Quote Originally Posted by Fuchs View Post
The U.S. has a trade balance deficit that exceeds a sixth of its industrial production. It could easily have four huge growth years with frozen domestic consumption
This is really an extraordinarily bizarre statement. How is the US supposed to “easily” have four huge growth years with frozen domestic consumption? Where are all the products of this industrial production supposed to go?

Of course I know about open systems, everyone does. I also know, as does anyone paying attention, that in this case it doesn’t make any difference at all. There are only three things that can happen to the goods you propose to produce. Either they are sold domestically, or they aren’t sold at all, or they are exported.

If we assume frozen domestic consumption, the only way increased domestic output will be sold domestically is to take market share from other locally produced goods or to take market share from imported goods. The latter is an attractive option on paper, but barring self-destructive protectionism it isn’t likely to happen in the real world, unless the US suddenly discovers some miraculous and hitherto unknown competitive advantage.

Not selling product isn’t an option: the factory won’t have revenue and will be unable to cover its costs.

But of course it’s an open system, and we can export… if you’re an ivory-tower economist with no connection to real world constraints. Realistically, who is going to buy the stuff? For the US to export its way into “four huge growth years with frozen domestic consumption” there would have to be either an extraordinary increase in global consumption or US goods will have to seize market share from somebody else’s goods. Again, this would require US goods to US to suddenly discover some miraculous and hitherto unknown competitive advantage.

The export “solution” doesn’t exist, outside the realm of theory. Individual businesses will be able to find or create niches and increase market share. Other individual businesses will lose. On a larger scale, driving up US exports to the level you’re discussing is simply not going to happen. If US goods were export-competitive this situation wouldn’t exist in the first place. Classic example of the old economist joke… “assume a can opener”. You might get a competitive US export economy if you could drop the dollar another 30% and wait a couple of decades for previous distortion to unwind… but the US doesn’t even have an effective way to control the value of the dollar, which has become a global currency and is not fully responsive to US policy.

At the end of the day you can talk all you want about investing in capital plant and boosting industrial output, but you can neither compel nor persuade companies to invest in capital plant that aims to produce goods that the investors don’t believe they can sell.

Then of course you get into policies designed to increase competitiveness… but these take time, and most of the ones recommended offer a whole range of side effects and potential unintended consequences, many of them unpleasant.

Quote Originally Posted by Fuchs View Post
You overestimate the influence on exchange rates. It's not an excuse and explanation for everything. The simple fact that all countries still export even at unfavourable exchange rates hints at the complexity.
What other country has to cope with having its currency used as the medium of international trade, completely divorcing demand for currency from domestic economic conditions or domestic policy? What other currency has had to cope with 40 years or so of being the world’s default medium for investment? There hasn’t been a currency as radically overvalued as the dollar since the British Pound of the late imperial era… and the US doesn’t have an empire to shove its goods on.

These distortions can be managed up to a point, beyond which the impact becomes overwhelming and they start to control the direction an economy takes. Why do you think the Chinese are so determined to suppress the value of their currency? Because it matters. It may not be the ony factor, but it’s the herd of elephants in the drawing room.

Quote Originally Posted by Fuchs View Post
The U.S. could pull itself out of the mess in two decades, maybe even just one if the policy is very unusual. There are thousands of levers to be used, and new instruments can be introduced.
Possibly you should consider revealing them. We wait with bated breath.