Word: dollarization
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Dates: during 1980-1989
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...theory behind the benefits of a currency devaluation is textbook clear: if the dollar falls, the international prices of U.S. products drop, and foreigners will buy more of them. At the same time, foreign goods become more expensive in the U.S., and Americans will reduce demand for imports. A combination of the two trends will lower the trade deficit...
That, at least, is the theory. In practice, the mechanisms have been more complex and less effective. Since early 1985, the dollar has declined by about 50% against major currencies like the Japanese yen and the West German mark. Yet the U.S. trade deficit is as high as ever. Admittedly, it takes time for consumers and businesses to change their buying habits, and an improvement in the trade balance may be in the pipeline. But several forces are holding the deficit up. For one thing, foreign manufacturers have shown a dogged determination to hold down their U.S. prices to maintain...
...case of the videocassette recorder, American consumers have no choice but to buy foreign, since U.S. manufacturers do not make the machines. Indeed, as long as the American appetite for imports remains, a perverse effect takes place: as the price of foreign products increases, Americans spend even more dollars for the same volume of goods. Meanwhile, they earn fewer yen, francs and marks for U.S. products that do sell well abroad, like Boeing aircraft and IBM computers. As a result, the trade deficit actually increases in dollar terms...
Even if a prolonged decline of the dollar eventually reduces imports, the side effects will be unpleasant. One is higher inflation: as foreign products become more expensive, many U.S. manufacturers will jump at the opportunity to raise their prices too. A big danger is that the weak dollar will become a crutch for U.S. companies, undermining their incentive to become more efficient and hold prices down. Beyond that, the bargain-basement dollar, together with lower prices on Wall Street, may make U.S. industry increasingly vulnerable to takeovers by foreign buyers...
...living standards. The mighty mark and yen have been putting a burden on West German and Japanese exporters, but they have responded by holding down costs and becoming more efficient. One reason they can do so is that many of their imported raw materials and components are priced in dollars and have become cheaper. With greater price stability, Japan and Germany face less pressure for wage increases. Despite the strong mark, Germany has become the world's leading exporter. Japan is openly contemptuous of the notion that the U.S. can solve its problems through devaluation. Says Johsen Takahashi, chief economist...