Dean Baker, what do you think will cause the dollar to go down?

thx!

Cratering the dollar will not solve the US's problems. The country needs to PRODUCE things that consumers will actually PURCHASE. Somewhere between 20-25% of US manufacturing jobs have disappeared in the "Lost Decade".

Or is the country to continue buying everything from China? With the 'enhanced exchange rate'?

How is this to remediate the US's appalling problems?

CrocodileChuck

To stay within your example - suppose that 10 computer factories met demand, and the next year, 5 more factories were built, on the expectations of massive growth in demand (housing bubble, Internet boom, BRIC middle class - pick your own story, but don't confine it to a single nation).

And further, let's just say that the growth in demand was actually 50% greater, so that the next year, another 5 factories are built. To stay very simplistic, note that the employees of the 15 profitable factories buy computers themselves, adding to demand.

I'm sure you can see where this is going - what happens when 20 factories are selling their products in a market that is only buying the aggregate production of 5 factories?

Yes, that old deflationary spiral.

Why some people who saw the housing bubble are blind to the massive worldwide overcapacity of many items (Volvo truck orders falling 99.4% in a quarter? - Lucky Mercedes saw only a 56% contraction) and what this means for those economies that still manufacture goods strikes me as ironic. Deflation is not about consumption, it is about production, something America decided was no longer relevant in a financially engineered future.

Your definition of deflation - lower prices - actually has nothing to do with deflation and confuses cause and effect. Deflation equals reduction of credit and money supply. Inflation equals increase of credit and money supply. The government's efforts to re-inflate money supply are right now banging into an over-indebted re-trenching consumer. If the government wins, we get inflation. If the consumer wins, we get deflation. Read Mises.

You are still addressing proximate rather than ultimate causes, Dean.
The housing bubble is one effect of the ultimate cause - which is the conversion of banking into an "entrepeneurial" activity.
Since roughly 1980, returns to capital have far exceeded those to labor. The new financial activities have sucked wealth from industry and commerce instead of providing investment for development.
The result is billionaire bankers and a labor force with negative net worths.
We need to adjust returns to favor labor versus capital and reduce reliance on credit.
Increased minimum wage, adjusted capital gains taxes, greater progressivity in income taxes and a national economic development plan are some needed adjustments if we want to see progress.

"The bulk of the economics profession, as well as the media, SOMEHOW managed to overlook an $8 trillion housing bubble as it was growing."

In Sandburg's biolography of Lincoln, Licoln asks this question, "If 3 crows are on a fence, and you shoot 1, how many are left?"

Government economists (everybody from the Fed to Fannie to Freddy) want to report rising wealth. Business likes it to, media likes to get more advertizing as well. Other than bloggers, no one has a financial interest in pointing out the bubbles, and a LOT of people hate you for it. And who doesn't want to be richer??? But as the anecdote suggests, there is a mathamatical number, and a "real" number.

The NYT reporter is certainly confused about whether deflation is a cause or a symptom. Monetary enthusiasts (which includes Bernanke and many liberal economists) think that they know the real cause, that is a deficiency of money, and they think that they can fix things by cutting interest rates. This is a theoretical and ideological dogma, which so far has not passed any real tests - indeed it has failed badly in Japan.

If the housing bubble is the only real cause as Dean claims, why is there a global crisis? Endemic problems in other countries seem to have been exposed as well. It seems there has been overexpansion of credit in many areas, especially pure speculation, but also including consumer debt. I doubt if most credit-card users care much about interest rates (what do either card users or banks care about federal funds when the going rate on balances is 20%?) or whether their house equity is backing up all their purchases.

A problem is the housing bubble's collapse. It is only one of the financial assets that has collapsed, however. The problem from which the others derive IS deflation -- deflation of the value of labor. The "Great Moderation," growth with low inflation, was built on the back of high productivity increases constrasting to stagnant wage growth.

We all have commented on the growing disparity between rich and poor over the past 30 years, as well as stagnating wage growth, and some have matched it to the 1920s. Inevitably the economy has to stagnate as well, or decline. When increases in growth were forced by profligate monetary policy and financial practices, it is imaginary growth.

One wonders whether anyone will go back to the residential investment figures and recast them in light of their current values.

That aside, rewards to producers in the labor market have been for decades below the value they produced. The financial sector built its castles on this eroding sand. No amount of saving the banks can solve the recession problem, nor even reverse the damage to the banking sector, because it is premised on lending and borrowing around a consumers who are now broke. We need to re-read our Keynes and begin to rebuild demand from the ground up. We even have WWII in the form of the environmental collapse of the planet.

The recent decline in housing values is a consequence of the unwinding of a decades-long Ponzi scheme that was fueled by an explosion of credit growth. Credits grew in response to rising overconfidence on the part of lenders who gazed into a mirage of low default risk that was promulgated by a prolonged period of overly accommodative monetary and regulatory regime.
This disequilibrating bias force was originally introduced by the authorities to dampen the severe employment and economic dislocations that they believed were imminent from the rapid globalization of business after the integration of what was the Second World. Unfortunately what should have been a temporary stopgap policy was left in place far too long,
leaving many debtors unwittingly dependent on accelerating growth, and highly vulnerable to collapse in the event of a normal cyclical slowdown. Securitization spread the contagion worldwide and compressed the timescale.

"The problem is quite simply a massive lost of housing wealth, compounded by the recent loss of stock wealth. The only cure will be finding alternative sources of demand. In the short-term, government will have to fill the gap."

Not sure what demand you are referring, do you expect the American consumer to somehow buy oversize houses,multi auto's,boats, ATV, take expensive vacations,based on today's medium income?
And just how will the gov't create enough tax revenue to make up what private enterprise lacks?

Hi Guys,

I haven't heard anybody comment on the idea that mortage payments should go down with the purchases of less expensive homes. Shouldn't there be some economic benefit to the consumer now he is a renter/purchaser and has lower monthly payments?

How do you guys see the current financial turmoil and potentialy ugly economy affecting the lower end retnal market? Will prices of rents maintain current levels,go down, or stay the same in the period of economic turmoil?

Thanks
Mark

dean, i think 12 months from now you will be made to eat your words.

the credit crunch is very real. for example, as we speak, international trade has ground to a halt largely because banks have stopped accepting each others' letters of credit. primary credit market volumes (syndicateed loans, bond issues, etc) have collapsed.

the housing bubble was just one manifestation of a global credit bubble. sub-prime mortgages are the harbingers of similar problems in credit card debt, junk bonds, auto loans, etc, etc. anyone with a bad credit who relied on being able to continually roll their accumulated debts is now doomed.

skeptonomist's point above also needs repeating: there have been concurrent bubbles that are now bursting elsewhere in the world - in the uk, spain, china, russia, the middle east.. again, these are not just housing bubbles.

i agree with you to the extent that there was clearly a downturn in consumption before the crisis hit that was driven by the housing market. consumption fell at its fastest rate in 3q08 since the 1970s, BEFORE the financial crisis really got going. but you should have no doubt the crisis will now make things many many times worse.

the usa's biggest problem is its zero savings rate. households will now be FORCED to save as they pay down debts they can no longer refinance. domestic private sector demand will collapse, and
as export demand is also falling, the us government needs china to buy treasuries like never before, or else the crowding out effect on stock markets and credit markets will be very ugly.

@ Skeptonomist:

Because much of the world has a similar RE (read: land) bubble.

@Dean:

Aww.. Your penultimate paragraph featured use of the word "equity" as what had been wiped out; unfortunately, your ultimate paragraph again featured use of the word "wealth" as what had been wiped out. Again, I'll keep saying that I think a major failing in the supposed science of economics is the lack of precision in terminology. There's no less wealth as a result of the housing bubble bursting: rather, landowners are simply able to command a lesser share of it.