The Two Scenarios
(1) The first scenario --- the gloomy one held by the likes above all of Paul Krugman and other doomsters (a fair tag, I believe) --- is that the sell-off of short-term (liquid) US financial assets like Treasury securities and corporate equity and bonds will be brusquely precipitous and ignite waves of trouble for the US: inflationary tendencies; rising interest rates as foreign capital flees; severe belt-tightening by American consumers whose savings rates (private and governmental) will have to rise rapidly to stop buying so many imported goods and services from abroad --- while shifting resources to the export-market so the US can reduce the size of the current account deficit. Generally, too, it's assumed in textbook fashion, there will be a reduction in overall American wealth as Americans find that with a cheaper dollar, they can no longer buy as many cheap and possibly diverse goods and services abroad compared to their counterparts here.
Nor is that all. Since some imported goods like foreign oil can't be quickly reduced in volume rapidly even as their prices abruptly rise --- right now, the US imports about 50% of its oil needs --- a swiftly falling exchange rate of the dollar will not only set off certain inflationary tendencies in the US economy that will require the Fed to raise interest rates and slow down economic growth at home, but will prolong the adjustment of the current account from large deficit to smaller, more sustainable deficits on a yearly basis, or even a surplus. (The technical term for imported goods like oil whose quantity can't be quickly adapted to by business firms and households when prices change is a demand curve for them that is price inelastic: the quantity demanded isn't very sensitive to big falls or rises in the price of the good being bought. Only gradually as substitutes, conservation, recycling, and the like come into play, as happened in the late 1970s and much of the 1980s, will the demand curve become more elastic and the high price of oil in dollar terms lead to a large cut-backs in oil usage.)
(ii) The other scenario that DeLong sets out --- much less gloomy but still too dismal tothe buggy prof's taste --- is a softer landing for the US economy as the dollar declines rapidly in price by 25 - 50%. Much of the harm, he observes, will fall on foreign workers and firms, accustomed to huge export sales in the rich, largely wide-open US market. (For instance, US firms and end-customers buy about three times more Pacific Asian manufactured goods on a per capita basic than do our EU counterparts, and have for over two decades now. ) Though DeLong doesn't spell out his "soft landing" scenario in ways that Krugman and others have their doomster-landen one, it appears that he doesn't see many benefits to the US in such a sharp drop of the dollar.
What follows is the buggy prof lengthy take on all this, posted yesterday at DeLong's site in three installments, all brought together here. You might first want to read DeLong's own commentary, found --- along with a good chart he drew up for it --- by clicking on the link above. Whether you want to look at the comments left by others, several dozen of them, is another matter. None of DeLong's fault, of course, they turn out as always to be a very mixed bag: a few, irrespective of their own substantive views, seem to know something about economics and can reason intelligently; lots of others seem deficit on both counts, not that it keeps them from sounding off, often in categorically cocksure fashion, about all manner of subjects they seem basically ignorant of. "A little learning," Alexander Pope observed back in the 18th century, "is a dangerous thing."
THE BUGGY COMMENTARY: EVEN THE SOFT SCENARIO IS LIKELY TO PROVE TOO GLOOMY. THE PROOF? WHAT HAPPENED IN THE LATE 1980S AND EARLY 1990S WHEN THE DOLLAR ACTUALLY FELL BY 50%. NO BAD THINGS HAPPENED, PERIOD.
The surprise is that neither DeLong nor the dozens of others who posted comments in response to his views seem to have shown any interest in what actually happened to the US economy when the dollar --- badly overvalued by 1985 (leading, as you'll see, to a variant of the crowding-out theory that the high Reagan federal deficits were crowding out US exports and leading to unsustainable current account deficits in those days) --- came down quickly in its exchange rate, in both nominal and real terns, and on the order of about 50% that DeLong and even more the doomsters worry about. (In contrast to face-value nominal changes, changes in the real exchange rate take into account what happens to relative prices in the US economy and in foreign countries as the dollar falls or rises in value.)
The buggy reasoning unfolds this way in six parts.
Part I. A Hard or Soft Landing For the US Economy in the Future?
If the experience of the 1980s is anything to go by, then a soft landing seems much more likely than the hard one, full of dislocations for the wider US economy, that Paul Krugman predicts these days --- just as he predicted, wrongly, back in the first edition of his book, The Age of Diminished Expectations
, that a hard landing was more likely then, something he now predicts again. In particular,
1) The sharp appreciation of the dollar between 1980 and 1985 --- the real effective exchange rate against other major currencies, trade-weighted --- was on the order of 50% or more. In that period, the prices of imported goods and services fell by 6.0%, but the prices of US exports in foreign currencies climbed a skyrocketing 80% on an average. The outcome? The volume of US exports barely rose in that period, specifically by a paltry 2.0%; in contrast, the volume of imports jumped by 51% (figures taken from Paul Samuelson and William Nordhaus, Economics
, 17th ed: McGraw Hill, 2001, pp. 642-642). The upshot? The US trade deficit --- more or less in balance in 1980 --- rose to 3.% of GDP by 1984 and stayed that way for another three years. It looked like something unsustainable, exactly as Paul Krugman and Brad DeLong predict will happen again (despite their differences as to whether the outcome will be severely dislocating for the US economy in Krugman's case, and much more benign in the soft-landing scenario set out by DeLong).
2) Then --- starting in 1985, thanks to a negotiated deal with other governments --- the dollar depreciated sharply against other currencies, both in nominal and real exchange rate terms.
Specifically, the real exchange rate of the dollar fell by about 50% over the next five years despite private investment inflows that continued to jar against the efforts of the US Treasury and other finance ministries abroad to intervene in foreign exchange markets to drive the dollar lower. (Against 26 other national currencies, the dollar, it's only fair to add, hardly fell at all in real terms, on a trade-weighted basis; but it did fall sharply in nominal terms against both the Japanese Yen and the German Mark, the other two major currencies . . . enough at any rate to do the trick.) The result this time for the US current account? Almost a doubling of exports in the next six years of both US goods and services. By 1991, consequently, the current account was more or less in balance again. (Besides Samuelson and Nordhaus, there are good charts in James Gwartney et al, Economics
: 10th edition, Thomson, 2003, p. 434; and N. Gregory Mankiw, Macroeconomics
: 5th edition, 2003, p. 126.)
Part II. Did the Sharp Depreciation of the Dollar After 1985 Cause New Inflation?
No, not really . . . contrary to the worries expressed here by some about the inflationary impact of a declining dollar in the future again. Inflation itself hardly rose between 1985 and 1995, compared to the previous decade and even the previous years between 1981 and 1984 when the dollar rocketed in value. It even fell noticeably in 1986, 1987, and 1988; and though it climbed somewhat the next three years, inflation reached the 4.0% level again that the US had experienced in 1983, a time when the dollar was skyrocketing in value. Nor was that all. By the early 1990s, the rate of inflation had even noticeably moderated compared to the entire 1980s, yet the dollar's exchange rate continued to remain noticeably low compared to the early 1980s. (See the Bureau of Economic Analysis table
on the price deflators for the US economy as evidence.)
Part III. What About Crowding Out? Did It Occur in the Period of Sharply Rising Reagan and Bush-Sr. Federal Deficits, 1981 – 1993?
A great deal of macroeconomic theory predicts that rising government deficits will have a harmful effect on economic growth, either crowding out private investment or US exports (or both). The transmission mechanism in both cases will be a rise in interest rates, caused by the way government deficits are financed.
In particular, the Treasury will have to sell new securities that compete with private agents seeking investment funds in loanable funds markets, whether business firms or households that want to buy houses and other durables: selling these Treasury securities will raise interest rates and crowd out some of the private investment, or at times, if the deficits are large enough, all such investment. Simultaneously, it's argued, the higher interest rates in the US will attract more capital inflows from abroad. The impact? Though these inflows will tend to increase the supply of loanable flows and hence moderate the crowding out effects on US domestic investment, they will also cause an appreciation of the dollar's exchange rate and hence crowd out US exports. The result will be a current account deficit each year the government --- in the US, the federal government and the states --- spend more than they take in through tax revenue.
What does the experience of the 1980s reveal?
1) Consider the crowding out of private investment
, which is supposed to occur because of higher interest rates.
The problem is, there is no clear correlation between the growth yearly of national debt (as a result of federal deficits) and long-term interest rates. Specifically, as shown in the chart at this site, the 10 year Treasury bond rate actually fell noticeably in real terms from its height in 1984 throughout the era of rapidly rising federal deficits in the era of the Reagan and Bush Sr. presidencies: these deficit culminated in 1992, if I remember correctly, at around 6.0% of GDP ---- yet as the chart shows, the ten year bond rate fell by about half during that period. To repeat, real long-term interest rates in the US did not rise in the period despite rapidly increasing federal deficits. Instead, they fell steadily throughout the period.
2) What about net national investment
during this period?
Despite the falling rate of long-term interest rates in the 1980s and early 1990s, net domestic investment never reached comparable levels ---as a percentage of GDP --- that were recorded in the recovery phase of the business cycles between 1950 and 1977. A good chart
by Benjamin Friedman brings this out (, p. 17; also the table on p. 16).
Does that then validate the crowding out theory of investment? Yes and no. The problem here is in the interpretation of the correlation between rising federal deficits and the trend-line in net investment during the 1980s and early 1990s.
In particular, all sorts of what statisticians call "disturbing conditions" make it hard to draw clear conclusions about theoretical propositions . . . especially in economics and political science, the latter my discipline, and for that matter all the social sciences. There are also problems of complex dependencies in regression equations between the independent variables, and for that matter, frequently too, between the dependent and independent variables as the former shifts value in response to changes in the latter. (In neo-classical Solow growth theory, for instance, rises in per capita income --- the dependent variable ---- as capital accumulation and the growth of the labor force as the independent variables themselves rise will, in turn, feed back and affect both the savings rate of the economy and the growth of population and hence the labor force.) Then, too, there are problems of omitted variables that can always be invoked, not to mention disturbing special circumstances. (It's for this reason, you'll note, that the most influential work in epistemology --- that of Willard Van Oman Quine and Donald Davidson --- rejected the positivist claim that scientific theories could be tested a proposition at a time; and for that matter, that rejection includes Karl Popper's version about falsifying propositions, not proving them. The arguments by both go back to the 1950s. Quine himself later elaborated on this, and the resulting argument is called the Duhem-Quine thesis, Duhem himself (a French physicist of the late 19th and early 20th century) having set out a similar argument earlier that Quine apparently wasn't aware of at the time. According to the thesis, no single hypothesis can be tested in isolation; other auxiliary hypotheses will always be required, and the failure of the former to withstand testing ---- statistical or experimental (anyway, empirical) ---- can always be blamed on the latter auxiliaries. For an interesting, easily read appraisal of the thesis as it applies to economics, see this article).
As for the failure of net investment in the 1980s to reach earlier percentage levels of GDP, the following counter-claims can be made by both supply-side economists and the neo-Ricardians. (The latter argue, of course, that government deficits financed by borrowing from the public will be totally offset by forward-looking economic agents; specifically, they recognize that future taxes will have to be raised by the government to pay the interest and principle on the sale of new Treasury securities, and so --- anticipating this --- they automatically increase their savings by an equivalent amount of the new government debt. As a result, nothing happens to the economy: interest rates don't rise because of crowding out; national income itself doesn't grow; and there's no new inflow of capital from abroad to raise the price of the dollar and hence crowd out US exports.)
---For one thing, if net investment never climbed to as high a percentage of GDP as supply-side economists hoped, it failed here only when compared to the robust levels of investment in earlier periods of economic recovery after a recession. It did rise sharply after a major dislocating period in the US economy --- double-digit inflation for nearly three years, very tight monetary policy to fight this, and the biggest (if short-lived) recession since the Great Depression years; and so both supply-siders and neo-Ricardians of the Robert Barro sort can claim that these are misleading comparisons: in particular, the first oil price rise of 1974-75 marks a pivotal turning point in the growth rates of GDP and productivity in all industrial countries, with both rates falling brusquely everywhere (though less so in the US than in Germany and Japan). The result? Comparisons of GDP and productivity growth rates --- makes comparisons with the earlier decades difficult.
As a further complicating factor here to drive home the point, the average of total net investment in the US economy --- as the table on p. 16 in Friedman's article notes --- was actually higher as a percentage of GDP in the era of rapidly rising federal deficits of the 1980s (6.1%) than it was in the period 1991-1998 (5.2%) , when the deficits started coming down sharply, eventually turning to surplus. (Concretely put, the federal deficit reached $298 billion in 1992, after which it started falling until it declined to $53 billion in 1997 . . . after which it then turned to a surplus for the next three years. See the BEA table, http://www.bea.gov/b/nipaweb/TableViewFixed.asp#Mid.) No less important, the total deficits of both state and federal governments in the US came down even faster in the 1990s, turning into a surplus in 1996. And yet, as the table and chart in Friedman shows, net private investment in the US was lower in this era as an average percentage of GDP than it was in the 1980s.
--- For another thing, net investment might be misleading as the main indice. Why? Because the US economy was particularly dislocated by the big radical leap in oil prices between the start of 1974 and 1980, what with the ways in which we (and the Canadians) had developed economies over several generations that relied on unusually cheap energy sources compared to Japan and the West European countries throughout most of their developmental history in the 19th and 20th centuries. As a result, American firms and households had to spend more on replacement capital for existing energy sources ---- such things as environmentally sounder stackers in coal-burning utilities, most gas-efficient automobiles to replace gas-guzzlers, insulation for conserving energy in plants, office buildings, and houses, and so on. Over time, all this replacement capital added up to a lot of new gross investment, none (or little) of which would be reflected in the trends of net national domestic investment. (See the BEA table on gross savings and investment in the US economy in the 1980s and 1990s, .)
--- For a third thing, as a further disturbing condition, that makes it hard to test a theoretical proposition statistically, if net national investment fell by comparison with earlier periods, then it would have to be because of other influences besides long-term interest rates within loanable funds markets. (These influences are numerous, and figure in lots of macroeconomic theorizing about what drives business investment, including psychological factors like optimism or pessimism, as well as international developments, confidence in political leadership, and the like.)
As a fourth thing, another chart by Friedman at the end of his article shows that net government investment did go up slightly in the 1980s --- though not by enough to bring overall net investment as a percentage of GDP up to earlier, pre-1979 levels.
3) What about the crowding out of US exports
as a result of rising federal deficits in the 1980s?
This is easier to handle. Consider the table and charts in Benjamin Friedman again. Though he thinks there was crowding out of net private investment as a result of the Reagan and Bush Sr. deficits (a trend reversed by government surpluses in the late 1990s), he also can find no correlation whatever between either the size of government deficits --- or surpluses --- and the trend in US current account in the balance of payments. The current account, more concretely, turned sharply into deficit in the first four years of the Reagan federal deficits; then the size of the current account deficit dwindled after 1986 as the dollar fell in price until it disappeared in 1991 and 1992, even though these were years of record federal deficits. Worse for the theory of crowding out of exports, the US current account almost doubled in the late 1990s era of rapidly rising federal surpluses. (See Friedman, figure 4, p. 20.)
The conclusion? Simply said, whatever causes the current account to be positive or negative --- never mind the size of any surplus or deficit --- there is no correlation whatever with the size or direction of US federal expenditures and revenues (or total state and federal expenditures and revenues).
Apparently, to clarify this, the inflow or outflow of foreign investment on capital account --- which seems to determine what happens to the trade in goods and services in current account --- bears no clear relationship to the ebb and flow of federal deficits or surpluses. Much more likely --- this is only a guess ---- foreign private agents and central banks will increase or decrease their investment flows --- and hence determine the exchange rate of the dollar in currency markets ---- according to other things, above all their confidence in the direction, dynamism, and stability of the US economy. Then, too, those countries like China or Japan whose governments actively pursue export-led growth --- to the point that they continually intervene in currency markets to buy dollars with their own currencies, buying up to $300 million daily the last year or so --- show that they have the means to keep such export-led growth going, at least into the growing US economy. In turn, of course, their Finance Ministries and Central Banks don't bury the resulting dollar accumulation under Chinese and Japanese mattresses: they invest them here, which further contributes to an undervalued rate of the yen and yuan in dollar terms. And of course, as a third shaping influence on the direction and size of the US current account, the US economy's relatively vigorous growth compared to the EU and Japan the last two years ---- disappointing as it might be for Americans and especially those who have seen unemployment grow to over 6.0% since the recession officially ended two years ago --- will naturally lead to a much larger inflow of imports from abroad even as Japanese and EU demand for US exports has fallen or stayed stagnant.
Part IV. What Conclusions Can Be Inferred from the Experience of the 1980s?
1) Those who worry that the current US federal deficits will lead to some sort of semi-catastrophic hard landing of the American economy in trade and investment flows with the outside world ---- something, by the way, Paul Krugman thought the likelier outcome in the first edition of his book, The Age of Diminished Expectations ---- can find little or no justification in the outcome of the 1980s and early 1990s Reagan and Bush-Sr. deficits. That doesn't mean a hard landing is precluded. It does mean the only experience we've had with prolonged structural federal deficits didn't end in the semi-catastrophe that the Jeremiahs of the 1980s and early 1990s predicted.
2) As for a prolonged rush out of the dollar by investors for whatever reason in the future, all that can be said is that it's unlikely to occur --- at any rate, to the extent that the experience of the 1980s and early 1990s is a guide. In particular, though the dollar fell by about 50% in value between 1986 and 1990, the rate of inflation did not increase, it decreased. Simultaneously, even as the dollar fell (with convergent efforts by the US Treasury and its equivalents in the EU and Japan to keep it falling), foreign investment inflows into the US continued at high rates even though net foreign investment inflows, of course, tapered off as the lower dollar brought about lower current account deficits. Long-term interest rates, moreover, weren't affected by the lower net investment inflow, it seems . . . any more than they rose as a result of the rapidly swelling Reagan and Bush-Sr. federal deficits. They didn't rise; they fell throughout the period of the 1980s and early 1990s.
3) As for the threat of a precipitous pull-out of Chinese or Japanese investments in this country --- presumably, this means central bank investments (though in the Chinese case, the Communist Party and the government can no doubt order private investors to do whatever they demand) --- that threat can't be excluded, but seems far-fetched. In the process of abruptly selling off their investments in US financial assets, they would see a rapid rise of the yen and the yuan no less abruptly occur, and hence find their dependence on export-led growth badly undercut . . . with no remotely equivalent market for their dependence on export sales as the major stimulus to their GDP growth to replace the US economy. They, official and private investors, keep most of their dollars earned on current account in the US economy out of self-interested behavior, finding it presumably a good economic bargain. And though they will from time to time adjust their portfolios and maybe sell off some dollars for, say, euros to invest in the EU ---- which is what presumably happened the last 18 months when the euro rose against the dollar until about June of this year --- there are limits to the attraction of euro financial assets compared to American . . . which is precisely why, since the start of June, the dollar has regained about 6% of its value against the euro.
(To put it differently, the euro is still about 6% lower than it was at the time it was launched as a currency at the start of 1999.)
4) Though nobody can say now what will happen with much certainty to the size of the US federal deficit --- the Congressional Budget Office's March projections of an unusually optimistic sort have been turned topsy-turvy by the growing burdens of financing defense, including the Iraqi war (as the CBO updated estimates of August showed) --- the experience of the 1980s and early 1990s suggests that a soft-landing of the sort DeLong believes in ---- not Krugman and some others --- is much likelier.
Part V: What About The Price and Burden of Imported Oil If the Dollar Falls Sharply?
Oops, the comment [by John Halasz at 3:04 PM on the DeLong site] reminded me that my earlier analysis forgot to deal with the fears expressed by him nd others about the price of oil should the dollar fall sharply in the future.
Again, instead of fecklessly speculating in an intellectual vacuum as to what might happen to the oil price, we can find solid empirical ground in the 1980s . . . especially in the period after 1985, when the dollar declined rapidly and lost 50% of its value in nominal exchange rate terms. See this chart
1. Specifically, as a chart shows which tracks the price of oil per barrel in 1996 dollars since 1947 (down until 1998), you will find that the price of oil dropped noticebly even as the dollar itself fell sharply in value. It did rise rapidly in 1991, but as a result of the Gulf War,nothing else.
2. There's opposite evidence for the era of the high dollar after 1996. The dollar was now rising rapidly against other currencies in both nominal and real exchange rate terms --- especially against the DM and then the euro (oppositely against the smaller Asian currencies) --- and yet a price of oil per barrel almost tripled in price after 1999, at the height of the dollar's value. More specifically, the price about tripled by the start of 2001, then fell slightly, then rose, then fell, and has risen against to nearly $40 a barrel in the last month or so. (The chart doesn't show this, stopping at the end of 1997.)
3. So there's no correlation whatever between a fall in the exchange rate of the dollar --- in real or nominal terms (and presumably too on a trade-weighted basis) --- and a rising price of oil. Exactly the contrary, both in the 1980s and late 1990s.
4. One other point, missed by the worried Casandras here. Not only is there no correlation of the sort just analyzed, but the energy sector of the US economy --- thanks to much greater efficiency than in the 1970s and early 1980s --- has declined by about half: from roughly 7.0% of GDP to around 3.0 - 3.5% (depending on the vigor of economic growth). The upshot? Should a big rise in oil prices materialize--- even to the $60 level or so as in the late 1970s (in 1996 dollars) --- it would not have the same impact nearly on the US economy that the big jump in prices did in that decade.
4. For that matter, maybe unknown to the contributors here who have expressed worry, the price already has jumped from about $12 a barrel at the end of 1998 to around $40 a barrel, and the ripple effects on the US economy have hardly even been visible.
Part VI: Are Analogies With Thailand or Argentina or Others Whose Currencies Fell Sharply in the Last Decade or So Relevant to the US?
Much as I or anyone can regret what happened to the per capita income of average people in Thailand or the rest of SE Asia and some of North Asia as Jim Coomes argues (a comment by him just left at the DeLong site before the buggy reply here), there is a huge difference between what they experienced and the causes of their currency and financial crash, and what the US is undergoing as foreign inflows of capital drive up the price of the dollar, or because of currency interventions by Japan and China and other Asian countries to keep their currencies undervalued.
1) In particular, Thailand and all the other Asian countries were obliged to pay back their loans of portfolio investment in dollars, not their own currencies. By contrast, the US runs up debt to foreigners --- based on mutually gainful economic transactions (foreign countries get export-surpluses with the US, which is what they want, plus a good outlet for investing their surplus dollars in the US eonomy; the US gets capital inflows to close the gap between our savings and investment rates) --- in dollars, our own currency, something we can never run out of.
2) The US continues to flourish better as a country with ongoing current account deficits than do countries like Japan, Germany, most of the rest of Asian countries, and most of the EU, all of which seek export-led growth and hanker after current account surpluses. Job growth in the US economy, though surprisingly lagging since 2001 --- owing to insufficient aggregate demand compared to the new potential output of the US economy (its long-term growth rate) --- is much better here than in those other countries or regions, and has been for decades. Similarly, GDP growth is much more vigorous here than in the EU or Japan, both badly stagnating --- Japan for a decade, the EU for two years (with a lower average GDP advance and growth in productivity than the US too throughout the 1990s).
Only neo-mercantilists can explain why countries with huge domestic markets --- the EU as a region, Japan, China, even South Korea --- continue to believe in the allures and magic of export-led growth, rather than domestic-generated growth.
3) As for productivity levels, the Bureau of Labor in 2002 found that US workers were by far the most productive in the world: each producing about $71,600 in output, compared to the next competitor, tiny Belgium (around $64,100); Japanese workers produced about 70% of the US level, at $51,700.
4) Almost all the doomsday scenarios represented in these forums rely, in short, on either excessive fears or, possibly --- as in Krugman's case, where he was blatantly wrong about the future of the US economy in the 1990s in his book about it (published around 1990 or so in its first edition) --- wishful thinking. As with any economic trend, there would be costs and benefits, each of which has to be measured carefully, to a dollar's fall. The experience of the late 1980s and early 90's, a period when the dollar had lost 50% of its earlier value, shows that the costs were minimal at worst, while US exports doubled in a brief 5 - 6 year period.
Why should a future brusque fall of the dollar's exchange rate be any different?
The burden of answering this question falls on doomsters like Krugman to explain their preference for gloomy, semi-catastrophic outcomes. Krugman himself, recall, was touting the sames doom-doom stuff at the start of the 1990s in The Age of Diminished Expectations
, a book that went through three or four editions in the first part of the 1990s.
The reality of that decade? Far from fiscal profligacy (mounting national debt as a percentage of GDP), low savings, and rapidly growing foreign debt, the US economy enjoyed in that decade of the 1990s its longest boom in history, a sharp revival of its labor productivity to levels thought to be impossible by the declinists and doomsters, and the lowest levels of unemployment in 3 decades. Why should we think that the doomsters will then be right this time?
-- Michael Gordon
More pretend economics by Buggy Wuggy. Paul Krugman is the problem - sure. Buggy is Buggy.
What about the time period 1970-75 when it was more the strong DM than the weak US dollar that caused economic discomfort here in the USA. The industrial countries tied their currencies to the "snake" and liquidity was tight resulting in poor stock and real estate growth.
The answer to professor DeLong's question may be the result of how quickly China matures as a developed country.If and when and how China allows its currency to float, will they become an alternative to the US as a finacial trading vehicle ? Will money be diverted from the US to Asia slowing growth and prosperity here. The US dollar would not devalue; the New Chinese Dollar would appreciate resulting in lower stock and real estate values in the US.
I've replied to your questions in a separate new entry, just posted. Hope they help clarify matters.