont have it now is because of deflation, what we NEED to do is FORCE banks to take their losses, the bad debt must be purged from the system. confidence must be restored. let insolvent banks go bankrupt and let their investors take their losses and fight over the assets in court as the LAW prescribes!. but we need the banks to lend , so simply create 10 NEW federally chartered banks and capitalize them with 50 billion each, with the standard 10 to 1 fractional reserve model this would INSTANTLY create 5 TRILLION DOLLARS in fresh lending capacity, these CLEAN, WELL CAPITALIZED banks could then be sold to the public ( eager for a sound investment ) via IPO. this new lending capacity would be plenty to get things moving again....

[RainDog]

38. I enthusiastically agree

these banks need to fail.

Congress takes back any money promised - and money given. It's so fucking ridiculous that these assholes went to fucking club med after the AIG bailout (yeah, not a bank, it's the same issue, tho) that if I had been in the vicinity, I would have happily torn the hair out of their heads.. assuming they have any. in the case that they were/are kojak, I would love to bitch slap them till their noses bleed.

this is meant to be an indication of just how PISSED OFF I am - and my feelings, according to sooo many people I've talked to who are not associated with DU, or even democrats in any way feel too.

fuck them.

we do not deserve the treatment we are getting from our govt. and we should not stand for it.

I am ready, as I said on another thread, to march on washington to stop this theft of our national treasury.

It makes me so angry I could spit, esp. when I know of sooooooo many stories of people who are suffering out in the real world. the entitlement of these motherfuckers makes me think that, if there is any such thing as karma, they will suffer mightly and soon.

(in other words, I wish there was such a thing as karma - if so, I wouldn't see the sort of suffering I see now in single mothers and working families. god I hate these shitholes getting these bailouts.)

[RoyGBiv]

44. Deflation/Inflation

"The only reason we don't have <inflation> now is because of deflation."

Allow me to rephrase.

The only reason we don't have high prices is because we have low prices.

Or, the only reason I'm not 7 feet tall is because I'm 5 feet tall.

You realize this doesn't offer a "reason" don't you?

Anyway ...

Which banks do you propose should be allowed to fail?

[RoyGBiv]

35. To paraphrase Keynes ...

Monetary policy alone cannot solve complex and severe economic contractions.

Now, you'll hear a lot of uninformed nonsense about the effects of dollar devaluation, and I'm not even going to attempt to address it directly because doing so either requires an audience familiar with basic economics or more space and time than I care to commit. (This is not a commentary on you or anyone specifically, just a general observation and an expression of my aversion to getting into yet another economics argument with certain individuals who have no knowledge of economics and no willingness to learn anything about it.) The effects of extreme devaluation are also just massively complex and are difficult to summarize coherently.

Suffice to say, an increase in the monetary supply is already occurring. A purposeful, sudden 50% devaluation of the dollar is insane at this point. The idea (this precise figure of 50%) is promoted by some fringe economists as a way of allowing debtors to quickly pay off debt, but the effects on the real economy are so massively severe that this surface benefit becomes irrelevant. You're basically talking about printing one dollar for every dollar already in circulation and handing it out to everyone 1:1. You've got $100,000 in debt you can supposedly pay of more quickly now, but you're paying $100 for a loaf of bread and gasoline is up to $20 a gallon. (Yes, I'm exaggerating ... maybe ... the point is that hyperinflation can't be controlled.) IOW, you're not going to be paying off any debt.

Back to Keynes, yes, monetary policy will have to be closely considered and utilized, but this is not "a" solution. There is no "single" solution. A vast number of strategies will have to be employed that work together.

And this is why Obama has experts on depression economics and people in positions of authority who have a shown willingness to be flexible in their attempts at problem solving as a part of his economic team.

[marketcrazy1]

37. bernake is running his thesis

chapter by chapter and he will (is) lead(ing) us into a depression. Paulson is a tool who refuses to admit complicity in this disaster. unless Timothy Geithner has a split personality he will be as bad as Paulson.... I weep for the future!

[charlie]

40. Bernanke is going through the strange trip

of losing his religion by being appointed Pope. He was the wonk who gave Greenspan academic cover for not popping bubbles. Now the all-too-real effects of his professorial papers are eating him alive.

[RoyGBiv]

43. An excellent way to put it ...

I've been struggling with how to describe him for some time, but that about nails it.

[charlie]

45. He's got to be scared out of his mind

with his intellectual and ideological ballast gone. Frankly, that seems to be true for everybody right now. Notice how equivocal and ginger Krugman's columns have been lately? He just got a Nobel and even he's paralyzed into "on the one hand, on the other, I dunno" space fillers. I don't think anybody's going to come out of this with their bedrock certainties intact. I wish Friedman could've hung on for a few more years, so he could enjoy some of this unmoored fear and dissonance with the rest of us, the bastard.

[RoyGBiv]

46. I say we dig up Friedman ...

Reanimate him, and make him watch ... Clockwork Orange style ... with a pink bow on his head.

I remember when Bernanke was appointed. I had an "oh shit" moment, not because I thought he was an idiot (he's clearly not) but because his background and expertise are only truly purposeful either in academics or a depression economy. I had the paranoid thought that Bush finally knew, was actually starting to understand, and even he was aware the fit was about to hit the shan and wanted someone that might possibly be able to salvage his legacy.

It seems to be all about his legacy lately. Speaking of bastards ...

Yeah, I've noticed that about Krugman. He even posted something on his blog a few weeks back that went entirely against almost everything I've ever understood him to believe about economics, and that kinda scared me.

Brad DeLong posted on his blog not long ago a headline something like, "I don't understand this ..." as a preface to a brief discussion of current dollar valuation. That also scared me.

DeLong has gotten more on track lately, more confident with his offerings, bleak as they may be, perhaps inspired by his colleague being appointed as economic adviser and forced to focus because he has to teach her classes now. A recent post he made about why we're paying such close attention to Depression history was quite good and admitted that what we're dealing with here can only be addressed by those who understand economics is not "hard" science and that crisis moments like these can only truly be address by those with a grounding in knowledge of economic history, not fanciful theories that make for good discussion but aren't worth much in the world of the real economy as it exists.

[RainDog]

50. I think Krugman is afraid he'll trigger panic

there's a lot of attention on him at this moment. A link to his appearance on Hardball shows him doing the same thing. He will not say we are in a depression or heading for a depression.

what he does say is something like we are facing "depression-like" circumstances.

[RoyGBiv]

51. That's an intereting thought ...

... and I don't disagree with it.

I hadn't considered that before, but it's certainly plausible.

He's not only intelligent, he's considerate and acutely aware of his position without the standard arrogance that often accompanies it.

[charlie]

52. Lol, uncertainty from DeLong is worrying, I agree

That's a guy who's never been afraid to make unqualified assertions. Bushco made him a scrapper.

I get my doses of reassurance from Dean Baker. He's still angry as a hornet, so he's perfectly willing to bawl YOU MORONS ARE DOING IT ALL WRONG when the Fed/Treasury makes a move. But he doesn't waste a lot of time flailing, either. Of course he's not ebullient, but he takes the time occasionally to remind us that there ARE differences that can make a difference in our situation. Money (credit) can be mobilized, moved, and disbursed in an instant, an advantage that can ameliorate problems before they become crises, which is something we couldn't do before. Our manufacturing infrastructure is huge (far larger than anyone else's, despite off-shoring and the popular perception that it's been entirely gutted) and won't have diminished a whit if Wall Street crashes through the floor. We can still avail ourselves of this manufacturing strength if we stay mindful of the importance of protecting it and make credit lines staying open to this sector a matter of primary importance. We're hooked up like never before, with millions of expert minds and eyes watching and able to respond in real time to developments. Of course, all this makes little difference when there are deranged idiots gumming up the works, but these tools will still be there in a month and a half.

[RoyGBiv]

53. Baker is good ...

I like the fact he eviscerates bad economic reporting. DeLong does some of this too (his <insert newspaper/journal name here> Death-Spiral Watch bit is classic), but Baker seems to have a more natural talent both for picking apart bad economic reporting and explaining precisely why it is so bad.

Is it January yet? I really want it to be January. I want Paulson to go get a job, and I want Bush to go do what he really wants to do and set up camp at a bar in Deep Ellum where he can meet "friends."

And I want people with a partial clue in charge again. I'm certain they're gonna screw up massively here and there, but at the very least they'll be genuinely trying.

[charlie]

54. Ha! You, me and...

...is there anyone else not crammed in the backseat with us? Even the Bush cheerleaders from the media are back here squalling, "IS IT JANUARY YET?!!"

They've got Obama growling about pulling over -- "There's only ONE president, you nitwits!"

[RoyGBiv]

41. Paulson needs a day job ...

Custodial engineer might be good for him. (A person of such high stature should have a nice-sounding title, after all.) I'm tired of him and am counting the days more for his departure than Bush's at this point.

I'm less pessimistic about Bernanke and Geithner. One of Bernanke's problems is in fact Paulson. The Fed can't do this alone, and currently Bernanke is at the point of having to do what he can while the Treasury sorta floats in the shallows trying to find some wind. Frankly, he was also served up with a problem left by Greenspan that the Fed, by itself, couldn't derail. He's been in damage control mode since his appointment, and without the rational cooperation of the Bush administration in addressing these issues intelligently, he's had limited influence. I'm quite distrustful of him due to statements he has made in the past that downplayed the problems, but some very good, very liberal, even Keynesian economists think we're lucky he's at the helm of the Fed at the moment, and so I will defer to their opinion for the time being.

I have similar thoughts on Geithner. He has some things in his past that give me pause, but as some are starting to say even in polite company, we're all Keynesians now. The people that work under him will be key.

[Critters2]

36. Yep. Just keep printing money with nothing to back it. See what happens. nt

[HamdenRice]

57. Horrible idea. The world is shoveling free money at Uncle Sam for recovery

right now. The yield on Treasuries is effectively zero, allowing the incoming Obama administration to finance a recovery. This is because world investors still consider dollar denominated federal debt the safest investment on the planet.

Devalue the dollar and that recovery fund goes away. That would be the economic end of the world.

[lonestarnot]

58. Bwwwwwwwwwwa ha ha ha ha ha.

:rofl: ROFLMAO