A Falling Dollar Is A Real Wage Cut That Also Cuts Debts

Felix Salmon says "US workers are massively overpaid compared to their equally-productive and well-educated counterparts in countries all over the world" which is a rather mean way of saying that our country runs a trade deficit. What to do about it?

There are a number of ways that the discrepancy can be narrowed: wages in countries from Slovenia to South Africa could go up; US wages can go down; or the dollar can simply depreciate. Which is a lot easier than nominal or even real wage cuts.

If you're anything like me, your wages are denominated in dollars, so if the value of a dollar declines your real wages decline. Currency depreciation isn't an alternative to real wage cuts, it's a mechanism by which real wages can be cut. Of course on the level of rhetoric "we need to defend manufacturing in this country and make China stop its unfair currency manipulation" is a tough stand the voters will love whereas "we need lower real wages in this country" will get you booed off the stage, but these are closely related concepts.

But there are differences. One of the most important ones is that not only are Americans' wages denominated in dollars but so are our debts. If you make me swallow a wage cut via a cut in my nominal salary, then my mortgage debt relative to income will balloon. But if my real wage declines via a depreciation in the value of the dollar, then the cost of my mortgage debt stays even. Given that we're currently facing massive household debt loads, this is a much better path to take.