TradecoHoldco

Killing it like a hooker in Hong Kong

What does a depreciating US Dollar hold for the world?

Topic of the hour.

The problem the US has right now is that it is grossly uncompetitive. When an engineer hired in India and China for USD20k a year costs USD100k a year in the US, you have a problem.

A depreciating US dollar will solve this problem, but not in the way most people think it might.

The Chinese rightly point out that yuan appreciation will cause low end manufacturing to shift to other Asian countries, and this will do nothing for the US.

Also true.

Actually, what I think a proper USD devaluation will achieve is return the US to its role in the early 1900s, the world’s primary and most efficient supplier of commodities, especially agricultural commodities. When I think of American exports, that’s where I see the opportunity, not in manufacturing, not in Boeing but in Cargill.

However this implies a vast structural shift. How many factory workers are going to want to return to farming? There’s going to be some serious pain to come.

 

 

 

 

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October 7, 2010 - Posted by | Uncategorized |

2 Comments »

  1. Good point, few remarks :

    – Efficient farming is as industrialy intensive than manufacturing. Relabel it as “biological engineering” with good pay and, voila, you get an attractive story to get workers in your industry. The Canadian have no problems filling the blue collar jons that come with tar sands development.
    – The first step of rebalancing may not be from higher Ags export, but from reduced hydrocarbon imports due to increased domestic production. Shale gas, especially if US road transportation gets adapted to NG, can be a game changer here.
    – I think you will find extraordinary political resistance to food supply dependence in China. This is just as critical as energy supply, and US + Europe + Brasil/Russia hold the upper hand here. Nothing garantees that the terms of the exchange are going to be favorable to Asia. That is why I am not that bearish on the dollar. This is also why I like Malaysia, because it is a balanced play between manufacturing and Ags/Energy.

    Comment by charles | October 11, 2010

  2. If the US is uncompetitive at prevailing currency rates and cross country wage rates, then how is Europe remotely competitive at $1.4? The higher EURUSD goes, the more you can virtually feel Spain and Italy seethe in pain.

    Rebalancing the trade deficit in US is more about overconsumption by Joe Sixpack and market penetration by products / services that US has competitive advantage in. If US savings rate goes up further and China pirates only 30% of its Microsoft software (instead of 60%) and actually pays for content (Hollywood, digital music, pharma tech), then there will be improvements in the deficit.

    At the same time currencies do matter and when you save so much in excess of required investment, grow 10% per year while domestic inflation is only 2-3%, exports and investment constitute 75% of GDP, and accumulate $2.5 trillion in reserves in FX intervention, then chances are your currency is undervalued and you are engaging in beggar thy neighbor policy, just as France did in the late 1920’s in accumulating its gold reserves against England and Germany. It’s also worth mentioning the latter two countries had depression-like contractions before the October 1929 crash, then devalued first among countries, and escaped the Depression first before France, US, and Japan.

    Comment by srm | October 16, 2010


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