Now the US, relying on the same flawed theory [of quantitative money], is doing it again. Not surprisingly, China accuses it of deliberately aiming to depreciate the dollar. But the resulting increase in US exports at the expense of Chinese, Japanese, and European producers is precisely the purpose.
The euro will become progressively overvalued, just as the gold bloc was in the 1930’s. Since the eurozone is committed to austerity, its only recourse is protectionism. Meanwhile, China’s policy of slowly letting the renminbi rise against the dollar might well go into reverse, provoking US protectionism.
The failure of the G-20’s Seoul meeting to make any progress towards agreement on exchange rates or future reserve arrangements opens the door to a re-run of the 1930’s. Let’s hope that wisdom prevails before the rise of another Hitler.
In many ways even the timing is pretty much on track. Why? Because fundamentally people are unable (at first) to distinguish between normal, healthy inventory-adjustment recessions … and [b]balance-sheet adjustment[/b].
The latter is a function of too much debt, and you cannot solve a problem of too much debt with even more debt. But try, they do, primarily at first by driving interest rates to near-zero levels in hopes of stimulating the borrowing that felt so good.
Once interest rates are near zero a very rational “time-preference of money” kicks in. Practically, it means [b]people would much rather hold cash than someone else’s debt[/b]. Borrowing and lending both fall off the table, thereby trashing “velocity” — essentially GDP divided by money supply, which was Fisher’s greatest contribution to economic theory.
Dealing with debt, either by repayment or default, is very deflationary, especially in a low-velocity monetary world. Price increases in commodities which are scarce relative to demand — food and energy especially do [i]NOT[/i] signal inflation. This is particularly true in our current environment of immense over-capacity in factories, housing, commercial real estate, and labor.
Gold and silver can also do very well in such an environment because not only are they “cash” in terms of time-preference, they are the only financial asset that is not someone else’s obligation. That’s a two-fer in this economic world.
Finally, it should be noted that [b]every single balance-sheet adjustment in the last several hundred years has eventually come to be called a depression[/b]. It took several years for people to understand that the 1930s were broadly the same as the 1870s, the late 1830s, the 1780s and so on.
Devaluing the dollar is a form of protectionism; but some protectionism may be necessary. The Chinese have refused to allow their currency to float against the Dollar. They do so in order to devalue their currency, making their exports more attractive. In short they have been doing all along what they now complain we are doing. Their goal in keeping their currency artificially low is to give their manufacturers an opportunity to achieve global dominance before they allow their currency to float.
We may have to risk trade war in order to persuade them we cannot let their plan prevail.
Recent news about Greece, Portugal, and Ireland, along with reports that the Spanish books have been “cooked”, strongly indicate that reports of the euro being overvalued are rather inacurate.