Martin Feldstein is growing increasingly worried about the state of the U.S. economy. He’s usually a voice of calm in the middle of the storm – former head of the National Bureau of Economic Research, past chairman of the Council of Economic Advisors under Reagan, and Harvard economics professor.
So that is where the US is now: in the middle of a financial crisis, with the economy sliding into recession, monetary policy already at maximum easing, and fiscal transfers impotent. That is an unenviable situation, to say the least, for any incoming president.
He’s basically saying that we have thrown most of our fiscal and monetary policy ammunition at the crisis with little effect. Uh-oh.
In related crisis matters, Tyler Cowen suggests that the dollar should weather the storm. His reasoning is solid as usual. The dollar is likely to hold for the short-term. But for the longer-run, I’m not so sanguine. There has been a big global shift in the underlying real economy going on for some time now. This, plus financial trauma and large deficits, means sooner or later the currency has to give. That leaves me inclined to believe Ken Rogoff, Marty Feldstein, Larry Summers, and others who agree that a gradual slide in the dollar is inevitable. Even if large investors and smart people simply hedge (rather than go on a stampede) – say in gold, euros, Swiss francs, and yen – the dollar will eventually slip.
My advice in the matter: we live in an increasingly global world – diversify accordingly.
October 3rd, 2008 at 10:35 am
Why should a decline in the value of the dollar always be a bad thing for the U.S?
Shouldn’t a declining dollar make U.S. exports cheaper and imports more expensive on the world market? Wouldn’t a decline in the value of the dollar be a boost to U.S. manufacturing activities, thereby providing some much needed stimulus to the rust-belt? Wouldn’t it slow the outsourcing of U.S. production facilities? Wouldn’t it raise the relative price of petrol imports, which then makes alternatives more feasible economically? These things don’t seem bad at all.
With that said, they are absolutely right about our lack of wiggle room with regard to monetary policy. Our huge deficit coupled with oil-driven price pressure has tied our “monetary policy hands” so to speak.
I am but a grasshopper to these economists, but none the less, I don’t see why a decline in the value of the dollar is necessarily a bad thing or something that must be “weathered”. It may, in fact, prove to be the ace up our sleeve.
One last point to throw out there, in “Cities and the Wealth of Nations”, Jane Jacobs rather controversially argued that a currency decline is exactly what sputtering economies need (while she was referring to cities, I think the argument applies here). In fact, she went so far as to argue that cities ought to have their own currencies so that the “metabolic rate” of a given would respond exclusively to its particular economic situation.
October 3rd, 2008 at 1:51 pm
Agreed in the short-term… but sometime soon these events will yield a cataclysmic organic innovative change in both policy and theory that will catapult the US atop another new era. Great minds and thoughts have always and will continue to prosper here.
Anyone want to hazard a guess until an new political party or at least movement sprouts-up in the US?? I would guess less than 5 years, in particular as we just saw all of the brokenness of the current system on display during the last two weeks.
October 5th, 2008 at 6:47 am
This (’diversity accordingly’) would be good advice IF many people understood what it even means. Example, am locked into a set list of 10-12 investments in my workplace’s 457 plan. All of them suck as much as the next so where can you really put your money?
October 10th, 2008 at 12:36 pm
Does anyone else find it amusing that pundits are calling our current troubles the greatest economic mess since the Great Depression, and simultaneously are debating whether or not we are in a recession?