11/28/2012 6:45 PM ET|
Bitter pill: Lower pay, higher prices
For America to get its economic act together again, we need to accept a weaker dollar. This strengthens our exports and will help cut our debt. But this prescription will be painful.
America is a patriotic place. We're proud of our heritage. We like to win.
So it's not surprising that we view the strength of the U.S. dollar as a proxy for our national standing. When it's up, the world is elevating us. When it's down, something's not right.
But that's not how the financial markets view it. Since the dollar is the global reserve currency, the dollar acts as an inverse for confidence. When people feel good about the global economy, the dollar tends to drop.
But if the United States is ever going address the global imbalances that got us into this economic mess (an overly large trade deficit, over-reliance on debt and excessive dollar reserves in China and elsewhere), the dollar will need to weaken substantially.
Yes, that means pain: rising prices and lower wages, which will be hard pills to swallow. But here's why we need to take our medicine -- and how to ease the pain.
Benefits of a falling dollar
Put simply, a dollar that's worth fewer euros or yuan would make the goods we make more attractive around the world and attract foreign investment in new factories here.
And there's more. A weaker dollar would discourage, as it has recently, the Chinese from buying dollars to artificially hold down the value of their currency. Up till now, the positives from this have benefited both sides. We gorged ourselves on cheap imported goods and cheap imported credit, while the Chinese put millions to work and accumulated trillions in stockpiled dollars.
Now, the negatives are being felt. Economists, including Federal Reserve Chairman Ben Bernanke, have warned that the flood of cheap money from China and elsewhere has overwhelmed the ability of our financial system to allocate savings to good investments that will grow the economy. Instead, as we saw during the housing bubble, it shoved cash into bad investments in inflated assets that blew up in our faces.
For their part, the Chinese have been battling with excessive inflation and their own bad investment, an over-reliance on exports and overbuilding of factories and other infrastructure. That, along with some negative attention during the presidential election, courtesy of Mitt Romney, has encouraged Beijing to push the Chinese yuan to new highs against the dollar.
So we're moving in the right direction.
The dollar is getting cheaper, especially relative to the Chinese currency, and the negatives from this are starting to emerge. Americans will find imported goods, including crude oil, becoming more expensive while their take-home pay remains stagnant. Travelers will find less-favorable exchange rates. And cheap credit will be a little less pervasive.
Yet, if we're going to turn this thing around -- and address structural deficiencies like an employment-to-population ratio that hasn't been seen since the early 1980s, lost manufacturing jobs (shown above) or an annual trade deficit of nearly $600 billion (shown below) -- more must be done.
That's because, as new research by the Boston Consulting Group shows, with rich world economies struggling under aging populations, fiscal deficits and excessive debts, the driver of economic growth globally is going to be in the emerging middle class in countries like China and India.
My recent columns have focused on "supply side" solutions for our economic malaise. These include encouraging businesses to hire and invest and boosting two critical metrics of prosperity that have slowed: labor productivity and gross domestic product per capita. (Read, for example, "Is this economy a lost cause?") This discussion, along with my recent comments on catering to the rich here at home, is the demand side of the equation.
It boils down to this: The government needs to find ways to encourage businesses to cater to wealthy consumers at home and the newly wealthy overseas. And by boosting the price competitiveness of exports, a weaker dollar will contribute to this.
Consider how our trade deficit started to stabilize in the mid-2000s after a large, sustained drop in the greenback.
The prize awaits
Some Boston Consulting Group researchers, led by Michael Silverstein, have elaborated on this strategy in a new book, "The $10 Trillion Prize," (find it on Bing) which refers to their projection that by 2020 the combined consumer market of China and India will total that amount -- which is nearly equivalent to current levels of annual spending by American consumers. By then, there will be nearly 1 billion middle-class consumers in those two countries.
The BCG team believes that lower U.S. labor costs and cheap domestic energy could create up to 5 million jobs by 2020 via rising exports.
BCG survey data show a confident, positive, and aspiring group of people. Some 36% of Chinese and 19% of Indians expect to increase their discretionary spending over the next 12 months, compared with only 11% of Americans, 8% of Europeans and 5% of Japanese. They are also looking to "trade up" to better-quality goods.
This is where we fit in. According to the surveys "Made in USA" is associated with quality and luxury and is an aspirational label for the newly affluent and brand-conscious in Asia. Chinese and Indian shoppers care quite a bit about image and brand. This is a great opportunity for marketing-intensive U.S. companies selling premium products.
Already, more than 60% of Chinese consumers say they are willing to pay more for "Made in USA," and more than half had chosen a U.S.-made product over a less-expensive Chinese good at least once in the month before the survey.
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I think what you are saying is that as soon as we get to the standard of living that China has, we will start making things here again. Wages will be lower, working conditions will be poorer but our industry will return? I'm glad we have that going for us.
The Fed can keep printing until chinese crap is too expensive for us to buy but don't think for a minute that the trade will ever go in the other direction. Free trade with China was never going to be a two way street. They always dangled their huge untapped market under our noses but if they can make it themselves, they won't be letting our stuff into the country. Unlike our greedy capitalists, they know better than to export all their jobs to other countries. My bet is that when it comes down to it, the other Asian countries will also put up walls.
The only upside is that we will start making things here again. Wages will be lower, conditions will be poorer, and as a nation, our standard of living will lower to the level of the rest of the world. That was always the promise of free trade.
As depressing as the article is, I do agree with the investment advise. If you are not invested, inflation is going to eat you alive.
"America is a patriotic place. We're proud of our heritage. We like to win."
If we're so patriotic, why do jobs move to foreign countries? And if we're so proud of our heritage, how come the country is broke - no one wants to pay for that heritage or preserve it? Pride can be a sin & lead to downfall.
America is screwed, no two ways about it. Globalization and outsourcing did it. How can you have a country when all your goods are made in foreign countries by cheap labor? It's a slow death and doesn't end until America becomes like the couniries where the stuff is made. How can you have pensions, benefits & entitlements when you're competing with people who will work for 50 cents/hr with no bathroom breaks? This has been going on for decades and is coming to a head because the government can no longer be run on fumes. The U.S. gov. never adjusted to this reality, so it's bankrupt. Weak dollar - it's not even worth the paper it's printed on. If it wasn't for the Chinese lending us money, we'd be sunk already. The U.S. Titanic is going down - make sure you get a life preserver and make it to the life boat.
The fix is easy but the Dumbocrats won't get off the free social welfare parade. We need to cut expenses in the government. It's like any household budget....spend the amount you make....not borrow 40% from China every year to pay your bills.
This tax and spend program of Obama's will turn the US into California....bankrupt!!
Every democrat on these boards says the same thing, TAX, TAX, TAX the rich.
CUT LIFETIME MEDICAL/DENTAL BENEFITS AND SALARIES FOR GOV'T WORKERS AND POLITICIANS?
NO MORE "LIFETIME SECURITY" DETAILS, EVEN WHEY YOU ARE OUT OF OFFICE?
STOPPING WASTEFUL SPENDING ON PROGRAMS LIKE SOLYNDRA THAT WENT BELLY UP ANYWAY, AND THE INFAMOUS "CASH FOR BLUNDERS" THAT FIZZLED...?
STOP BAILING OUT MAJOR UNION RUN AUTOMAKERS AND BUSINESSES, AS WELL AS BANKS AND MORTGAGE COMPANIES?
Yes, NEW revenues WILL be needed, thanks to Nobama and the Democratic leeching that has been done. But then again, if you REALLY want to fix the problem, you need to fill the HOLES that continue to BLEED...Putting a band aid on the problem WON'T fix it, and neither will JUST raising taxes on the "rich" and "super rich"... stitches are needed for these economic holes, and BOTH sides need to recognize this, otherwise NO medicine will help after the innocent taxpayers are driven right over the cliff that is getting closer...
A dis-satisfied customer and voter...
Obamanomics, mmm, mmm, mmm. It's OK though cause Barry's gonna pay my mortgage and give me a Chevy Volt.
You really don't believe this crap do you? If you think the Chinese and Indians are going to buy American goods you need help. Most of these folks are broker than we are. What America needs to do is end outsourcing and tariff cheap imports thus bringing back the 20-30 million jobs that were lost. All this is a moot point anyway as the bond market has topped off (300 year highs) and will collapse in the very near future, bringing everything down with it. KKR is now packaging their long term bond risk into new security packages that they now want to foist on the general public. When the big guys want to let Joe Sixpack in you know the party's over. Folks watch out!!!!!
The chickens have come home to roost; the fat lady has sung; payback is hell. Any number of proverbial sayings work here. We can forget 'growth' or anything ressembling what has come to be known as growth. We like 'infinite' champagne on a 'finite' beer budget. Forget about energy independence, forget about the land of happy motoring going on forever. It cannot and will not happen.
Reality is the new world order. And that reality is severe compressive contraction; the economy will contract to a level of activity that REAL energy and REAL natural resources and REAL wealth will support. That level is much much much lower than the pretend debt driven hayday we have known.
It is neither good nor bad; it just is.
"It boils down to this: The government needs to find ways to encourage businesses to cater to wealthy consumers at home and the newly wealthy overseas. And by boosting the price competitiveness of exports, a weaker dollar will contribute to this."
Change dollar to yuan and you have China's trade strategy circa 1990. How the worm has turned.
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