Some Federal Reserve policy makers are citing the lowest inflation rate in at least five decades as an alarm bell for the economy. Economists at UBS Securities LLC say the figure isn’t as troubling as it appears. … Among the reasons for slowing inflation are improved efficiency and a stronger dollar, which puts downward pressure on prices of imported goods such as cars and clothing.
“If anything, the price softening is helping to support demand,” and the dollar is set to rise further, said Coffin [an economist at UBS Securities]. … “Households are getting a little bit more purchasing power out of their income growth.”
Michelle Jamrisko, Inflation at 53-Year Low Belies U.S. Demand Vigor: Economy, Bloomberg, June 12, 2013.
If a stronger dollar means you can buy more T-shirts from Bangladesh, then the manufacturing job growth will be there not here. Just as importantly, who says you are going to buy another T-shirt or a new Toyota with money saved because a stronger dollar creates lower real prices. Maybe you just might bank the extra money or buy a couple more GM stocks. What happens to demand growth in that case?
Then, there is the other side of the stronger dollar. While American consumers can buy more T-shirts from Bangladesh with the same wages, the factory owners in Bangladesh have to pay higher real prices for the American parts to keep their sewing machines running. Maybe they turn to China or Brazil for those parts. Quite logically, any demand growth at home can easily be offset by losses in demand from abroad.
(Of course, most economists either work for global corporations and investors or support their agendas. Global corporations and investors don’t care where the demand is rising and where it is falling or where jobs are being created or being destroyed. Unlike you and me, they are not tied to a particular nation or a particular city or a particular family, so their fortunes do not rise and fall in connection with a particular place or a particular group of people.)
The key point is that supply and demand functions are global. To write about supply and demand in nation terms is misguided and misguides readers. The U.S. has to export goods and services to pay for the things we import — although we are now wedded to a way of life in which we buy goods and services made in other countries on credit and then pay our debts by selling ownership of our tangible wealth to global investors in those other countries.
Debt supported buying has obscured the loss of wealth in the U.S. But, only in the short term can debt do this. Sooner or later a transfer of real wealth has to take place to clear the debt — then the loss that occurred a decade ago is finally seen for what it is. (It may well be that one part of the value of the foreclosed home down the street from you now belongs to an Asian investor and the other part belongs to a Swiss investor.)
In a world economy, what matters for the working people in the U.S. and for working people everywhere else in the world is the structure of global investment decisions that give life to the relationship between global supply and global demand. Globally, there are now too many businesses and not enough buyers, and tracking the ebbs and flows of demand within the U.S. obscures the far greater power of this global reality over our working lives.