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Thread: why a weak US dollar does NOT help US manufacturers ...

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    Default why a weak US dollar does NOT help US manufacturers ...

    (snip)"Why a Weak Dollar Hurts U.S. Manufacturers
    by Peter Schiff

    The vast majority of economists are currently hailing the freefall of the dollar as a windfall for American business. While some domestic manufacturers may enjoy some initial benefits from a weaker dollar, they will ultimately suffer many adverse consequences as well. More importantly, the dollar's demise is a disaster for American consumers.

    A cheaper dollar helps domestic manufacturers because it makes local costs, such as wages and rents, decline in relation to the costs borne by international competitors. While this is true, it also means that American workers and landlords see a corresponding decline in the real values of their pay and rent. Given that such declines negatively impact living standards, such developments hardly seem worth celebrating.

    Too often overlooked however is how the weakening dollar also works to increase costs for domestic manufacturers. A falling dollar raises the costs of raw materials, such as oil and metals, while simultaneously decreasing the relative costs that foreign competitors pay for the same supplies.

    But it is not just raw materials prices that rise. Perhaps even more important will be the prices of foreign-made components that are used in American factories. In fact, many American "manufacturers" are really nothing more than assemblers of imported components. For example, take a domestic golf club company that supposedly manufactures clubs in the good old U.S.A. Such a company might import the heads from China, the shafts from Indonesia, and the grips from Mexico. The only thing the American company actually does is put the pieces together. So as the dollar loses value, the costs of importing all of the components will rise, making the finished product more expensive for Americans.

    Another often overlooked cost of a weakening dollar is higher interest rates. Because a falling dollar diminishes the global appeal of dollar denominated debt, U.S. interest rates will inevitably rise, resulting in increasing capital costs for domestic manufacturers. Similarly, strengthening foreign currencies increases the appeal of non-dollar debt, reducing the capital costs paid by our foreign competitors.

    Furthermore, as a weaker dollar forces up domestic consumer prices, American workers, suffering from declining real incomes, will ultimately press their employers for more generous pay raises. Rising nominal wages will eventually undermine the competitive gains associated with lower real wages that initially resulted from the falling dollar. Similarly, landlords will look to raise rents to make up for the falling purchasing power of their rental income.

    Lastly, as rising interest rates and consumer prices combine to exacerbate the severity of the coming recession, federal tax receipts will inevitably decline causing the budget deficit to swell anew. A populist Congress will likely seek to impose even higher taxes on those businesses profiting during the hard times. So any advantages U.S. manufacturers might get from cheaper dollars may be lost to higher taxes.

    The bottom line is that true competitiveness comes from sound money, high savings, low taxes, minimal government regulation, hard work, and the entrepreneurial spirit. Laying the hopes of America's industrial salvation on currency devaluation will only backfire, leaving American manufacturers even less competitive in the future than they are today."(snip)

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    Default Re: why a weak US dollar does NOT help US manufacturers ...

    Only an idiot or a sellout would think it would.
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    Default Re: why a weak US dollar does NOT help US manufacturers ...

    ^^^ unfortunately, a lot of old school economists as well as old school politicians are of the opinion that they can have an instant replay of the 80's if only the dollar's exchange rate is weakened again vs the currencies of Europe and Asia (as was the case in the 80's).

    Obviously they're wrong on the first count because in the 80's American companies still manufactured a complete product in America (as opposed to importing components / sub-assemblies and simply putting them together here in order to get a Made in America certification). Obviously they're wrong on the second count because the supply vs demand equation for all 'inputs' from labor to raw materials to machine tools / technological process improvements has been massively globalized since the 80's, which dictates that all of these 'inputs' become more expensive as the currency value drops. And they're even wrong on a third count because, by and large, the actual ownership of US manufacturing companies (both direct and stockholders) is no longer American either, meaning that even if such companies' profits do increase those profits merely get shipped out of the USA and back to the actual owners in Europe or the Middle East or Asia.

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    Default Re: why a weak US dollar does NOT help US manufacturers ...

    We are about to see how globalism totally skewers the economic "rules" we so love and hold to be true.

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    Default Re: why a weak US dollar does NOT help US manufacturers ...

    There is nothing holy about manufacturing.

    An inflating dollar was bad in the 80s, too. It's always bad. Inflation is bad, period. It's legalized counterfieting that always results in a wealth transfer.

    It's just a hidden tax they resort to more powerfully when the political climate does not allow for more direct borrowing or overt public taxation.
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    Default Re: why a weak US dollar does NOT help US manufacturers ...

    There is nothing holy about manufacturing
    granted, but manufacturing is one of the few industries that actually creates real value out of nothingness. This is as opposed to service industries which merely slice off a piece of the real value created by others, and as opposed to the public sector which merely vampire feeds off of every other productive endeavor.

    With the housing sector in the dumper in terms of creating real value (obviously it is now LOSING value), other than the remnants of domestic manufacturing there are very few America industries which are still creating real value - domestic oil & gas (in decline), Hollywood, domestic software, domestic mining ... this list is WAY too short to bode well for the future.

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    Default Re: why a weak US dollar does NOT help US manufacturers ...

    Any industry based on VOLUNTARY exchange creates wealth. People's values are subjective so wealth can only be generated by providing things people want, whether it's manufactured goods, services, prayer help, whatever.

    Services industries create value every bit as real, if the money they are getting is real. There is no use manufactoring stuff nobody wants while people are demanding certain services. Additionally, America has compartive advantages in some service industries, while being at a disadvantage in some manufacturing sectors.

    The housing market isn't losing value so much as the real value is being revealed. Inflationary booms distort the market signals and the true prices. A recession is a return to rational pricing.

    How does one judge "real value" in Melonie's eyes? So far as I know, the only real test is whether or not people will voluntarily pay for something. If that is the case, we are producing a lot of real value.

    What scares me is you have "economists" like Alan Tonelson running around writing books promoting the idea our biggest problem is our somehow current situation of unbridled free trade and that to fix it, we need protectionism. How in the world people except his initial proposition we have uncontrolled Free Trade is beyond me, the second half of the idea is even more wonky.



    Domestic oil, gas, other forms are mining are hindered by environmental regulation(which is always some form of economic warfare of some type). BUt even with that, there was a decline trend anyway(which is why the regulations were able to pass). America by and large is not really a retail goods manufacturer. What we do produce are a lot of capital goods and a lot of foodstuffs. Those are the areas we have a good advantage in over most other countries, so our economy migrates that direction,especially for the export picture.

    We would lose if we took measures to encourage more domestic production of retail goods, especially if that measure took for the form of even higher tariffs or quotas on imports. We suffer enough in the foodstuffs industry from various tariffs. Americans pay twice the world price for sugar and many other in-demand farm products because of the protectionism we already have.

    Our economy is doing pretty well despite everything Bush and Co are doing to hinder it. We had the biggest increase in exports in almost 20 years the last 4 quarters.
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    Default Re: why a weak US dollar does NOT help US manufacturers ...

    How does one judge "real value" in Melonie's eyes? So far as I know, the only real test is whether or not people will voluntarily pay for something.
    Well perhaps I'm not using the correct buzzword. The 'real value" that I'm referring to is an enterprise that truly creates a form of 'value' that did not previously exist. Obviously industries like oil / gas / mining do this because they insert labor to extract raw materials, and those raw materials have intrinsic and enduring value far in excess of the labor. Obviously manufacturing does this because they also insert labor on top of heavily processed raw materials, with the manufactured product also having intrinsic and enduring value far in excess of the labor and raw materials. Put another way, a barrel of oil or a pound of copper or a bushel of corn or a new truck have a 'real value' that is largely independent of a booming vs busting economy.

    But when you start talking about a service industry, be it banking or brokerage or retail in the mainstream sense, or be it dog grooming or maid service or lap dancing in the esoteric sense, none of these produce anything of enduring value. All of these depend on extracting a percentage of 'real value' from somebody else that DOES have a connection to (and extracts a profit from) something of enduring value. Because of this, a booming versus busting economy will arguably have a profound impact on service industries.

    The ultimate example of the point that I am trying to make is the public sector, which is arguably a service industry. All of these jobs are funded not by creating anything of intrinsic value, but exclusively by extracting a percentage of 'real value' from someone else. In the extreme hypothetical case where the public sector grows to become the majority of a country's economy, the wheels fall off the whole system because there is nothing of underlying 'real value' to fund the economy. By definition it's impossible to continue paying public sector salaries based on the taxation of other public sector salaries ... unless of course the tax rate is 100% !!! Private sector service industry jobs share at least some of this conundrum, since it's also impossible to continue paying for service worker salaries via the voluntary spending of other service worker salaries ... unless of course the spending rate is 100% (which it can't ever be because 20-30% must be diverted to taxes in order to support the public sector !!!).

    Logically speaking, the public sector and the service sector are kept 'afloat' by the continuous injection of new 'real value' i.e. the voluntary spending and tax revenues from people whose paychecks aren't 100% dependent on the recycling of someone else's paycheck but instead are derived from the creation of additional 'real value'. THIS is where the US economy is becoming increasingly vulnerable as businesses and industries that create / extract 'real value' continue to move out of the country.

    I agree with you that, at this stage of globalization, there is no way that America can practically attempt to rebuild a domestic sector that creates 'real value'. As such, America's service sector economy (as well as America's public sector economy) is now dependent on foreign sources to supply the continuous injection of new 'real value' necessary to keep the system 'afloat'. But this also, for essentially the first time, makes America almost totally dependent on the continued health of the global economy and on the continued existence of robust global trade.

    As you point out, if certain politicians were to be successful in erecting trade barriers, then America will very probably wind up with a nasty trickle-down effect. When the Arabs / Chinese are not allowed to profitably invest their trade surplus dollars i.e. 'real value' in the US, all of a sudden the incomes / bonuses of bankers and brokers drop precipitously. Gov't tax revenues also drop precipitously, giving rise to calls for tax increases. Those bankers and brokers then stop spending as much as they had been on 'discretionary' items. Thus the paychecks of all 'downstream' service workers from retail clerks and restaurant waiters and lap dancers all take an immediate hit. This in turn causes the 'downstream' service workers to spend less, and also results in a further reduction in tax revenues with the inevitable call for tax increases. Without some source of 'real value' being injected constantly, the service economy and public sector would quickly snowball straight to hell.

    Of course the gov't / FED does have other means of artificially injecting the system with 'apparent value' to keep the service economy and public sector afloat ... for a while. I'm talking about borrowing money from foreigners to the tune of $3 billion a day, printing money out of nowhere, liquidating assets (i.e. selling interstate highways / ports to foreigners) etc. All of these are now taking place on a grand scale to make up for the fact that America no longer has domestic sources of 'real value'. But 'apparent value' and 'real value' aren't the same thing, and at some point 'apparent value' must be paid for with 'real value' by one means or another or the system will collapse.

    ~
    Last edited by Melonie; 10-14-2007 at 07:29 AM.

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    Default Re: why a weak US dollar does NOT help US manufacturers ...

    Public sector jobs are bad because they are not based on voluntary exchange. They are based on taxation(an involuntary exchange). Same thing goes for government actions that actually produce physical goods(like water treatment producing clean water etc). Still not based on voluntary exchange so they are never the "wealth" generators the GDP and such automatically assume they are.

    Produced goods are only added value in so much that somebody else wants to buy them. If you turn a 10 dollar lump of plastic into a toy people will pay 15dollars for, you have created 5 dollars of additional wealth per toy. If you turn the same 10 dollar lump of plastic into a hair tool that people will only play 5 dollars for, you are essentially wasting resources and generating negative wealth, which is why thankfully such unprofitable excursions causes bankruptcy.

    Profit-loss tells us if we are being productive or destructive.

    Valuing manufacturing over service work is an error without looking at prices. Most economic commentary is usually devoid of mentioning prices, which means most of it is usually devoid of point. To talk about the economy without the context of the price system is not really economics. Maybe metaphysics? I dunno.

    Our ability to build more manufactoring is based on consumer whim. Government action hinders movement in either direction, of course. As it is now, for many RETAIL goods, the price of labor prohibits any advantage for producing things in the US. That's fine, we benefit from things being produced more efficiently elsewhere. America focusing on producing cheap toys and combs is like buying BMWs to deliver pizza: a waste of a resource. Our heavily capitalized economy is better used making capital goods or higher priced, more complex goods.

    As long as the government does not interfere with the price signals that people use to make their economic calculations, there is no problem. Of course, the government is forever doing that.
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    Default Re: why a weak US dollar does NOT help US manufacturers ...

    [quote=Melonie;1242121]granted, but manufacturing is one of the few industries that actually creates real value out of nothingness. This is as opposed to service industries which merely slice off a piece of the real value created by others, and as opposed to the public sector which merely vampire feeds off of every other productive endeavor.

    Melonie- I agree with 1st sentence there, but recognize that nothing is in true equilibrium. A falling dollar makes US products cheaper for foreign countries to import (eg - a lot of foreign airlines buy Boeing products), yet as you point out earlier, there's more foreign "parts" in US manufactured goods. Yet, there are also US vendors subcontracted by foreign manufacturers. So, trying to pinpoint net effect of a certain event is like trying to nail Jello to the wall. Still, I think less dependence on foreign goods would be better for our national sovereinty in the long run

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