Is the Strong Dollar the Real Cause of the Collapse of US Manufacturing and Secular Stagnation?


Naked Capitalism has the article Is the Strong Dollar the Real Cause of the Collapse of US Manufacturing and Secular Stagnation?

The article was written by Douglas L. Campbell, PhD candidate in Economics, University of California, Davis.

My job market paper seeks to identify a causal impact of real exchange rate movements on manufacturing output in the US (Campbell 2014). I compare:

• The US experience in the early 2000s to the 1980s, when large fiscal deficits led to a sharp appreciation of the US dollar; and

• Canada’s experience in mid-2000s, when high oil prices and a falling US dollar led to an equally sharp appreciation of the Canadian dollar.

I am wondering if Campbell is suffering from the problem of equating correlation with causation.

I commented on the article with my initial reaction.

I am having a hard time wrapping my head around the idea that large fiscal deficits raise the value of a country’s currency. What’s the economic theory behind that idea?

Also, I am wondering how China benefits by holding large reserves of US money. They are giving us the benefit of their labor in trade for holding our currency that they cannot do anything with except leave it on deposit at the Federal Reserve. Oh yes, they are earning interest which just adds to the money they are holding that they cannot use.

How do they pay for the raw materials that go into the goods that they are selling us? Does that mean that their labor adds enough value to pay for the cost of the raw materials  and still have huge profits left over? And they can also pay for whatever raw materials they actually use domestically? Someone needs to figure out where is all the money we give to China going. Not all of it is being used to build reserves.

As I mulled this over the dawn started to dawn.  I also posted that as a comment.

I just think I figured out what China gets out of building all these reserves. It is exactly the same issue about what the .1% in this country get for accumulating all the wealth. Try as they might, they can’t possibly spend all the money they are raking in. If they were spending it, they wouldn’t be accumulating it. What they are getting and what China is getting is power and control.

You cannot come up with an economic value to explain the level of power and control that is being concentrated in the hands of fewer and fewer people. The value is psychological. If we continue to search for economic reasons for this accumulation of wealth, we will keep seeing correlations without finding the causation.

 

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