Hotel Iraq
The Dollar Moves Downward

Looking Forward to the Real-Side Adjustments When the Dollar Declines

Menzie Chinn from last August on how manufacturing matters:

Econbrowser: Does Manufacturing Matter? An Update: Here's the policy implication: If one needs to get the trade deficit to GDP deficit down from the 6 percentage points recorded in 2006q2 to say 2 percentage points, the implied 4 percentage points of adjustment will have to take place over either 12 or 39.5 percentage points worth of value added (in the tradeables sector).

We had better hope that the tradable share of GDP is closer to the 39.5 ppts., or that there is going to be a lot of labor that will be freed up from construction and nontradable services that can easily be reallocated to manufacturing, mining and tradable services with relatively low adjustment costs (realtors as computer code-writers!). The adjustment will be harder if rest-of-world demand (knzn's hope for defense against a recession) doesn't pick up the slack of declining US absorption.

In other words, those who said we should import and borrow as much as possible while prices of imports and interest rates were low were implicitly assuming the adjustment costs of reallocating resources across sectors were also low. Time will tell if they were right.