Tuesday, January 10, 2006
Good News and Bad News
Peter S. Goodman, writing in the Washington Post for Tuesday, January 10, 2006, reports that "China has resolved to shift some of its foreign exchange reserves -- now in excess of $800 billion -- away from the U.S. dollar and into other world currencies in a move likely to push down the value of the greenback, a high-level state economist who advises the nation's economic policymakers said in an interview Monday."
First, the bad news: If China starts selling dollars, Japan will have to follow. The result may be a catastrophic fall in the value of the dollar in international trade. Imports will cost more. American tourists won't be able to afford vacations to Europe or Asia. The Bush administration won't be able to continue deficit spending because foreigners will no longer want to buy our bonds. Poor Mr. Bush will be caught between a rock and a hard place: either curtail our expensive adventure in Iraq or agree to a substantial increase in taxes.
Next, the good news: China's action may set in motion a trend toward equalization of pay scales. If the dollars is worth less in comparison with the yuan, the yen, the baht, the Hong Kong dollar, the currencies of Indonesia and Cambodia and Malaysia and other countries who now provide American corporations sources of cheap and compliant labor, it will become less attractive for those firms to export jobs. Eventually a worker in Indonesia or Thailand will earn the same wage as an American worker. Then the goal and promise of globalization will be realized: every country will produce and export those products at which it is most skilled. We will again (or perhaps for the first time) have Portugal specializing in producing wine and Britain in manufacturing clothing to the benefit of both populations.
In between the bad and the good there will be some very hard times for us Americans.
First, the bad news: If China starts selling dollars, Japan will have to follow. The result may be a catastrophic fall in the value of the dollar in international trade. Imports will cost more. American tourists won't be able to afford vacations to Europe or Asia. The Bush administration won't be able to continue deficit spending because foreigners will no longer want to buy our bonds. Poor Mr. Bush will be caught between a rock and a hard place: either curtail our expensive adventure in Iraq or agree to a substantial increase in taxes.
Next, the good news: China's action may set in motion a trend toward equalization of pay scales. If the dollars is worth less in comparison with the yuan, the yen, the baht, the Hong Kong dollar, the currencies of Indonesia and Cambodia and Malaysia and other countries who now provide American corporations sources of cheap and compliant labor, it will become less attractive for those firms to export jobs. Eventually a worker in Indonesia or Thailand will earn the same wage as an American worker. Then the goal and promise of globalization will be realized: every country will produce and export those products at which it is most skilled. We will again (or perhaps for the first time) have Portugal specializing in producing wine and Britain in manufacturing clothing to the benefit of both populations.
In between the bad and the good there will be some very hard times for us Americans.
