Thursday, July 3, 2008

What to do...

The Dollar is falling because it has long been overvalued, we have already sold and mortgaged our future quite thoroughly, and the trade deficit has a life of its own due to oil that will keep it from falling rapidly even as the dollar declines.

The best way out of this mess is to increase US production and exports.

Oil is one piece of this, and a vital part because of the way oil exacerbates the trade deficit and the vicious cycle this seems to be establishing with declines in the dollar. Expanded oil exploration in the US and perhaps offshore, oil shale production, and so forth.

But almost as important, the U.S. should to work to expand and encourage manufacturing and other exportable goods production.

The first step is to reset expectations so that potential exporters know that the US is not going to revert to a debt and deficits policy as soon as the crisis clears. One way to do this would be with tradable import certificates and a clear plan to move trade towards balance over a series of years.

In light of the credit crisis, it might be worthwhile to make federal loans available for companies seeking to expand domestic production. This would do the economy more good than current strategems to prop up the overvalued housing market.

Finally, we need to encourage Americans to begin saving money. One way to do this would be through tax policy.

But tax policy is only one part of the picture. When I was exploring banks in Europe to see whether I could move some of my savings to France, I noticed something very interesting about the way interest rates on bank accounts were structured in major U.S. banks and in French banks. I'm sure government policy has something to do with it. But... in France the small saver gets favorable terms and interest rates. The rates are somewhat worse for large deposits. In the U.S. rates are near zero for basic passbook savings acounts at most banks. If banks paid real interest on small consumer savings, many ordinary people would have a stronger incentive to save.

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