1) We can look to real exchange rates based on published inflation differentials;
2) We can look at purchasing-power-based comparisons to get some sense of a change in buying power not captured by common price indices;

Consider the US and China. One USD buys about 80% more labor productivity than it did in 1999 (while the same dollar buys less than 10% more labor productivity in the US). That looks like a real appreciation to me.

In the meantime, one tradable sector (debt production) is booming in the US while others are withering, the service sector has boomed, and financial and human capital is increasingly skewing towards the financial sector. It looks like Dutch disease to me.

If Canada has “Dutch disease”, it seems of the more traditional variety, with nominal price appreciation and a resource boom. One might look to the UK for an analog to the US with a less rigid exchange rate. The UK is experiencing large inflows from intermediating the sale of US debt, it’s economy also seems to be tilting towards finance while other tradable sectors languish. There is no reason why a tradable service can’t stand in for a tradable good in the Dutch disease scenario, so long as one country has a sustainable comparative advantage in its production that it lacks in other sectors.

I agree with RebelEconomist. The fact that debt needs to be repaid is an important distinction between selling debt and selling oil. But that doesn’t prevent the present situation in America from looking like Dutch disease. Should credit conditions turn and debt need to be repaid rather than expanded, no doubt a different diagnosis will be appropriate.

Macro Man’s point about it being rational of the US to borrow and consume cheap is fine in theory. In practice, however, I doubt that people generally understand what they are doing and are prepared for how hard it might be to go the other way when it is made rational by expensive loans and expensive consumption. I suspect that they are being over-optimistic about the future, for historic, political, cultural and even genetic reasons. Like Micawber, they expect “something to turn up”.

Regular readers know what my answer to these issues is by now!

the $ has appreciated a tiny bit in real terms v. China methinks (tho a lot depends on when you start) as cumulative inflation differentials have offset the nominal move. certainly the rmb hasn’t appreciated by as much as one would expect based on productivity differentials. The case for financial dutch disease is strongest vis a vis east asia and the commodity exporters, where the $ hasn’t been allowed to depreciate and as a result demand for us financial assets has grown much faster than demand for us goods.

i also don’t think the case for Dutch disease hinges exclusively on the XR effect, though that is a big part of the standard argument. Dutch disease could refer to any rapidly expanding sector that sucks resources/ talent from other sectors. A terms of trade shock that increases the value of commodities does that. but couldn’t a shock that dramatically increases the value of “exporting financial assets” potentially have similar effects?

http://www.ft.com/cms/s/60d24556-f671-11db-9812-000b5df10621.html

“The real question for both New York and London is different: whether in the foreseeable future the world will still have a financial capital as we know it…

“London is getting a corresponding grip of the new-issue market. Here as elsewhere, its role as intermediary can only be helped by the rise of China. And all the while, it is establishing itself as a magnet for global talent – the Silicon Valley of finance…

“But the long-run trend looks unstoppable. One big reason is the continuing march of privatisation. The more enterprises are sold off in Russia, China and India, the more liquid capital is drawn to those countries and the more local expertise is created in managing it.

“One powerful illustration of this is the share that the developed economies hold in the world’s stock of quoted equity. Thirty years ago, the big five markets – the US, Japan, the UK, Germany and France – between them accounted for 90 per cent of the world by value. The figure is now 64 per cent and falling steeply.

“One way of slowing this trend, of course, is for the older markets to shore up their credentials – that is, to ensure that a London or New York listing is a desirable badge of quality…”

cf. https://ssl.tnr.com/p/docsub.mhtml?i=w061113&s=risen111706 – “The day is fast emerging when globally mobile capital will pick and choose among exchanges based on a wide set of criteria. Some will go for exchanges in countries where money is cheap and questions are few; others will go for the security that comes with weightier regulations… over time, national exchanges will have to compete directly for listings and, in doing so, to differentiate themselves. True, some will try a lowest-cost, lightest-regulation approach, and they will win a certain amount of attention in doing so. But market listing is hardly a commodity; with lighter regulation comes increased risk. Many companies will just as likely seek stability and accountability. Which is why the United States should stand behind, not tear down, its reputation as the best-regulated and most transparent financial sector in the world.”

in other words, it hasn’t hurt switzerland any! but the operative word is ‘quality’, which arguably is lacking in the menagerie of C*Os…

As I understand it, dutch disease is a condition where the export of a traded good (generally a commodity such as oil) result in a rapid appreciation in the country’s exchange rate. This appreciation makes the traded manufacturing sector uncompetitive.

This doesn’t describe the current US situation. Clearly, the US traded manufacturing sector isn’t under stress from a rapid appreciation in the USD. At best, the argument is that the sector is stressed by the pegging to the USD by other countries.

A much better example of dutch disease exists on the northern border of the US. CAD/USD has gone from close to .60 to around .90 in the last four years as resource prices have gone up, and this is causing stress in the manufacturing sector.

It may therefore be more accurate to say that the rising US export of debt to China (among others) is causing dutch disease in third parties.

There are two hopes of that happening: Bob Hope and no hope.

More than a few thousand Apple IPods are sold every year. I think it is more like around 100 million IPods in total sales. Last year alone, 10.5 million IPods were sold. IPods are manufactured in China not only due to lower labor costs, but because of the clustered network of component suppliers for the consumer electronics industry.

In effect, shedding the USD for the Euro. Consequently, look for even greater EUR appreciation. Over the next several years, China’s asset allocation between the USD and Euro will reverse: roughly 60% allocated into Euros, around 30% into USD, 10% into Yen.

Although exports in the USA will probably climb somewhat, reducing trade deficit, the situation there isn’t gonna help the USD too much since exports account for only 8% of America’s GDP. Ultimately, the US must stop its out of control deficit spending for a global rebalancing.