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Source link: http://archive.mises.org/14642/currency-wars/

Currency Wars

November 15, 2010 by

When governments try to confer an advantage to their exporters through currency depreciation, they risk a war of debasement. In such a race to the bottom, none of the participants can gain a lasting competitive edge. FULL ARTICLE by Robert P. Murphy


Christopher November 15, 2010 at 9:06 am

Makes me wonder if a global currency would but an end to this nonsense.

Colin Phillips November 15, 2010 at 9:59 am

I doubt it – the problem with having a single currency is that inevitably the power to create new money becomes “justified” for some important reason, and soon thereafter the power is concentrated in the hands of a few “experts with the best intentions.” This might be in a space as short as weeks after the introduction of a new global currency.

Of course, I’m assuming you meant a global fiat currency, but, from what I’ve seen, as soon as the use of any one single currency is enforced, the temptation for politicians or whoever controls the mint/printing press to take the currency off its commodity base standard is very great.

As soon as there is only one currency, there is only one unit of saving, which is subject to whatever policies are enacted by the government in control of the money supply. Having a global currency is essentially putting the eggs of the entire planet in a single basket – not a good idea.

Christopher November 15, 2010 at 12:28 pm

Wouldn’t a global currency have the very same effect that the Euro is having on countries like Greece, Italy and states like California? Greece and Italy can’t inflate away because they’re tied to the Euro, and California speaks for itself. A world currency would take away a central banks ability to inflate away would it not?

J. Murray November 15, 2010 at 11:36 am

Not at all. The reason the United States isn’t competitive internationally has nothing to do with the “strength” or “weakness” of the currency. The equilibrium between currencies is fairly constant. Doubling the quantity of one currency only causes the prices of everything purchased in that currency to double. This is one part of the equation that I don’t think the article properly hit on. If the exchange rate of the Dollar to Euro changes from 1-1 to 2-1, all that will happen is that US wheat will just double in price in terms of Dollars. Adding more money into circulation doesn’t really benefit anyone beyond the first user. So unless the Fed is dumping the newly created money into the farming sector, the only impact of the changing exchange rate is that the farmer increases the price in Dollars and existing Dollars already owned are worth less.

The problem with the United States when it comes to international competition has nothing to do with the money, but the costs of production. I’m a cost accountant and former auditor and having looked at a number of US based companies, about 48% of the total operating costs on any given company is because of taxation and regulation. The production cost of US goods is doubled purely because we insist on an income tax system and because of regulatory agencies. Additionally, personal income taxes, OASDI taxes, sales taxes, local land use regulations, rent control in major cities, government regulations on health care, and a myriad of other rules and restrictions drive up the cost of living, thereby drive up the salaries and benefits paid.

If we take a fairly conservative approach and say that we could cut our salaries and benefits by 30% and not notice a quality of life difference if we removed all the destructive government programs and interventions, that would further cut into the cost of doing business in the USA by 15%. This means the cost of goods sold of US products would decline by 63%, which would cause the prices to fall even further due to economics of scale. China could not compete with the US in this environment due to our vastly superior technological and productivity base. They’d have to resort to giving away goods for free to undercut American production. A Chinese laborer may work for 1/10th our salary, but with the capital infastructure available in the USA, our workers can produce as much as 50 Chinese workers.

Of course, this advantage is being eroded daily due to the capital destruction going on right now.

Additionally, a one world currency would only exasperate poverty and conflict around the world. Such a world central bank would still need to get that money into circulation, and this would likely be through major banks and financial centers that handle the bond creation. This policy would dramatically increase the wealth transfer into these regions (most likely to be London, Hong Kong, and New York if this was done today), leaving other regions without the benefit of first-come monetary creation drastically poorer as their currency holdings are rapidly devalued through printing activities.

Dave Albin November 15, 2010 at 12:09 pm

Yes, at least now you can move to another country with sound economic policy if our system ever falls apart completely. Of course, you used to be able to do this in the USA by moving to another state.

greg November 15, 2010 at 5:33 pm

You are correct on all counts. But I would like to point out that there exist a very fine line between producing and item in the US or China (where the majority of the sales are in the US). I was faced with this decision on a couple items I had made for the US market and when I considered all the cost and write-offs, it was more cost effective to produce the items in the US.

Now with the high cost of transportation, production is returning to the US. A company I know that sells measurement control units for production lines have seen a huge shift in sales from Asia to the US. This year they have record sales with the US market leading the way. I am even seeing some furniture manufacturing returning to N. Carolina.

The problem I see is that we will see this trend continue and these people that are screwing around with our money supply will take credit for it.

Sione November 17, 2010 at 4:19 pm

J Murray

Thank you for your insightful comment.

Although not a citizen (or is the correct term “subject” these days?) of the USA I have found that the situation you describe is common and holds throughout the Western demo-crazy system. The imposition of various taxes, welfarist rorts and sundry barriers to productivity inevitably and in every case results in severe reductions of wealth and welfare. This result is considered a “market failure” or a failure of Capitalism etc. and calls for yet more tax, rorts and taller barriers to productivity. For some reason people accept this situation and demand more of the same. Menken said something along the lines of them getting what they wanted “good and hard.”

Meanwhile in SE Asia and China productivity is gradually ramping up. Barriers are far lower. After a mere 20 years China has made fantastic advances. The West has not done nearly as well by comparison. What will another 20 bring? I’d guess the Chinese will do the opposite to the USA and accumulate capital rather than destroying it. Will anyone learn anything from any of this?

An aside:
Jim Rogers was recently asked why he moved to Singapore, abandoning the USA. Apart from explaining that he wanted his children to learn Mandarin (as that is the future), he also commented along the lines of “well, I didn’t decide on the basis of, look at all those debtors, let’s go over there and be with all of them.”


Bogart November 15, 2010 at 1:10 pm

I think the whole advantage from currency manipulation is much shorter in term than is commonly thought. There may be a price advantage for exporters but even exporters depend on foreign raw materials and on foreign equipment. In the where I work, most of the equipment is from European or Japanese providers. The same advantage that grain sellers in the example given have will be lost when the farmers attempt to put their grains in a container, or ship it using a petroleum fueled vehicles, or attempt to convert that grain into something else domestically.

Christopher November 15, 2010 at 2:35 pm

And the net result is inflation in all economies once the currencies of other countries adjust correct?

Dave Albin November 15, 2010 at 4:51 pm

I guess the key point to all of this is that, as a (or eventually, all) currency has less and less purchasing power due to inflation, other forms of “currency” will be adopted. When it takes $100 to buy a loaf of bread, some other system, like bartering, will take hold. So, in one sense, having a bunch of currencies, or one global currency, will come to the same end result. However, having one global currency, you lose the option of fleeing inflation to another country with sound money. More choices seems better to me in terms of currency.

Also, bartering without taxation involved is illegal, correct? The govt. tries to force you to use its currency in that and other ways.

Gil November 15, 2010 at 11:32 pm

Why would “bartering take hold”? A anti-inflation person from 1900 would be aghast at people nowadays who spend a week’s wage (as per 1900) on a cup of coffee yet people today don’t want to go bartering.

Dave Albin November 15, 2010 at 11:49 pm

If money has so little purchasing power that it is essentially worthless (my bread example), some other form of exchange will be used. One example is bartering. People will find some way to satisfy their needs and wants. When people turn from the government’s currency, the government uses force (taxing gold coin transactions above $600 was an article on here recently) to encourage people to go back to the currency.

Gil November 16, 2010 at 3:07 am

People will only go a-bartering during fast-paced inflation: i.e. hyperinflation. If inflation is slow enough then people will think nothing of $500 for a cup of coffee or paying $3 million for a family car. Besides if the number of zeroes gets a tad cumbersome then what’s wrong with creating a new currency with straightforward exchange rate? For example, greenbacks being replaced for bluebacks: $1 blueback = $1000 greenbacks. Lower prices have been restored without going through some sort of painful deflation.

Dave Albin November 16, 2010 at 10:04 am

Gil, people are already engaging in pseudo-bartering in this economy. A concept called time-shares, where people work off goods and services rather than paying US dollars for it. Growing in popularity….

I think what you are describing, blue backs, is a system on the verge of collapse or abandonment due to the threat of inflation running out of control.

Gil November 16, 2010 at 10:16 am

Why would changing currency be detrimental? A few countries went from pounds to dollars conversion without much problems.

Dave Albin November 16, 2010 at 2:44 pm

People have to believe in it – if the last currency became devalued, why won’t this one, maybe at a faster rate. Who knows? – that’s the problem.

Gil November 16, 2010 at 7:35 pm

Most people don’t believe the money supply has to be static.

Dave Albin November 16, 2010 at 10:34 pm

Maybe true, but they (we) certainly notice when their (our) dollars buy less at Wal-Mart…


King George November 18, 2010 at 2:05 pm

Add 10 zeroes to everyone’s balances and you would devalue things to the point where 1 dollar would be quite worthless, indeed.

However, why would we expect anything to change? Why would people barter if their incomes had risen as a result as well? All you’d have to do here is issue new bills or “reset” the decimal point. The real problems of inflation comes from who gets the new money first. Devaluation of the dollar in absolute terms does not necessarily pose a problem unless, as Gil said, it happens rather quickly.

gene November 15, 2010 at 1:30 pm

Except for the fact that at the present time the “dollar” is the world currency. so, whatever bernancke does is as if he is increasing the world currency, not just the US currency.

He already has caused bigtime inflation in emerging markets, simply because that is where all the recent new money has gone. and, unlike our economy, investment in emerging markets is investment primarily in the productive sector, not the financial. note our rising stock market and psuedo bank profits but high unemployment and low local lending and investment.

What he is hoping is that the inflation WILL spread to the US productive sector, due primarily to the overabundance of world dollars. Some will find their way back home.

and it probably will, if the money production is enough, which many think it is way short and will continue to drain into asia and latin america.

so our ruler will bring us high inflation and the inevitability of another downturn.

BioTube November 15, 2010 at 1:53 pm

Except that the world’s already wary of Bernarke’s policies – if he inflates enough to actually do anything, the dollar would get dropped faster than you can say “Zimbabwe”.

J. Russell November 15, 2010 at 5:16 pm

And what does increasing the money supply do to my savings? It reduces it’s value making me poorer than I was before. So now prices are higher and my savings is worth less.

Gil November 15, 2010 at 11:33 pm

What about poor borrowers who will lose out in deflation? They get hit with a hidden tax.

Inquisitor November 16, 2010 at 7:14 am

Which, absent a central bank unpredictably toying around with money, can be worked around by accounting for deflation as one would inflation. Of course, you mean appreciation in the currency value rather than literal deflation, I’d think. Same goes for it.

Gil November 16, 2010 at 11:22 am

Yes, deflation can be magically accounted for but evil inflation can’t be . . .

David S November 16, 2010 at 12:52 pm

Both inflation and deflation can be taken into account when charging an interest rate. There’s no magic in it.

Gil November 16, 2010 at 7:36 pm

Inflation can be taken in account? Oh good, so there’s no problem then.

King George November 18, 2010 at 2:09 pm

Define your terms, people.

Both monetary inflation and deflation have redistributive effects over time.
Price inflation/deflation occur as a consequence of monetary inflation. See above. They can also occur as a result of a change in supply/cost of real goods and services. In this case, this change does not entail purchasing power redistribution. In terms of what you can buy, everyone’s units of account’s purchasing power rises and falls equally.

Jaycephus November 16, 2010 at 1:22 pm

Yes, I remember that when I was poor, I had to walk to work and back home up-hill both ways!

There is something wrong with your analysis if inflation, on balance, is bad for the poor, AND, on balance, deflation is ALSO bad for the poor. Maybe you are making an argument for targeting exactly zero inflation instead of 2% inflation, but you left that out of your post.

‘Poor borrowers’ is something that shouldn’t even exist. Something that discrourages that is a societal good, I would think.

Gil November 16, 2010 at 7:38 pm

So deflation is a moral tax?

King George November 18, 2010 at 2:11 pm

Defining inflation/deflation as monetary inflation/deflation which lead to wealth redistribution in the effect of an assymetric change of the prices of goods and services:

Deflation can only really exist as a consequence of inflation. Without blowing up a bubble in the first place, there is nothing to deflate.

Ron Finch November 16, 2010 at 9:51 am

Yes. A very important point! Although Mises taught value free analysis, we should point out that a weaker dollar hurts the poor the most. This policy is a transfer of wealth from the poor to global export-importers. Why do they think it is a good idea to help the rich at the expense of the poor?

Gil November 16, 2010 at 7:39 pm

The poor are the weakest member of society so any swing of anything in any direction is going to hurt them the most. Hence Ayn Rand told people “don’t be poor”.

Ron Finch November 16, 2010 at 10:12 pm

Very amusing. However, EVERY time the “weakness” in the dollar is mentioned on TV, someone says “it helps exports!” Well, that only helps them for a very short period and it hurts everyone else all the time. It makes us all poorer. Can someone say THAT, please?

Robert November 15, 2010 at 7:37 pm

Taxes on barter is especially enforceable on regulated items such as cars. Try to trade something for a car or motorcycle and the state vehicle registration agent whips out the approved vehicle values book.

Mr Economy November 17, 2010 at 6:58 pm

Trade in a lot of instances today is really just a money printing out of thin air game. Outsourcing today is the transfer of US technology to countries that have weaker currencies due to faster money creation out of thin air relative to the US so that based on paper exchange rates foreign labor is cheaper to employ with US technology.

There is no better way to confuse people than to call protectionist trade agreements free trade. These managed trade agreements only help some sectors at the expense of others. Trade is becoming a hot topic because the money printing stimulus packages didn’t create as many jobs as hoped for in the US, but it did create jobs in other countries. Companies that got taxpayer money in the US are active creating jobs overseas instead due to foreign protectionism which is explained more in the next paragraphs.

Exchange rates do have effects on trade. China controls their exchange rate by total fiat in which for each dollar that’s invested in China they currently create almost 6.8 Yuan in exchange. By the multinationals getting almost 6.8 Yuan for each dollar invested in China, they have increased leverage to bid for resources like labor in the Chinese economy. It would be similar to if for example the US created and gave 7 Dollars for each Euro invested in the US economy.

Besides currency management whether by total control like in China or by frequent interventions into the FX markets like Japan, some countries require technology to be transferred overseas to sell overseas, have requirements that to sell products overseas you have to produce overseas, impose high tariffs on goods made in the US, gives free real estate, taxpayer money and below market interest rate loans from the central bank to favored exporters and to foreign multinationals for setting up production within the country. Also, a lot of foreign countries have industrial policies which means they back their private companies whether profitable or not with the printing press. This practice allows foreign unprofitable companies to stay afloat and dump products overseas below cost to take market share from foreign profitable companies.

Luis Mauricio Jiménez Corona November 19, 2010 at 12:57 am

I just wondering why people cannot see the big picture inside this matter, first of all, the so call competitive advantage of “devaluating currency paradox” was solved by David Ricardo in the 18th century, you must to remember that it doesn’t matter how strong are the desire of any specific country to import goods, ALL IMPORTS ARE PAID BY EXPORTS, currency manipulation did not improve economies, not even export sectors, if all countries or we can choose only USA and China and if they decide to devaluate its currencies mutually, the ONLY RESULT for general public is impoverishment on both sides, there is no paradox, consumers will be hurt by both countries, production will be reduced as a result of inflation. The question here is WHO BENEFITED FORM THIS?, well that’s easy, the same who benefited from normal credit expansion “GOVERNMENT”, why the China government wants to devaluate its currency? … simple to invest in two sectors mainly, to buy “GOLD” (The China’s Central Bank already announces its desire to acquire enormous amounts of gold and other assets, in order to diversify its portfolio) and second and must important issue China is increasing its MILITARY SPENDING, as I think everyone in Mises blogs knows that the USA is a Military Threat to China (WWIII coming soon…), and the USA is doing the same thing (except by diversifying central bank portfolio) USA government are spending a lot of money not only in welfare state but in MILITARY SPENDING. It is obviously that USA are pushing countries against China by using the economic issue as a pretext, but USA and China will not stop until one of them decide to initiate the battle, they are just preparing for the war. China has a wider range of manipulate it’s currency in order to steal wealth from its citizens, because due to the economic freedom in China they growth faster than the USA, the power of China to tax people without representation it’s bigger than the USA, who has an economy that it is just to be about to collapse.

Carl February 22, 2011 at 5:00 am

I believe that there is no competition against currencies only that we will take a look and contribute something for the progress and development of our economy

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