Reply To: Switzerland and Britain at currency war


There is a mercantilist fallacy at work according to which trade surpluses (more exports than imports) are good for our economy and trade deficits (more imports than exports) are bad. Trade surpluses mean more domestic production and employment and trade deficits less domestic production and employment. By artificially devaluing one’s currency, exports become cheaper for foreigners and imports more expensive for domestics,

Of course, economics demonstrates both domestics and foreigners are better off with a natural division of labor. Any government intervention shifts resource uses into less economizing patterns. Trade deficits and surpluses, then, have nothing to do with overall production and employment. Prices adjust so that resources will be used regardless. If the U.S. devalues the dollar to stimulate foreign purchases of domestically-produced cars, then labor, steel, and other resources will be reallocated away from more valuable lines of production into automobiles. Also, the effect of devaluation is temporary. If the money stock is increased it may devalue the currency sooner than it decreases the domestic purchasing power of the currency, but the two tend to conform.

The article seems to be claiming that it isn’t devaluation per se that different governments are aiming at but stimulating production by quantitative easing and that devaluation is a happy by-product for some of them. Each government is trying to avoid the dreaded price deflation by inflating its money stock (thus, stimulating production by pushing prices higher), but only some currencies get the extra stimulus to production (in the form of trade surpluses) of currency devaluation.