CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Fellow Travelers of the Depression Lobby

Fellow Travelers of the Depression Lobby

Print
Friday, 11 July 2014 04:10

Paul Krugman took off the gloves in his column today. He said that much of the opposition to the Fed's low interest rate policy stems from the narrow interest of very rich people who earn lots of interest on their money. While we hear arguments, often from prominent economists, that low interest rates and other expansionary policies from the Fed risk hyper-inflation and other evil things, these arguments have repeatedly been disproven by the evidence. Krugman argues that the reason the argument against low interest rates continually reappears in different forms is the money that the 0.01 percent have at stake in protecting their interest income.

On its face this is a plausible story. Certainly the very rich have been especially prominent in making and backing absurd arguments that hyperinflation is just around the corner, or even already here, but we just can't see it  because the government is hiding it.

While we are on the topic of interests determining views on monetary policy, let's take a step over to a different, but arguably more important issue: dollar policy. The key point here is that the value of the dollar is the main determinant of the trade deficit. The basic point is simple. When the dollar is highly valued in terms of foreign currency (i.e. it takes a lot of euros, yen, or yuan to buy a dollar) our goods and services become more expensive relative to the goods and services produced by other countries. This means we will import lots of items from other countries, because they are cheap to us, and they will buy few of our exports, because they are expensive to them. In other words, we will have a large trade deficit. 

That is a big deal, especially now that even respectable economic types recognize the problem of secular stagnation. If we have a trade deficit of $500 billion (@ 3 percent of GDP), which we do, this is demand that we are generating in other countries rather than here. We have no simple mechanism for replacing this demand.

We could have large budget deficits, but that route is prohibited by the bi-partisan cult of balanced budget worshiping. We can try to have the Fed boost the economy with low interest rates, quantitative easing, and other such policies, but these paths have a limited impact on growth, at least as we have seen to date.

This means that we have no good route for filling the demand gap created by the trade deficit. This might lead us to believe that a lower valued dollar should be item number one, two, and three on everyone's economic agenda. Yet, it rarely appears on anyone's to-do list.

There are powerful interests who clearly do not want to see a lower valued dollar. Walmart has spent decades establishing low cost supply chains in the developing world. It doesn't want to see the price of the goods it imports rise by 15-20 percent. The same is true of big manufacturers like General Electric who now have much of their capacity overseas. The Wall Street crew also like a high dollar, which makes it a bigger actor around the world.

The power of these groups explain why it is difficult to actually push through a lower dollar policy, but they don't explain why dollar policy doesn't even rate mention in most economic debates. To answer this question we have to turn to the fellow travelers.

These would be people who take vacations in Europe, or anywhere overseas. It's not just any people who go on such vacations. It's people who write news stories and columns, produce television and radio news, staff congressional offices, and who in other ways play major roles in public debate on economic issues. These people would see the cost of their vacations become more expensive if the dollar were to fall by 15-20 percent against other currencies.

Is it plausible that a congressional staffer would nix discussions by her boss of a lower valued dollar and smaller trade deficit because she doesn't want to pay more to stay in a hotel in Paris or London? Is it plausible that someone who is richer than God would go ballistic because he can only earn 0.5 percent interest on his billions?

It might seem pathetic that millions of workers may go unemployed or underemployed, and tens of millions will lose the bargaining power to secure higher wages, because upper middle class professionals want cheap vacations overseas, but that is politics in America today. Hey, at least you can get a good deal on a vacation in Spain.

 

 

Comments (13)Add Comment
...
written by foosion, July 11, 2014 5:28
Low interest rates only hurt those whose portfolio consists of very short term bonds, which is obviously a very undiversified portfolio. Low rates help stocks. Low rates increase the value of bonds, even if the interest payments are lower.

If rates go up, the value of bonds goes down (although the lower yield can make up for this after some years).

You explanation makes a lot more sense than Krugman's.
Excellent
written by JayR, July 11, 2014 5:41
I think also another part of the problem with lowering the dollar is that it is currency manipulation. China already does currency manipulation and seems to get away with it but if the US does it in a big way will more countries be tempted to? Would this lead to a race to the bottom? The value of currency is not really discussed in trade deals but I think at some point it will have to be. I don't think putting limits on what a country can do with their currency would be a good idea as you could end up like some of the European countries which cannot maneuver out of a bad situation because of currency printing is something that is no longer in their control. Overall a crazy idea but since currency valuations already act as tariffs or export subsides it seems like we would should re-examine tariffs. Possibly with the idea of keeping trade flows balanced.
...
written by foosion, July 11, 2014 6:32
@Jay, Dean has often written that we should be negotiating for a lower dollar in trade deals rather than negotiating for more protection for intellectual property holders, etc.

The obvious problems are political and beggar thy neighbor.
The Blank Stare: The Ultra Rich Have Morphed Into Ultra Loser Liberals - Not Conservatives
written by Last Mover, July 11, 2014 6:56

One way to understand the econonmic downfall of America and its ongoing evolution into a neo-fascist nation, literally run behind the curtain by ultra rich economic predators, is to look at the values claimed by these predators and the sock puppets they own.

These values in an economic rather than cultural context are actually ultra liberal, not conservative. They are the same values conservatives of an earlier era fought against with all their political might.

Back then (1900-1975), conservatives hated the idea of anyone (traditional liberals) taking from others, what they didn't earn themselves, whether through taxes, regulation or any other forced redistribution. Instead they preached the haves should deliver to the have nots through voluntary charity and compassion.

Talk about loser liberals as Dean Baker would say. Today's conservatives are yesterday's liberals on steroids. They want not just handouts or even just compensation to reimburse losses for others' gains.

They want the whole enchilada America, Cliven Bundy fashion. They just don't admit it like Bundy does.

With their money to buy unlimited political and economic power granted by SCOTUS, the predators have shaped the national conversation on economics to proceed as if it was 50 years ago between traditional liberal takers and conservative makers.

This maintains a bright line in the public eye between takers and makers accepted by many Americans like a religion, however absurdly ridiculous and shameful of a lie it is.

It fuels Americans to go at each others' throats on every issue imaginable, especially cultural, on ultimate grounds that it's always the other side that is doing the taking instead of the making.

The maddening absurdity of it all is the real takers in the .1 percent and .01 percent are the real "liberals" in the traditional sense, except now they take so much they really do cripple the economy and bring it to its knees.

The rest of America is reduced to a 24/7 food fight carried on by the sock puppets as if each morsel fought over is a turning point down a slippery slope of doom and gloom "liberal" socialism.

Take note America. The "stupid liberals" are not stupid and they don't reside within the 99%. They are firmly entrenched within the 1%, secure in their cocoons of ultra liberal values that justify their existence. Just ask any sock puppet of theirs who will confirm the same with a blank stare.
...
written by dax, July 11, 2014 6:56
I don't get it. Dean wants a strong dollar, but when other countries like Japan (and Sweden) enact policies to increase domestic demand by in effect lowering the exchange rate, he's basically supportive. If the dollar is to be weaker, it has to be weaker against something. Can't be the euro, because the dollar is already weak vs the euro. So if it's not the yen, and not the euro, and not other developed currencies, that leaves, I don't know, the yuan. But if it's only the dollar rate vs the Chinese currency which concerns him, then perhaps he should make this clear; it's not dollar weakness he wants but yuan strength.
he wants a *weak* dollar vs. yuan
written by atheist, July 11, 2014 7:40
@dax, July 11, 2014 6:56

Dean wants a strong dollar

He wants a *weak* dollar especially vs the yuan.

that leaves, I don't know, the yuan. But if it's only the dollar rate vs the Chinese currency which concerns him, then perhaps he should make this clear; it's not dollar weakness he wants but yuan strength.

I figure he thinks it goes without saying. I also think the reason he focuses on the yuan is because China is so important to manufacturing and therefore US manufacturing would get its biggest help that way, but perhaps I have the argument wrong?
US Hegemony
written by John Parks, July 11, 2014 7:49
As corporations (e.g. Ford Motors)learn to take advantage of better deals by dealing in the Yuan I can't help but think that the dynamics of the dollar valuation will slowly change. Any little chinks in the American hegemonic image can't help but to eventually lower the dollar value and increase demand here in the US.
You're welcome to correct me, cuz' ultimately, I really now nothing!
keynes view
written by djb, July 11, 2014 8:57
keynes believed in government policy in each countries economy that would take care of that economy and a floating exchange rate

this of course would require fiscal stimulus, and not just monetary stimulus

The value of the dollar isn't the most important elite obsession by a long shot.
written by Amileoj, July 11, 2014 4:00
"We have no simple mechanism for replacing this demand."

Actually, we do--it's the one mentioned in the very next sentence:

"We could have large budget deficits, but that route is prohibited by the bi-partisan cult of balanced budget worshiping."

And what interests are served by this cult?

"We can try to have the Fed boost the economy with low interest rates, quantitative easing, and other such policies, but these paths have a limited impact on growth, at least as we have seen to date."

Right. And yet center-left economists, and even some center-right ones, seem to spend an enormous amount of time and energy advocating for these dubious solutions.

"This means that we have no good route for filling the demand gap created by the trade deficit."

Again, we have a perfectly good route for doing this. It's just a route that is closed off to us. Perhaps by powerful interests?

"This might lead us to believe that a lower valued dollar should be item number one, two, and three on everyone's economic agenda."

No actually it leads me to believe that increased deficit spending should be items one, two and three on everyone's agenda.

"Yet, it rarely appears on anyone's to-do list."

Well it gets lip service that active promotion of larger deficits does not. For instance, there have been many calls in both Republican and Democratic administrations for China to allow the value of its currency to rise. This is the same thing of course as having the dollar fall.

"There are powerful interests who clearly do not want to see a lower valued dollar."

Sure, and there are also powerful interests that would be happy with a lower dollar (exporters, e.g. in agribusiness). This seems to be a policy on which powerful interests are far more divided than on deficits, where essentially all powerful interests speak out against the economically sensible course of action.
...
written by Noni Mausa, July 12, 2014 6:49
There's another way in which the effects of interest rates differ between the wealthy and the poor. The wealthy have a lot of capital they do not need, and service charges can make up a negligible slice of their savings, so that money can sit and grow, whether slowly or not. But for people at the low end, there is little to spare, and the tiny interest paid will be eaten up by fees and inflation. It is depressing to even have that sort of a savings account. And GICs are nearly as bad. In my area, the highest interest being paid is about 2.3% for a three year GIC, essentially providing working capital to somebody in return for the promise it won't be eroded by inflation, very much.
Never Been to Spain
written by Larry Signor, July 12, 2014 10:07
but if Dean is correct, the problem is worse than "pathetic". Just mind boggling...if true.
Competitive devaluation?
written by Farrar Richardson, July 12, 2014 11:34
Europeans are already complaining that the US is manipulating the Dollar down with low interest rates. Imagine the uproar if the US actually implements a low Dollar policy. Besides, what more can be done? Negative interest on foreign accounts? Penalty charges on investment custodial accounts? Jawboning?
Don't forget stimulus LEAKAGE
written by Mr. Smith, July 12, 2014 11:34
The dollar policy is really the big enchilada. Much more important than the refusal to engage in stimulus.

Even if the (R)'s agreed to a $1,000 billion stimulus this year so much of that would leak abroad because of currency manipulation. To build a self-sustaining economy the US has to focus on manufacturing. There is no way around it.

Money = ability to buy traded goods (manufactures) That's it folks. Currencies today are backed by something real, it's called tradable goods. In the long run American's per capita income is absolutely undividable from the country's capability to produce manufactures.

Rich countries make things. No way to get around it.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives