1. That's the tail, not the dog. The dog is the exchange rate. Right now, the US is selling China their industrial base. If and when China decides that the US has no more worthwhile industrial base to sell (or that the US isn't going to sell it anymore), China's interest in the US shifts from being an export market to being a raw materials provider. And then the only thing that stops China from treating the US the same way the Washington Consensus has been treating various other third-world countries is the fact that giving the US the WC treatment would cause economic collapse and political turmoil in the world's largest nuclear arsenal.

2. There's no harm in a dollar decline, provided that it is accompanied by a well-thought-out industrial policy with an emphasis on import substitution. However, industrial policy and import substitution are non-trivial exercises at the best of times, so you really want to do them on your own timetable. The US can only do it on their own timetable if they initiate the process by devaluing the dollar on their timetable rather than waiting around for China to decide that it's no longer in their interest to prop it up.

3. China cannot keep the dollar high in the face of a determined attempt to devalue it. China can only keep the dollar high relative to their own currency. But if the US devalues on their own timetable, then China will end up devaluing relative to the € and Yen on somebody else's timetable. And that's not necessarily desirable.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

If less competitive domestically against producers that are not reliant on inputs to the same extent ... that's assuming the existence of competing identically those other producers, and may be turbulence but not a long term problem.

If less competitive against overseas producers ... they are dealing in the overseas currency in which the imports are priced and the cost of the imports in terms of that overseas currency has not change. And assuming any domestic content at all, the cost inflation in exporter currency terms is cost deflation in importer currency terms.

There certainly will be J-curve effects.

If the fix-price component of imports are primarily contracted in foreign currency and the fix-price component of exports are primarily contracted in domestic currency, that gives a J-curve effect which requires stability at the new exchange rate to settle out.

And of course, if the volume of flex-price imports is greater than the volume of flex-price exports, there is a J-curve effect as flex-price products shift on a foreign-exchange-rate driven timetable while fix-price products shift on a price-setting (menu or contract) timetable.

I do not know how much of fix-price product imports is denominated in US$ - likely a large share, but I don't know how dominant - but clearly there is an appreciable flex-price component in the US import bill in imports of about 200b US gallons of petroleum products, so certainly the second source of J-curve effects will be important.

If US policymakers had given up on the US policy setting process as a means of pursuing a desirable change in the exchange rate regime, that larger J-curve costs in having the shift take place by pressing another country to push the change through would be one of the costs of having a thoroughly corrupted political system incapable of pursuing high priority national needs.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.