Summary: Reuters reported that the dollar took a hit today that rang through the stock markets sending all of the major averages down today worldwide. U.S. stocks sank after a call from the world’s richest nations, the G7, for more flexible exchange rates sparked a sharp drop in the dollar that ignited fears overseas investors would flee U.S. assets. They said a flexible currency rate “is desirable for major countries or economic areas” in order to iron out global economic imbalances.” This signaled that Japan would interfere less with the value of the yen against the dollar. For some time, they have been intervening to hold the yen down so the US would continue to buy their imports. The weak dollar will benefit US manufacturing as our goods will be less expensive to foreign customers. This also extends to China who fixes their currency, the Yuan, to the dollar. Flexibility will allow the dollar to fall against the Yuan to a more reasonable level.

My Take: The impact of the strength of the dollar is both psychological and real. There are so many that feel that the traditional strong dollar policy has something to do with a strong nation and without any economic knowledge would think less of an administration that would support a “strong” dollar policy. Hence from this perspective strong vs weak is not the typical definition as construed by the voters and we often bow to political pressure when it is clearly wrong. But there is a real concern about the weakness of the dollar and its affect on interest rates, which is our topic this week. If foreign investors feel that the dollar will continue to fall, they may elect to remove their investments from the US and therefore sell US treasuries. Selling a bond lowers the price and raises the interest rates. If China or Japan, who both have billions in US treasury bonds, start to sell, rates could rise, possibly substantially. If professional investors feel that those nations may be making a move, they may try to profit from this by selling dollars and buying Yen, sending it down further or just moving their current dollar denominated investments to Eurodollars or other currencies that will appreciate when the dollar falls. Viewing the situation as only a gain for US manufacturing and not a threat to our economic recovery is short sighted and biased.

When I was younger, I was a gopher. I drove from our office to other offices and picked up and dropped off things. I always tried to be outstanding so I drove fast. The faster I drove, the more productive I was and that meant I was more valuable, at least in my own mind.

Currently, we are in the midst of what economists commonly call a productivity miracle.  Our productivity, how much we each produce, has increased substantially over the last decade or so. I am far to lazy to research the numbers, but I am confident that they will back me up on this.  I know I still drive fast, apparently other do too!

My query lies not with the numbers, they are most likely within the margin of error, but rather with productivity itself.  Is a given action productive just because it causes capital to change hands?  In other words, is everything we are doing to earn money actually productive in the broad sense of the word?  Are our actions moving us forward as a collective?

Certainly if farmers use people to harvest crops and sell them in the market, that’s a productive use of our time and energy.  We need the food and they are filling that need.  If a device, like a tractor, comes along and they begin using fewer people to harvest the crops, that is an increase in productivity. Those people can then go and do something else, yet we still get the same amount of food to eat. We are all better off. We are being more productive. Conversely, when the reduced the speed limit to 55 my productivity as a gopher declined.

But what about other professions.  Take tax preparers for example. Can what they do be called productive? Well, we pay them so they cause capital to change hands. So that meets the definition of productive. If computers allow them to do more tax returns in less time that counts as increase in productivity.  Technically, all that is true.

My quandary lies in this question, “how does having all these people preparing taxes make us better off?” In other words, is that a productive use of their time? Wouldn’t we be better off to simplify the tax code so we wouldn’t need a specialist to do our taxes for us? The millions of hours spend on taxes could be used elsewhere, yes?

Then all these bright people could go do something really productive, something that would accomplish a need that is not invented like tax preparation.  This kind of make work industry takes bright people out of careers that can propel us forward as a society, thus reducing our potential overall. 

I’ll give you another make work job that we can get rid of, Real Estate Agents! Put the info on the internet, have the homeowner show the house and negotiate, go to a title company to write it up and Viola! a 6% savings on every house and lots more talented people out doing things that actually need to be done.

In fact, I can think of what one of those real estate agents could be doing right now – Fetching my lunch! That would be productive as I need to eat and I am busy doing this, so go get my lunch, Mr. Gopher.

Oh, and Drive Fast. (We want to keep up our productivity 😉

There is a rational expectations joke that economists like to repeat. It goes like this. Two economists are walking down the street. They come across a $20 bill lying in front of them on the sidewalk. They pause and glare at it. One economist says to other,“Aren’t you going to pick it up?” The other replies,“I would, only the bill can’t really be there. Someone else would already have picked it up.” And they keep on walking. The joke amuses economists because it describes a true-to-life event – finding money on the ground – that they are predisposed to believe is very unlikely.