A Review of Chapter Two and Chapter Three

In chapter two, it mainly discusses the currency devaluations and details for improving the U.S. competitiveness. Those efforts resulted in significant consequences both for American people and people of the other parts of the world. The 1971 dollar devaluation was initiated by President Nixon when the first trade deficit 2.3 billion dollars was found in decades of American economic history, which changed the fixed exchange rate which was made in the Bretton Woods agreement. Through altering the exchange rate, Nixon aimed to strengthen the competitiveness of U.S. firms to reduce the trade deficit. However, the results were not like what people expected due to the rising prices of imported oil and high-mileage foreign cars. The deficit kept rising to 25.5 billion dollars by 1980. What’s worse, many government bonds with high-interest rates issued to curb inflation made the dollar value rebound. In 1985, the trade deficit reached 122 billion dollars. Then the Reagan administration decided to devalue the dollar again by Group of Five. The agreement made by Group of Five was known as the Plaza Accords. But U.S. firms and consumers did not react as policymakers and economists expected. The deficit kept soaring after the Plaza Accords implemented and slowly reached the 1985 level until 1990. Meantime, the devaluation of dollars led to much loss of U.S. assets and resulted in massive job loss and timber loss in the Pacific Northwest. Then the story was still not ending. Dollar devaluations generated remarkable impacts on oil-producing countries, such as the inflations, oil price fluctuation, and wars. Also, dollar devaluations brought in global monetary instability and economic crises in the world. That forced some countries to use U.S. dollar as their own official currency. A series of troubles occurred consequently.

The author listed out many powerful facts and statistics to support his argument. I also agree that Nixon’s 1971 dollar devaluation decision was the beginning of a battle to restore the U.S. competitiveness and also control the inflation. The first trade deficit posted in 1971 made the U.S. government have to face what was happening at that time. The economic rising of Western Europe and Japan had influenced the competitiveness of the U.S. in the domestic and global market. The U.S. government adopted series of solutions accordingly. Though that triggered many problems, there were also some notable achievements. The U.S. gold was successfully reserved after Bretton Woods agreement was destroyed. Dollar devaluation policy protected the position of the dollar as the world’s monetary standard. Global debt can also be devalued through dollar devaluation. For example, supposing the exchange rate USD to RMB is 1:8, if U.S. sells a debt of 100 dollars to China, China will pay RMB 800 yuan to buy it. When the dollar is devalued, and the exchange rate USD to RMB is changed to 1:7, then the U.S. only needs pay RMB 700 yuan back to China. Then the differential section of RMB 100 yuan can be retained by the U.S. One day when the exchange rate USD to RMB is changed to 1:8 again, China needs to pay RMB 800 yuan again to buy the debt of 100 dollars. Then the exchange rate USD to RMB is adjusted to 1:7 again. Another RMB 100 yuan is taken away by the U.S. when the U.S. pays the debt of 100 dollars to China. It created a good way of making money for the U.S. from other countries whose official currency is not US dollar. Considering above, the U. S. is still a winner in the battle.

In chapter three, it examines the efforts to control inflation and consequences caused by those solutions. In 1971, Nixon introduced the means of wage and price control to slow the inflation. But it failed due to some reasons. In 1979, the second round of control over inflation began. Rather than wage and price control, the U.S. government adopted the high-interest rates and the Federal Reserve to fight the inflation. Through shortening the supply of money and credit, the Fed official forced the interest rates to rise and then the economic growth would slow down, as well as the inflation rate. It worked effectively but caused a deep recession in the economy. That policy also resulted in some unsatisfaction from different social groups because their wealth were affected by the high-interest rates and falling inflation. Additionally, it also caused the problems of the overseas debt crisis, growing U.S. budget deficits and weakening of U.S. competitiveness. Since the interest rate paid on borrowed money was connected to the U.S. interest rates, many businesses or governments which ever borrowed money from the U.S. found it difficult to repay their debts because of the high-interest rates and their own domestic capital flight. The Fed’s high-interest rate policy, Reagan’s increasing military spending and lower taxes created massive and growing budget deficits. With the flood of foreign currency to the U.S., the dollar also regained the value so that the redistribution of production from the U.S. to Western Europe and Japan reoccurred. The competitiveness was declined again. Besides that, the high-interest rate policy severely destroyed the S&L industry, which made more and more people homeless. Meantime, high-interest rates also crippled the residential construction industry, which offered millions of jobs to male workers. Therefore, the battle for inflation won but at a heavy cost.

In the analysis of inflation from the author, it is very clear that dollar devaluations were closely connected with the inflation. The consequences and causes of the inflation explained are very detailed. It points out the pains of the U.S. economy directly. But it is also necessary to know some failures are not inevitable. Every decision maker has his own limits. It is similar as a nation defends its interest as a person defends his interest. Every decision the U.S. made undoubtedly created more or less impacts on the other parts of the world since it is a leading country. It would be better if the author could give more details on the consequences of dollar devaluation and inflation to the third world.

For different countries, we have different situations. For U.S., the firms and consumers did not react as policymakers and economists expected in the 1980s, and the deficit kept soaring, which implies there are gaps between the economic policy and the real situation. On one hand, the U.S. automakers were not willing to make use of the price advantage created by the policymakers but to increase the unit price. Because stock value could influence the company decision. On the other hand, the Japanese automakers focused on market share and paid less attention to the stocks. Thus, the high-mileage foreign cars still had their big markets. The rising prices of imported oil also contributed to the trade deficit. The situation in China could be different because China depends on less oil than the developed countries. So, as policymakers or economists, they need make a full evaluation of the real situation and potential risks before designing their strategies. We also need to re-examine the inflation history and give enough attention to it. At the same time, we should also try to avoid the long time deficits and strengthen the macroeconomic managing ability.