America is probably getting cheaper. And Americans are probably getting poorer. That’s how the global accounts get settled. Americans owe a fortune to foreigners. As their paper money is marked down so is the fortune they owe. They will owe less. But they will own less too – because the value of their own dollar holdings…and dollar incomes…will go down. Foreigners will take advantage of the situation in two ways. They will buy US assets at low prices. And they will take advantage of low US wages by outsourcing some of their low-wage business to America.
America is a cheap country already; our guess is that it will get cheaper.
Back in the beginning of September, Frederic Mishkin, a Fed governor, estimated that housing prices might fall 20% by the end of 2008, and that it would reduce GDP by as much as 1.5% within three years.
That didn’t seem like much to us…certainly not enough to worry about. But Mishkin felt like a passenger on the Titanic; he wanted to find the lifeboats.
“Monetary authorities have the tools to limit the negative effects on the economy from a house-price decline,” Mr. Mishkin told his colleagues.
Then, in a speech October 19 on ‘monetary policy under uncertainty’, Mr Bernanke argued for acting sooner rather than later when risks become apparent.
“Intuition suggests that stronger action by the central bank may be warranted to prevent particularly costly outcomes,” he told a group organised by the St. Louis Fed.
The thought has been followed by the deed. ‘Strong action’ is what the Fed has already taken. Stock market investors have been reassured as a result. It’s the currency markets that are troubled. So far, so good. That is, so far no one seems to care much about the dollar losing its value. People hold trillions of them…earn them…invest them…foreigners even save them…and all of them seem convinced that this is only a temporary weakness in the greenback. Otherwise, they’d surely want to get rid of them, wouldn’t they?
Our old friend Rick Ackerman comments:
“We’ve long assumed that a collapsing dollar would take the global economy with it, but perhaps we were being too pessimistic? After all, the Dollar Index has fallen by 45 percent since 2002, but life goes on. Moreover, when the greenback slipped to historical new lows on Friday, hardly anyone seems to have noticed. Or rather, if they did notice, it was deemed reason to celebrate. The Dow Industrials shot up 135 points as stocks rose across-the-board – especially precious metal shares, which may finally be starting to reflect fears that there is nothing to prevent the dollar from slipping still lower. Perhaps much lower…
“Some years ago, when bullion turned feisty after dipping briefly below US$300, [Larry] Kudlow suggested in a Wall Street Journal op-ed piece that gold would find ‘equilibrium’ at around (if memory serves) US$330 an ounce. Any higher would mean that US monetary policy was too loose, explained Kudlow, and any lower would indicate that money was too tight. Now, with bullion quotes about to blast through US$800, we would surmise that the pathologically bullish Kudlow, and just about everyone else with a listing in Who’s Who in Economics, have simply ‘adjusted’ to that likelihood. Gold bugs have adjusted too, in their anxious but canny way, and are poised to reap a huge windfall. As that timeless trader’s adage reminds us, ‘He who panics first, wins’.”
“Time is money”, say economists. If time is money, what isn’t it? It struck us recently how shallow economic thinking is…which led us to think about how shallow all thinking is. Economists tell us that all our decision-making is, or should be, based on rational calculations involving quantifiable – or at least appreciable – results.
When a woman – or a man, for that matter – leaves the home and enters the workforce, the total output of the economy tends to go up. One more person has taken his place in the big machine…producing an incrementally observable quantity of extra output. GDP rises. Now the person is doing something measurable! Something that modern life can appreciate! And now we know that the person is worth something; he earns money. We can tell how much he is worth by looking at the money he earns.
But what about what he has given up – free time…time with the family…time for other things? Well, say the economists, he does a calculation…he figures out what those things are worth to him and compares it to what he gets out of working.
Yes, but that is where life begins to imitate academic theories. People do not make their calculations in a complete void. They make them in the context of popular tastes and attitudes, which are shaped – in part – by the dead economists who tell people how they’re s’posed to act.
Markets and Money