Today’s Reading in Macroeconomics

December 29, 2006

Ronald McKinnon has some intelligent things to say over at the FT blog about the falling value of the dollar. It’s interesting, if not a taxing read, so here are a few gems:

Regarding the manufacturing sector, he says: “In order to transfer resources in real terms from the rest of the world, the U.S. runs very large trade deficits in manufactures… This ‘real’ transfer of manufactures to cover the shortfall in American savings speeds the contraction in employment in U.S. manufacturing beyond the ‘natural’ rate of decline… [P]eople incorrectly blame ‘unfair’ foreign trading practises - undervalued currencies, substandard labor practices, or ‘dumpin’ of subsidized exports in American markets - instead of America’s own deficient saving covered by foreign borrowing.”

And further:

“[T]he really big incidental negative from a deep nominal devaluation of the dollar is the monetary upheaval associated with debasing the key currency of the international monetary system…” McKinnon goes on to explain Nixon’s 1971 tariff wall, which lead to “disastrous worldwide inflation” for the better part of two decades, and concludes that “[Monetary economists] lie awake at night wondering if such a calamitous event might happen again.”


Posted in: Economics Lessons

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