A devaluation, however, is always couched in terms designed to make people believe that the government has performed some sort of fiscal miracle. What, in fact, it has done is announced that it is reneging on its debts.-Robert Ringer, The True Cause of Inflation...
Rising financial markets amidst a world where the US dollar flounders seem to have set loose growing cacophonous voices in support of such politically induced environment. The general theme is: A falling US dollar (via devaluation) translates to surging exports and bigger profits from multinationals, hence are seen as a good development for the markets and economy.
Essentially rationalizing devaluation as the best alternative path for economic recovery is clearly a manifestation of the reflexivity theory-a reinforcing feedback loop mechanism where people interpret prices as signifying real events, and where real events reinforce these price signals. The positive temporal effects from a weak dollar have been construed as blessings. Hence the appearance of asset price and economic recovery seem to have drawn in a growing number of weak dollar fans.
Yet oblivious of the present dynamics, the mainstream fails to take into the account that asset pricing today hardly reflects actual demand and supply balances but importantly signifies as the various degrees of government interventions in the marketplace aimed at “patching” the system.
In short, growing misinterpretations from rising asset prices by a system surviving on straps of band-aids leads to false confidence.
Inflation Is Not A One Size Fits All Formula
The mainstream seems baffled by the genuine reasons behind why US policy appears to be directed towards a lower US dollar. Programs such as the nationalization of the US mortgage market by the immensely expansionary roles of GSEs as Fannie Mae, Freddie Mac and FHA, an extended period of zero interest rate regime, equity stakes at key financial institutions, centralization of Fed powers, large fiscal deficits, a broad alphabet soup of makeshift programs aimed at providing marketmaker, lender, buyer or investor of last resort and importantly “money printing” Quantitative Easing programs, have all contributed to the falling US dollar or the “devaluation”.
Many have erroneously moored their views on the alleged necessity to restore “imbalances” of the US economy (e.g. wage differentials, nominal GDP, unemployment) allegedly targeted to enhance competitiveness relative to the world via devaluation. However, such perspective camouflages on the authentic but implied reason: To forestall systemic deflation from unwieldy debt aggregated within the system.
We have repeatedly been saying that Federal Reserve Chairman Ben Bernanke has made this campaign against deflation as the foremost incentive for today’s policy action, as noted his famous November 2002 Helicopter Speech Deflation: Making Sure "It" Doesn't Happen Here.
Yet Mr. Bernanke’s sweeping examination of the Great Depression as model for today’s policy guidance, from which his panoply of antidotes has been devised from, emanates from mostly the monetarists’ dimension. However, this framework diminishes the weight of influence from wage and price controls instituted during the New Deal era.
The US recovered from the Great Depression not from inflationary policies, as Mr. Bernanke perceives, but from the massive attendant price and wage adjustments. Importantly ``a partial dismantling of the regulatory infrastructure that had grown up during the Depression and the war; in effect, it was a rediscovery of the market and a new birth of freedom for entrepreneurs and workers” notes Professor Art Carden, post World War II.
This means that throughout history, devaluation, as Henry Hazlitt rightly exposes, is the modern euphemism for debasement of the coinage. It always means repudiation. It means that the promise to pay a certain definite weight of gold has been broken, and that the devaluing government, for its bonds or currency notes, will pay a smaller weight of gold.”
In other words, policies dealing with tacit debt repudiation should be seen in a different light compared with that from the adjustments from economic imbalances.
Theoretically, in order to solve unemployment government can hire everyone (communist model). But this would be different from preventing systemic deflation from outsized debt by concentrating taxpayer resources on the banking system as seen today. Because the objectives and policy recourse actions are different, hence the repercussions from current policy actions will be different. So it would be a folly to lump debt repudiation and economic imbalances as a “one size fits all elixir”.
Presently, the global governments’ collective approach has been to substitute constricting private sector debt fueled consumption (from economies blighted by the recent bubble) with its own.
As Morgan Stanley’s Spyros Andreopoulos rightly observed, ``This time around, however, eroding the debt through faster growth may not be an option. Instead, growth in many developed countries is likely to slow significantly going forward as labour forces shrink due to the demographic transition. Worse, population ageing will impose added pressure on public expenditure through higher pensions and healthcare costs. If outgrowing the debt is unlikely, and if governments lack the resolve to cut spending and/or raise taxes sufficiently, the remaining options are default and inflation. No policymaker in the developed world - and, by now, few in the developing world - would want to countenance default as an option. This leaves inflation.” (bold emphasis mine)
So while mainstream engages in data mining of facts in order to fit in to their preferred bias/s with its accompanying outcome, the reality is that policy actions have been concentrated on managing the intractable debt burdens.
Dismissing The Benefits Of Devaluation From Empirical Evidence
Figure 1: New York Times: China Grabs Export Leadership
The post hoc fallacy assumption that a falling currency is a boon to international competitiveness, as represented by export growth, can easily be disputed from the reference point of today’s roster of biggest exporters.
Simplistically this suggests that top exporters have weak currencies.
Figure 2: Economagic: Currencies of Major Exporters
Seen from the perspective of the Euro (blue line-top window; currency of Germany, Netherlands, France, Italy and Belguim) and the British Pound (red line top window), aside from the Japanese Yen (blue line, lower window), except for the 2008 meltdown, these currencies have been on a long term appreciation, in spite of their roles as the world’s largest exporters.
The South Korean won (red line lower window) which devalued by half as a result of the Asian crisis in 1997, has seen a recovery of its currency yet its exports exploded over the same period. One should note that the Bank of Korea used the Asian crisis as an opportunity to liberalize its capital account in two phases to offset the impact of the crisis.
Alternatively, if the weak currencies equate to strong exports: Zimbabwe, the Philippines or the previous hyperinflations episodes of Argentina or Brazil should have made them export giants of today. None of this is true.
Incidentally, Argentina used to be one of the world’s most prosperous countries in the world during the first quarter of the 20th century or the “golden age of growth” (Library of Parliament). Its political and economic regression had been largely due to the protectionist and isolationist policies (wikipedia.org) post 1930 or the Great Depression.
Hence given the Argentine experience, devaluation and closed door policies make a lethal combination to lower the standards of living of a society.
Today, Argentina is classified as an emerging market.
Although one may point to Argentina’s export recovery following the 1999-2002 crisis, which saw the Peso massively fall anew, the fact is that Argentina’s exports has mainly been in commodities, agricultural (54%) and energy (12.2%). In other words, Argentina’s export recovery can be construed from less of the international competitiveness from a weak currency, but mainly levered from global demand for commodities which appears to be in a supply ‘shock’ following years of underinvestment.
So based on empirical evidences as shown above, the notion that weak currency equals greater international competitiveness is utterly unfounded and represents sloppy and an oversimplistic thought process meant only to justify government interventions.
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