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Get rich slow
A cheap U.S. dollar is no fun, but it will get the job done
David Frum
David Frum
W

ork more. Save more. Export more. Import less. Consume less.

That's America's economic future. It's not a fun formula. But it will get the job done.

The U.S. economy crashed in 2008 and 2009 in a classic balance-sheet recession, like 1929 in the United States or 1989 in Japan.

Balance-sheet recessions happen after long booms. Asset prices rise. Households and corporations borrow and borrow to buy and buy. Suddenly the asset prices cease rising. Suddenly everybody realizes the debt burden is too heavy. The game of musical chairs abruptly stops.

For recovery to begin, the ratio of debt to income must decline.

That process has already started in the United States.

Personal savings rates have jumped, from virtually zero in the mid-2000s to 5.5 percent in the early months of 2011.

Collectively, Americans are selling more to the rest of the world and buying less from other nations. U.S. exports hit an all-time high in March 2011, and are up more than 21 percent from 2009. Meanwhile, the non-oil trade deficit is dropping: down 6 percent in the first quarter of 2011.

These steps are uncomfortable, but they are necessary. Yet much of the current political debate seems intended to suggest that there is some other way out. 

Some argue that the real problem is public-sector debt, not private-sector debt. Cut government spending enough, they say, and watch the economy soar.

That was a good argument in an anti-inflation recession like 1980. Back then, the recession was caused by the Federal Reserve raising interest rates to crush raging inflation. By cutting government spending, we abated inflationary pressures, and helped shorten the period in which high interest rates were necessary.

But this recession did not start that way, and so that old 1980 medicine won't work.

This recession was triggered by private-sector panic, not government action. And the wrong government action can prolong the private-sector panic and aggravate the recession.

For example: Many on Wall Street are fretting about the decline in the value of the U.S. dollar. And yes, the decline in the dollar has negative effects. A declining dollar means that everybody who earns income in dollars is poorer relative to the rest of the world. A decline in the dollar means that dollar-holders perceive internationally traded goods (oil, wheat, Paris hotel rooms) as more expensive.

But those negative effects are features, not bugs. Those negative effects induce Americans to buy less and sell more. A cheaper dollar invites foreigners to buy U.S. assets. The sellers of those assets can then use foreign money to repay their creditors and extinguish their debt. This is what recovery looks like. Americans got into this mess by speculating in hopes of getting rich quick. Americans will escape by working more, harder, and longer to get rich slow.

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