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Global Imbalances and the U.S. Economy

 
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PostPosted: Sat Mar 29, 2008 2:24 pm    Post subject: Global Imbalances and the U.S. Economy Reply with quote

The depreciated dollar makes U.S. goods relatively cheaper domestically and abroad. So, for example, U.S. consumers are more likely to buy American autos than European autos (given European automakers receive fewer Euros per dollar), while E.U. consumers are also more likely to buy American autos (given U.S. automakers receive more dollars per Euro). So, the weaker dollar causes an increase in U.S. production or at least a relatively higher consumption of U.S. goods.

Sustainable economic growth (of goods & services) is optimal growth. High debt and low saving will cause Americans to work longer, which will add to future growth. It's likely, Americans will consume less, pay-down debt, and build-up saving. Consequently, U.S. real consumption may be flat or low, while the U.S. export and tourism booms will add to growth. U.S. wage growth may accelerate at the expense of slower profit growth, given the inverse relationship between wages and profits, and the U.S. profit boom in recent years.

So, the correction of global imbalances is the inevitable process that continues to benefit the U.S. Initially, export-led economies accepted smaller gains of trade (which implies the U.S. received larger gains of trade) to spur their output and raise their employment levels. Export-led economies maintained high output and employment by receiving increasingly smaller gains of trade to the point where they were working almost for free (and U.S. consumers had diminishing marginal utility to the point where they refused to buy, unless foreign goods were sold at cost). Export-led economies are becoming worth less, because they're holding dollars, while the U.S. commands market power for its goods. So, those dollars flow back into the U.S. more cheaply, i.e. improving U.S. terms-of-trade.
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