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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: reaper who wrote (225129)3/4/2003 9:16:23 AM
From: Perspective  Read Replies (2) of 436258
 
Reap - I've got two arguments against your position:

1. The *primary effect* of weaker dollar is higher relative import pricing; it's the opposite of what we've enjoyed for the past several years, where lower import prices increased purchasing power and - you guessed it - the trade deficit exploded. Reverse the primary driver and you reverse the primary effect. Assuming the "memory" of the system is negligible, US$-based prices and demand have a static supply-demand relationship that would respond to deflation with higher demand (of course the system *does* have memory - human behavior and D-E-B-T ).

2. If a reduction in purchasing power resulted in foreign prices falling even faster than the dollar, then the net deflationary effect would increase our aggregate purchasing power - and I would expect consumption of foreign goods to continue increasing.

In order for your argument to work, you'd have to see a true chain reaction (positive feedback) engage, where the initial dollar shock tips the lead domino, tons of people get laid off and/or consumers start saving bigtime, and even falling prices are unable to keep pace as effective purchasing power falls even faster than prices with the removal of consumer credit.

This would certainly be true if foreigners started liquidating US treasury debt instead of sopping up all we care to issue. However, that would also jam interest rates upward, which I believe is the opposite of what you see.

BC
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