January 5, 2013 at 6:38 am #17487rtMember
In this article it says that Switzerland and Britain are at a currency war, both countries (respective governments and central banks) try to devalue their currency. I’ve heard that Japan wants to devalue the Yen as well.
Why would a country want a weaker currency? Exporters might benefit and banks might profit from the increased money supply but the average person’s money loses its purchasing power, right?January 5, 2013 at 10:17 am #17488swalsh81Member
Yes you are right. But devaluing currency is, unfortunately, not meant to benefit the average person. This type of currency manipulation is a direct result of too powerful a government. It allows politicians to do things that benefit the politically well connected businesses and banks. That, in turn, gets campaign contributions and lobbying money to go to those politicians from those businesses and banks.
This kind of policy is not really fought against by the general public because those politicians and their pocket economists are able to convince them that their policies are causing aggregate economic indicators to get better. GNP and other aggregates goes up. Politicians, to an extent, also believe that simply having high GNP and other aggregate numbers is a sign of a god economy and follow the Keynesian by-any-means-necessary approach to get to these numbers without looking at the unseen consequences. But, as you know, those indicators really mean little if anything when it comes to purchasing power and quality of production and investment.
Unfortunately the general public doesnt really have a good understanding of purchasing power and quality of production and investment….and, for some reason, they tend to trust their politicians.January 5, 2013 at 11:46 am #17489jmherbenerModerator
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.January 10, 2013 at 3:12 pm #17490rtMember
Thank you, that’s what I thought! It’s unbelievable that these fallacies are committed again and again.
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