Economist On Why We Need A Weaker Dollar

For over a year now, I have been ranting about the need to weaken the Dollar. I know that it has made some of your stomachs turn. However, my logic has simply been that a weaker Dollar makes US Labor more competitive and will lead to the creation of new domestic Manufacturing Jobs.

Former World Bank chief economist and Nobel Laureate Joseph Stiglitz had this to say on the topic -

“One way of looking at it is that the U.S. has turned to exporting T-bills instead of automobiles or other commodities. Global demand for dollars has supplanted demand for manufactured goods and services, resulting in multilateral trade deficits and loss of jobs at home.”

From MIT Economics Professor Simon Johnson today -

http://www.thedailybeast.com/blogs-and-stories/2009-10-06/obamas-secret-jobs-plan/?cid=hp:mainpromo2

“…think what a weaker dollar does for the industrial heartland, where so many congressional seats will be in play and where today it’s easier to export or compete against imports because the same dollar costs convert into fewer euros, yen, or renminbi (this is what a “weaker” dollar means—foreigners can more easily afford our goods and their stuff is more expensive to us). If the dollar stays weak or declines further, our car companies, machinery makers, and turbine blade manufacturers will soon be rehiring and we’ll finally get some job growth as part of our sputtering economic recovery.”

He also when into the mechanics of a “Carry Trade” –

“If you can borrow in dollars and buy Australian (or Korean or Chinese, etc) government debt, you are in what is known as a positive “carry trade”—because of low interest rates here, you pay close to zero to borrow the dollars and you can invest in Australia at more than 3 percent interest (or you can plunge into speculative Chinese automotive stocks, as Goldman is now doing).

And if you think interest rates will rise in the rest of the world before they do in the United States, because the dollar is on its way down, then this carry trade becomes a one-way bet: You make money on the carry, you hold foreign currency while the dollar falls, and then you pay back your loan in depreciated dollars.”

This is what they did with the Yen over the last Business Cycle. Now it is the “Dollar Carry Trade”.

I did this post to show that I am not some raving lunatic, hell bent on killing the Dollar and redistributing the wealth of the US to the rest of the World. I posted this to show you that the end game has to be a declining US Dollar. It is the only way to bring Manufacturing Jobs back.

The weakening Dollar has obvious investment consequences – the most important of which is that if you want to maintain your Standard of Living relative to the rest of the World, then you need to position assets to protect yourself against a falling Dollar.