The latest fad among those economics types is discussing the state of the American Dollar. As it stands, The U.S. is importing way more than it’s exporting — around 5% of GDP. We call that the current account balance. In order for us to have a negative current account balance, which means basically buying much more than we sell, we need to take on loans from other countries.
Much of our current account deficit is financed by Asian countries, which intervene in the currency markets to keep the American dollar artificially strong and their currencies artificially weak. From the American consumer’s standpoint, this process makes Asian goods artificially cheap. From the Asian consumer’s standpoint, American goods then become artificially expensive. The American producer likewise has a hard time selling to Asian markets, but the Asian producer has an easy time selling to American markets.
American “overconsumption” is financed by foreign countries, and at some point, they will begin to cash out. As countries shy away from American investment, the dollar will weaken against foreign currencies. As the dollar weakens, American products will cost less for foreigners, while foreign products will cost more for Americans. That’s how the current account deficit begins to correct itself. Which brings us to outsourcing.
An artificially strong dollar does not just make American goods unattractive to foreigners — it also makes American workers unattractive to foreign businesses. American workers seem more expensive when the dollar is artificially strong. The reverse is true as well: the strong dollar makes foreign workers seem more attractive to American businesses. As it stands, American companies have been moving parts of their operations to foreign countries, taking advantage of cheaper labor abroad. A weakening dollar could stem, stop, or completely reverse the flow of jobs overseas (if such a flow even exists).
Let’s pretend that foreign countries stop intervening to keep the dollar strong. We start:
US$1 = 50 Indian Rupees
American worker: $50,000/yr salary (R2,500,000)
Indian worker: R500,000/yr salary ($10,000)
American pay:Indian pay = 5:1
Panic! Panic! Massive dollar selloffs. Now the American currency depreciates by a factor of 2:
US$1 = 25 Indian Rupees
American worker: $50,000/yr salary (R1,250,000)
Indian worker: R500,000/yr salary ($20,000)
American pay:Indian pay = 2.5:1
Suddenly foreign labor becomes twice as expensive, and American labor becomes two times cheaper. Outsourcing looks like a much less attractive option to the CEO, and the jobs never leave the shores. Could a weakening dollar make outsourcing irrelevant?
