If China dumped the U.S. dollar, the immediate effect would be a sharp increase in the price of imported goods as the value of the dollar plummets. Since nearly everything in the U.S. is imported these days, this would manifest itself as steep inflation. Basically, those trillions of dollars that the Fed has pumped into the economy over the past 10 years would suddenly become visible, instead of being masked by the deflationary effects of cheap Chinese labor.
Soon after, domestic manufacturers - those we have left - would notice their profit margins jump as their goods suddenly become competitive again. The real reason American manufacturing sucks now isn't that Americans are stupid or lazy, it's that the overvalued dollar means everyone has to pay more for American goods than they're worth. If the dollar's value declines by half, the price of "Made in USA" goods drops in half relative to imports. I'd never consider buying an American car now, but if they cost 1/2 to 1/3 of what an equivalent Japanese car did, I'd think about it.
Because the U.S. manufacturing sector has atrophied so much, that increase in competitiveness would lead to a large labor shortage. Wages for blue-collar factory workers will jump to meet demand. Since cheap Chinese labor is no longer economical, companies will substitute American labor instead.
The end result will be a net loss for the U.S. economy, but it'll generally fall most on those most able to pay. The financial industry will be ruined. I'll likely lose my job (I work at a financial software startup, and many of our customers have large international positions). Wal-Mart's profits will take a tumble as it finds it can't maintain its "every day low prices". Many retailers will be similarly hurt.
But ordinary working-class Americans - those most left-behind by the economic boom of the last 25 years - stand to gain the most, relatively speaking. In addition to returning the U.S. manufacturing sector to competitiveness, inflation benefits debtors and harms creditors. So all the folks who owe $20K on their credit cards find that $20K is worth half as much as it used to be, while their wages may very well double.
All this assumes a catastrophic financial meltdown, as described in the great-grandparent. If the dollar-slide is more gradual, as the financial community expects, there's no reason to believe the dollar will undershoot fair value and return U.S. manufacturers to competitiveness. And most financial firms are already factoring a gradual dollar decline into their models, so their investments stand to benefit.
As for the Chinese, a meltdown in the dollar would be absolutely catastrophic. They've lifted 400 million people out of poverty by giving them cheap manufacturing jobs funded by Western multinationals. If their wages becomes significantly inflated (in dollar terms), they'll find that those 400 million people will lose their cheap manufacturing jobs and go back into poverty.
China has 1.2 billion people spread densely throughout the habitable areas, with a large number of them in the unmarried 15-30 year old male demographic that's especially prone to violence. The government has managed to maintain control because many of those people have seen their lives improve dramatically over the past 30 years. There is no social safety net. If people suddenly lost hope, they'd face a revolution faster than you can say "Kalashnikov". The #1 priority of the Chinese government is to keep itself in power, which is why they can't dump U.S. dollars.
No comments:
Post a Comment