Dean Baker gives a whole new meaning to “creative destruction”

His piece should not be read by neophytes (or the Ted Cruz gang), lest they become enthralled with the’possibilities’!:

…The gap in demand created by the trade deficit was filled in the late 1990s by the stock bubble. It was filled in the last decade by the housing bubble. At this point, we have no bubbles on the horizon (a good thing), which means that we have to live with the gap in demand created by the trade deficit and the resulting unemployment.

This is where the horror story of the dollar losing its status as the reserve currency comes in. In principle, we should be having discussions in Washington about how to lower the value of the dollar to make our goods more competitive internationally and bring down the trade deficit.

Unfortunately these discussions are not taking place. For some reason exchange rate policy does not come up in public debate. This means that the two policies that could put an end to mass unemployment — stimulus and exchange rate policy — are both taboo in Washington politics.

But the prospect of a default causing the dollar to lose it status as the reserve currency could give us a backdoor route to achieve this result. If the dollar is no longer the pre-eminent reserve currency, then countries will dump much of their dollar holdings, pushing down its value in currency markets.

A lower-valued dollar will cause exports to soar and imports to plummet, creating millions of new manufacturing jobs. Millions more jobs would be created in other sectors due to the multiplier effect. This could well bring us back to full employment — a goal we may not otherwise achieve until the next decade.

3 thoughts on “Dean Baker gives a whole new meaning to “creative destruction”

  1. A period of Fed indiscretion brings all kinds of jokers out of the woodwork. I wish the central bankers would fix this mess before things like this actually enter public debate.

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