There is a tendency among some people to think that the economic problem is to devalue the dollar enough to make our trade balance come back into equilibrium. This is misguided.
The basic problem isnt that our exports are uncompetitive or that we cant match the quality of imports, but that we are SPENDING TOO MUCH compared to our income.
As a country we are spending more than we are making. Given near zero rates of savings in the private sector the massive deficit in the current account is basically the mirror image of the government's deficit. Fixing the problem in the most direct way means that the government has to either spend less or tax more.
Even so, there IS an exchange rate change big enough that it will solve the problem. But to induce the savings/income change needed only through the exchange rate channel is a very very painful way to go about it. (Ask any of several LDC's)
To reinforce the point I am trying to make I sometimes tell students there is a very sure-fire way to get instant balance in the balance of payments - Drop an atom bomb and kill everyone. You will get perfect balance. It will be at a level of zero, but there will be balance.
That is the problem before us - How to achieve balance (or at least be close enough) AT THE HIGHEST LEVEL POSSIBLE IN TERMS OF INCOME. Using only the exchange rate isnt the way to do that.
And that is why the guys in Washington right now are scary. By doing nothing they are forcing the exchange rate to take all of the burden of the adjustment - and that will mean that balance will be achieved at a much lower level than could be done if they would come to their senses. With the reappointment of Snow it doesnt look like they will.
Hold on. It could be a bumpy ride.