Two years ago, I wrote a post about deficits, and whether we should respond to the recession by printing even more money. It discussed the causes of our deficit spending, and the theory which says that it’s impossible not to run a constant governmental spending deficit as long as we run a trade deficit… which means, in other words, as long as other countries keep selling us goods in exchange for dollars that they don’t spend back here, but instead use as the medium of capitalism at home. This theory, as best I know, is most identified with the liberal economist James Galbraith. It says that as long as we act as treasurer and currency supplier to capitalists overseas, we must run corresponding deficits domestically, which means the shortfall has to be either borrowed or printed (and watch out you don’t print too much).
But now I’m hearing about interesting happenings on this front from the more conservative economist John Mauldin. And there’s big news here that I never expected. I had thought that the “strong dollar policy” — the political decision to encourage worldwide demand for dollars, which produces all our deficits — would be something that it might be very difficult to back our way out of. Among other things, it would require that some other currency could step up and be the new “reserve currency” that people use for international wealth. I thought no other currency was in a position to take on that role.
Well, it looks like the Chinese renminbi (or yuan, informally) is starting to do just that. And at the same time, the US is starting to do a lot more exporting. Some of this has to do with increased fossil fuel production, some of it has to do with decreased wages, some of it has to do with Obama administration policies… and maybe some of it is actually a direct result of yuans coming out to play.
So quicker and easier than I ever thought could happen, we might be scaling back our production of dollars to a volume more suitable for a domestic economy. And we’ll start seeing “Made in USA” on products again… which means that the incredible cheapness we’ve become accustomed to from Chinese products will become a thing of the past. (Some of the products we import now actually lose money for their makers.) This would mean people will start to feel how poor they’ve actually become, and want better pay. It’ll cause some discomfort.
And meanwhile, the newly ascended Chinese economy will find its greatest source of wealth drying up, and suddenly have to create prosperity on its own. These factors will all tend to create a negative feedback on any such change, causing an inertia that will slow down the transition. But Mauldin believes it will still happen faster than anyone expects. Maybe, maybe not.
Mauldin’s friend David Brin, the SF novelist, points out one aspect of this which I hadn’t appreciated: namely, that the strong dollar policy, though best known here for how it hurt American workers, has done a tremendous amount of good for people overseas. It has subsidized the creation of middle classes in China, India, and many other countries. It has helped lift a huge number of the world’s citizens out of poverty! Brin has been accused of exaggerating the economic importance of this money, but still, in that light, the mild impoverishment of the American working class suddenly doesn’t seem like such a high price.
The “quantitative easing” that has been supporting the big banks since the last crash has also done a lot to stimulate developing economies, Mauldin says. That obviously needs to wind down. The Fed has warned that the first decreases may start soon.
Maybe the strong dollar policy’s job is now largely done and it’s time to move past that phase — time to wean the developing world from the dollar teat, in Brin’s terms. It’ll have to be a gradual thing — too sudden a move might cause a crash in areas with a lot of current dependency on that cash flow. And even a very gradual reduction is going to eventually cause some kind of shakeout. But apparently that transition is under way.
But it does sound alarmingly like it all depends, more than anyone likes to admit, on natural gas fracking. Which means that tightening the environmental regulations on that very unclean practice might end up restoring all our deficits. At least for the short term. This certainly helps me understand why policymakers are so eager to continue fracking despute the blatantly awful environmental costs… because it produces wealth vast enough to reshape the entire world economy.