Monday, March 14, 2005

The Economy!

OK, so I'll admit that I don't know too much about the economy. I took Economics 101 my freshman year in college, but it was at 9:00 in the morning, and the chairs were really comfortable. I mean, I got an A, and I did well on all the tests, and I even had a subscription to the Wall Street Journal for six weeks, but those facts are a bit deceiving. The tests were incredibly easy, and the grade hinged mostly on them. That explains the A and the tests. Oh, and I promptly threw away the Wall Street Journal as soon as I took it out of my mailbox every day. Without fail.

But that doesn't matter, because Economics 101 was pretty much basic stuff. Supply and demand, you know, the basics. It wouldn't have given me any kind of huge advantage in understanding to have paid more attention, or even to have been awake more of the time. But I'm interested now, and I'd like to learn more. And I'd like to think that I have been.

I stumbled upon this article on MSNBC last night, and I put off reading it until this morning, because it was long, I was tired, and I knew I'd want to write something about it. It's called "Bottom Dollar," and it's about the sluggish state of the dollar compared with other international currencies, and the role that our economy and trade deficit play in that situation, and in the world economy at large.

So here goes my little riff on what I understand of the economy, and what I understand of the dollar and why it's falling. One thing to keep in mind is that currency isn't just straight-up value. Since currencies can rise and fall against each other, based on relative strengths of economies, the currencies themselves become commodities. Some people, like George Soros, can profit greatly off of currency exchange speculation.

The US economy is huge, and the consumption rate of the US populace has driven the trade deficit. See, people in the US want more than we have to give, so we've got to buy it from other countries. Hence, the dollar is put out there into the international market. The trade deficit is the amount more that we import than we export, and it's something like $650 billion this year. So that means that there's $650 billion floating around there in the international market. But like I said, currency is a commodity, and increasing supply decreases demand (and, consequently, price). So running such a huge trade deficit floods the market with dollars, and since there's so many dollars floating around, they're subsequently devalued just like any other commodity.

So why don't we just stop running such a trade deficit? Well, that's the rub, isn't it? The whole world's economy pretty much depends on the US trade deficit to prop up the rest of its economy. Asian countries in particular make a lot of money from exporting to the US. If the US stopped buying so many goods from other economies, those other economies would falter simply because so much of their worth is in exports to the US.

But it would seem that the balance would naturally shift towad equilibrium. When the dollar falls, in order to get its value back to where it should be, the US should (it would seem) increase exports and decrease imports. In fact, it would better serve the dollar and the economy at large to do this. The world could afford more US exports on a weakened dollar, and the US could afford less international imports on a weakened dollar. I'd think that this would happen fairly naturally, until it swung a little too far in the other direction and then began swinging back the other way.

But there's other complicating factors, such as this one: the currencies of a lot of Asian countries (including China, excluding Japan) are "pegged" to the dollar. That means that as the dollar rises, those currencies rise. As the dollar falls, those currencies fall. Relative to one another, a dollar is always worth 8.28 Chinese yuan, no matter what's going on with the pound or the euro or the yen. So there's no incentive for imports and exports to and from those countries to change at all, I'd think, since our economy is in a kind of symbiosis with theirs. But pressures from other floating currencies' strength relative to the dollar would certainly push the US to increase exports and decrease imports across the board, even to the economies with currencies pegged to the dollar.

So what's the upshot? Well, the trade deficit is there and getting bigger all the time, despite what conventional economic wisdom would tell us. Again, lots of reasons for that, and probably the biggest one is just that other countries make so much money from exporting to the United States, and there's still demand for those exports. But why are we still able to do it, considering the weakened dollar, with little perceived change? I mean, why haven't the prices of foreign imports risen drastically? The article postulates that some countries have opted to reduce their profit margins in order to maintain the same volume of trade with the US, which seems to make some sense.

But who knows how long it can last?