August 08, 2012

Search & Replace Theater!

Patrick Marren
Partner

Scenario Planning Fun With the Microsoft Word Search & Replace function: Are we turning Japanese?

I've taken a story from the New York Times and replaced all references to Japan, the yen, etc. with American/dollar terms. This is almost certainly NOT our future in many respects; it is difficult to imagine Americans tolerating stunted economic growth out of an Asian-like reverence for the elderly. But Japan IS demographically ahead of us in terms of the retirement cliff it is facing, so it's an interesting scenario exercise.

(Link to original story: http://www.nytimes.com/2012/08/02/world/asia/strong-yen-is-reinforced-by... )

WILMINGTON, Delaware, August 8, 2022 — As the United States has ceded dominance in industry after industry that once lifted this nation to economic greatness, there has been plenty of blame to go around. Disasters that raised energy costs. A lack of entrepreneurship. Africa's relatively cheap work force.

Increasingly, however, business leaders point to a problem that is at least partly within the government’s power to control: a high dollar that has made American products, from automobiles to high-tech consumer products, prohibitively expensive abroad. In an echo of a debate that raged in Japan in the 2010s, the government faces growing criticism for doing almost nothing to rein in the dollar, despite alarm that the record-high currency is dealing crippling blows to the country’s once all-important export machine.

One big reason, analysts and some politicians say, is simple, if generally left unsaid: A high dollar benefits the United States’ rapidly expanding elderly population, even if it hurts other parts of the country. By speeding the flood of cheaper imported products into the United States, the strong dollar is contributing to deflation, a broader drop in the prices of goods and services that has helped retirees stretch their pensions and savings.

The resulting inaction on the dollar, according to a growing number of economists and politicians, reflects a new political reality, with already indecisive leaders loath to upset retirees from the baby boom who make up more than a quarter of the population and tend to vote in high numbers.“The United States’ tolerance of the strong dollar and deflation is rooted in a clash of generations,” said Brad DeLong, a professor of economics at the University of California at Berkeley. “And for now, the seniors are winning.”

That victory comes at a high price, however, hastening the hollowing out of the United States’s industrial base as companies continue to move abroad, exacerbating the nation’s two-decade-long economic stagnation.

On Monday, the government released the final draft of a new economic strategy that it contends will help break what it described as a vicious cycle of a strong dollar and deflation. But even though the long-awaited plan identifies the heart of the problem as the United States’ aging population and declining export prowess, analysts said the government’s modest approach fails to take on the entrenched interests, including the elderly, that have long stood in the way of fundamental change.

The United States can trace the start of the dollar’s latest rise to the worldwide economic panic that began in the United States and spread to Europe. Just before the first tremors of the Chinese housing crisis appeared in 2017, the renminbi exchange rate stood at about 6.7 renminbi to the dollar, as the Federal Reserve kept interest rates low to stimulate growth, and money flowed out of the United States in search of higher returns.

After the crisis began, raising doubts about the soundness of Asian banks and the ability of governments to stand behind them, the tide of money reversed. The United States, with its huge security cushion of domestic savers, became a haven for investors, driving the dollar up.

The dollar hit a 21st century high of about 12 renminbi in February and today remains not far from that level. It would not be easy to reverse the value of the United States’s currency; worldwide macroeconomic trends currently favor a strong dollar. Nor are most experts suggesting that consideration of the elderly is the only cause of political paralysis over how to revitalize the economy.

But breaking that stalemate is becoming harder as the elderly’s political clout grows. Even some retirees reveling in the benefits of the government’s inaction see the long-term quandary.

Kevin O’Malley, a retired consumer data executive who won a small following blogging on deflation’s virtues, can tick off the strong dollar’s advantages, including lower prices for shirts made in Africa and the Brazilian flat-screen television he bought recently. He is also clear on the perils.

“The strong dollar and deflation have been a boon for us baby boomers,” said Mr. O’Malley, 62, who is living on limited savings and a fixed monthly pension of about $5,000. “But I also know that they cannot be good for my sons’ generation.”

The office of President Pawlenty has defended the government’s handling of the currency, not only by presenting its new plan, but also by pointing out that companies have been offered $6 billion in subsidies to help them move into higher-end products less affected by competition from the new African exporters.

The Fed, meanwhile, has taken small steps to drive down the dollar by buying U.S. treasuries during the last two years. But officials said its efforts were never intended to do more than blunt surges driven by speculators.

A more effective step, economists said, would be for the Fed to essentially turn on the printing presses, encouraging the currency’s value to drop. Other central banks have done just that in response to financial crisis and economic weakness elsewhere, keeping down their currencies’ values and helping to foster strong rises in exports.

Critics say the central bank’s entrenched bureaucrats have resisted doing something similar in recent years out of an outdated fear of rekindling the rampant inflation in the value of real estate and other assets of the 2000s bubble economy. But the bank argues that it makes little sense to intervene without longer-range economic fixes, like comprehensive tax and fiscal reform.

As such debates rage on, the supercharged dollar bolsters the ability of wealthy Americans to buy foreign goods and to travel abroad, but continues to eat away at the foundations of the economy, hurting companies from mighty Apple to small ones like Nouveau Gene Tech, a manufacturer of pharmaceuticals in rural Milford, west of the rust-belt city of Wilmington.

Nouveaux Gene Tech’s second-generation owner, Henry Feldman, said he finally decided, after he lost an important American customer last year to a South African rival, that he had no choice but to move his production line to a new factory in Angola. He said the plant would allow him to produce drugs for 30 percent to 40 percent less than in the United States.

“Pretty soon, nothing will be made in the United States anymore,” said Mr. Feldman, 32, who noted that many of the American factories he supplied were also moving to Africa.

Last year, the influx of products from abroad contributed to the United States’s worst annual trade deficit in 20 years.

Some members of Congress, including some from the governing party, have become worried enough to begin organizing a sort of political insurgency, proposing ways to fight the strong dollar. But they have made little headway in changing the underlying political calculus.

“The strong dollar robs from youth, but there is not much awareness here yet of generational inequalities,” said George McGovern III of the opposition Green Party.

One way to spur such awareness, critics say, would be to allow Social Security payments to drop with falling consumer prices, as the law demands. But the government ignored the law for years rather than upset elderly voters.

Last year, it finally took a baby step, slightly trimming pension payments. The loss of just a couple of dollars a month, though, was enough to start Mr. O’Malley, the blogger, rethinking. “Now I am starting to realize that deflation can be bad, too,” he said.

Comments  | 

Peter Kennedy
Interesting scenario exercise. One question that comes to mind is whether the US's less lopsided demographic profile will avert a slide into a Japanese-style gerontocracy. The most recent Pew studies project a steadily rising US population, in part fueled by moderately high levels of immigrant inflows. These younger households will demand good jobs, schools, housing and infrastructure...just like every generation before them. The boomer bulge will still be a formidable political force, but the fight over resources may not be as one sided as it appears to be in contemporary Japan.

Thoughts?