Interesting article from the bank of Montreal
snips below.
The US is the only industrial nation where employers must
price the cost of employees' and retirees' health care costs into their products and services. This has always been a competitive disadvantage, but it has become a crippling (no pun intended) problem since 1998, as health care costs have been rising roughly five times as fast as the rest of the CPI. In all other nations, governments pick up most of the cost for employees and all—or almost all the costs—for retirees. To the extent companies contribute to those costs, they are usually included in sales taxes and VATs, which are not included in exports. (General Motors reported in 2002 that what it spent on just one blockbuster drug—Prilosec—for its employees and retirees was close to what it earned on producing and selling
private passenger sedans in the US.)
A decade ago, Former Secretary of Health and Welfare Joseph
Califano, then a director of Chrysler, explained the auto
manufacturers' eagerness to open plants in Ontario by asserting
that it cost $900 more to produce a car in Detroit than in Windsor because of health care costs. That differential, we hear, has since doubled. The Big Three have been aggressive spenders on machinery, equipment and systems to produce cars and trucks in the US more efficiently. To the extent they succeed, they reduce their workforce. But also, to the extent they succeed, they increase the number of early retirees, to whom they pay health care and pensions. GM has more than two pensioners for each active worker. Cost-cutting is thus a Sisyphean process: through R&D and capex, you reduce the
number of workers, but that same process increases the number of pensioners—and their health care costs climb far faster than the costs for active workers.
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The dollar must be devalued—by at least 25%.
The longer devaluation is delayed, the greater the risk the market will panic and force a huge devaluation amid a catastrophic crash. The stock market crash of 1987 was triggered by a sudden, market-driven plunge in the dollar, which caused a crisis in the Eurodollar market. (The details of how that crisis developed and unfolded are included
in my book, The New Reality of Wall Street.) The trade deficit is now far higher than the fiscal deficit, and almost
each month economists express surprise at how high it has become. Yes, the cost of importing 10 million barrels of oil a day is a significant factor in the deficit, but China and Japan import oil at comparable levels for their own economies, and the Continental countries also have big daily bills for barrels. The domestic oil and gas industry isn't bleeding jobs: it's struggling to find people and is increasing its domestic capex in a most un-American fashion. The trade deficit began to expand during the late Clinton era. Coincidentally or not, that was the time of the "strong dollar" policy of Robert Rubin. That was an OK policy for the time, because it kept US inflation and interest rates low, and the deficit was concentrated in trade with true trading partners—Canada, Mexico, Japan and Europe—where there were reciprocal opportunities for American businesses. The trade deficit now exceeds 5% of GDP. Fred Bergsten, the respected international economist, asserts that unless present trends change dramatically, it will reach 8% of GDP in this decade. Long before then, the US political scene will be riven by battles over protectionism, and the kind of ugly nativism that Pat Buchanan espouses could become infectious.
But how can the US devalue the dollar?
As long as The Great Symbiosis keeps propping up the dollar, then the dollar will remain at levels that make large sectors of American business uncompetitive. Even now, the overvalued dollar suppresses American wage growth, as companies seek desperately to remain competitive. Kerry has a point when he notes that businesses keep cutting back on health care for their employees. Wal-Mart, the preeminent American merchandiser, has become a dirty word among unions and liberals because of its strict control of wages and benefits.
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Option #3 [revalue the RMB upward] makes sense for China. Not
only would it lower the costs of oil, coal, scrap and metals, thereby dealing with the prime progenitors of inflation, but it would improve corporate profitability and thereby help stabilize the rickety banking system. Moreover, it would help China as it moves to acquire needed mineral assets abroad. In the bidding for prime properties, a bidder who becomes richer by a purely domestic decision obviously has an advantage over those with wealth denominated in weaker currencies. It also makes sense for Japan, particularly if the two nations move together. They will continue to be competitive abroad, because both nations are investing so heavily in advanced technology to make their production even more competitive. By reducing their input costs, and modestly expanding their export prices, they become more profitable—and powerful. So the dollar is like the man walking the plank—descent is inevitable, whether voluntary or involuntary.
Currency markets are already beginning to sense that some international move on the dollar is under consideration. The wellinformed David Hale reports that at the Washington IMF meeting, people in gatherings with such luminaries as Alan Greenspan chatted about the possibility of a 30% dollar devaluation to try to rein in the cancerous Current Account deficit. Across the world, policymakers are getting increasingly nervous about this "System" in which US consumers go deeper into debt in an overvalued currency to keep factories abroad humming. More and more central bankers are saying publicly that this daily increase in US external debt is the biggest threat to the global economy.
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