> exchange rate of barrels to tomatoes hasn’t altered since that is a matter of productivity
Of course it has. We are one of the world’s largest importers of tomatoes [1]. The dollar devaluing makes them more expensive. That, in turn, means the internal price of tomatoes goes up. We’re a net oil exporter, on the other hand. So yeah—the “exchange rate of barrels [of oil] to tomatoes” has been altered. In part because the productive benefits of comparative advantage are being slashed. In part because trade frictions are being introduced that reduce our economy’s productivity.
> How does it make them more expensive. Where else are they going to sell the already produced tomatoes?
It’s currently cheaper for me to take a vacation to Canada to buy next year’s skis than it is to buy them domestically. That’s demand transfer.
On the other hand, car factories that used to export to America are being idled in Canada and Mexico. That’s supply contraction.
More pointedly, if you have an unreliable trading partner, it makes sense to offer discounts to other buyers who will make up for the price cut in the long term. (Either with increased quantities demanded or a less-volatile trading relationship.)
> We already know from history that devaluations don’t work. What has changed that suggests they have suddenly started working?
We’re not in a controlled devaluation. This is America facing its first semblance of a currency crisis. Far from fully blown. But if a large foreign holder of Treasuries started dumping them, for example, and were to co-ordinate it with our erstwhile allies, that could create problems.
What's the policy response to supply contraction causing people to lose their jobs? What does that tend to do to exchange rates?
" it makes sense to offer discounts to other buyers"
If they are offering discounts to other buyers, then won't those buyers then take the advantage and re-export to the US?
There's an arbitrage opportunity right there - as we've seen with Russian oil.
Why won't that happen?
Plus why go through the problem of trying to obtain new customers for less money, when you could just pay the 10% tariff and get the same amount of less money for less effort?
"But if a large foreign holder of Treasuries started dumping them, for example, and were to co-ordinate it with our erstwhile allies, that could create problems."
How would it create problems? Run through it precisely at the transaction level please.
Then you'll find it doesn't.
To 'dump' Treasuries somebody else has to buy them - so no fewer Treasuries. To 'dump' US dollars somebody else has to buy them - so no fewer dollars. Same number of dollars chasing the same number of Treasuries?
The somebody that took on the dollars and the Treasuries wanted to buy them or the transaction would never have happened. Why did they want to buy them?
> What's the policy response to supply contraction causing people to lose their jobs? What does that tend to do to exchange rates?
You’re acting like the Asian financial crisis or like Argentina haven’t existed.
> If they are offering discounts to other buyers, then won't those buyers then take the advantage and re-export to the US?
Across-the-board tariffs.
> when you could just pay the 10% tariff and get the same amount of less money for less effort?
Stability. Again, you’re acting like Smoot-Hawley didn’t happen.
> To 'dump' Treasuries somebody else has to buy them - so no fewer Treasuries
Nobody…said as much. In this case, look at Russia in the late 90s.
> where's the problem?
People buy the treasuries on the secondary market and then have less demand on the primary. That lowers their price which raises yields. That, in turn, makes the policy remedy you suggested at the top—for unemployment—more difficult as it requires monetising the debt.
To elaborate on your last point, high yields are macroeconomically detrimental on several fronts. On one hand, They provide a safe haven for Capital which diminishes investment and growth. On the other end, servicing that higher debt interest means more taxes and again lower growth.
Yup. Basically supply contraction puts people out of work, which requires lowering rates by selling bonds, but exporters under duress are also dumping their bonds, which means you need to print more money than you otherwise would to push rates down. Those dollars create inflationary pressure whose solution is raising rates. But you can’t because of the supply disruption. Basically, Trump and Musk have engineered stagflation.
One thing I really struggle to understand is the economic arguments for large national debts, which seem to be a mainstay of modern nations. Is it as simple as countries really cant help themselves?
It seems so clear to me that the economically superior position is lower deficit spending, extremely low treasury yields, high investment, and high growth.
Am I severely underestimating the effectiveness of government spending at stimulating growth?
It seems that large deficit spending should be reserved emergency stimulus for correction, not a feature of healthy growing economy, and their use during "good times" diminish capacity for use in the "bad times"
Of course it has. We are one of the world’s largest importers of tomatoes [1]. The dollar devaluing makes them more expensive. That, in turn, means the internal price of tomatoes goes up. We’re a net oil exporter, on the other hand. So yeah—the “exchange rate of barrels [of oil] to tomatoes” has been altered. In part because the productive benefits of comparative advantage are being slashed. In part because trade frictions are being introduced that reduce our economy’s productivity.
[1] https://www.worldstopexports.com/international-markets-for-i...