To understand what's going on, make sure you read the last sentence on the first page, continue on to the second page, and then watch this Charlie Rose interview with Gordon Brown (http://en.wikipedia.org/wiki/Gordon_Brown) where he also talks about the US/China "currency wars" and the "race to the bottom" (http://www.charlierose.com/view/interview/11343).
China artificially lowers its currency so its goods are relatively cheaper ("it's pegged to the dollar"), which keeps its foreign trade prices down and therefore boosts its exports. So how does the US "compete" with an artificially-lowered foreign currency to discount its debt and keep its exports up? Or, in other words, how does the US devalue its own currency in a "race to the bottom"...?
Currency devaluation is a way for governments to tax their populations surreptitiously. All governments that have control of the money devalue it to some extent, but generally not too much for the same reason they don't directly overtax or over-regulate: too much state looting discourages production and investment.
If China is over-looting (relative to other countries), then investors should be leaving China, not queuing to get in.
Currency devaluation is a tax on savers and a tax cut for debtors. So there is one group of people that is surreptitiously taxed and another one that is surreptitiously bailed out. Since the US is a net debtor nation, the Fed and the government creating inflation amounts to a net tax relief for the US population.
To clarify: that only goes for the inflation beyond the expected inflation. The expected inflation is priced into the interest rates. The current level of inflation of the dollar does not amount to a tax on savers.
it does because many of them are holding fixed rate notes at very low interest rates. For those with resetting interest rates it is no big deal, but grandma holding CD's or bonds bought in the last few years is going to get killed.
The price of the US Dollar is decided by international markets. The US does not manipulate its currency prices. Most economists in the US are very happy with this situation.
The only governmental force which might change the value of the dollar on purpose, by increasing or decreasing the amount of dollars available, is the Fed. The Fed's primary goal right now is to prevent deflation. All of its actions have been entirely consistent with its goal of preventing deflation, and just about every economist in the universe agrees qualitatively with the Fed's behavior, though there's wide disagreements on just how much they should print.
Deliberately printing money for the purposes of a trade war would be inflationary stupidity and would be a shocking move from an institution that had, in the past, actually prolonged a recession in order to maintain a stable currency. (Inflation doves like Paul Krugman would suggest that the Fed is doing that a second time, right now.)
REP. HENRY WAXMAN: Do you feel that your ideology pushed you to make decisions that you wish you had not made?
ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not.
And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.
REP. HENRY WAXMAN: You found a flaw in the reality…
ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?
ALAN GREENSPAN: That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.
That's an interesting quote, but I'd like you to clarify what it has to do with what I'm saying. Judging by the actions and commentary of just about everyone, neither Greenspan nor anybody else seems willing to throw out monetary policy entirely, and I caution you not to misread Greenspan's words that way.
Much of "conventional wisdom" is political meme. There has been a shift in perspective (an "ideological change") among many economists (though Krugman is not necessarily one of them). MMT goes against "conventional wisdom" -- I am saying read the link for an overview of MMT.
Like the conventional wisdom that house prices can only go up? Or there's no more boom and bust? There is no conventional wisdom, it's all speculation, especially as it tends to play out over generations and not political terms.
We've got a strong communist partially planned economy in a capitalist market, which has a currency that's got a weird valuation from a centrally planned bank fighting a currency war.
And that bank is deliberately manipulating the price of the dollar.
When has it happened before? So what wisdom can there be?
To say that it's FUD and that the Fed isn't going to at least consider what to do about that and they are going to always stick to a particular course regardless of the actions of the Chinese seems premature.
How the hell can anyone know what's going to happen? Or how the Chinese are going to act in the next 5-10 years?
I agree with your assessment of the Fed's influence on the dollar, but I think it's wrong to say that it's the "only governmental force." For example, if Congress decides to cut spending by 50% (hypothetical obviously :P), assuming the anti-bias government provisioning system, some of the cuts will come from goods abroad. That reduces the demand for, say, the Euro relative to the Dollar, and thus causes the Dollar to rise relative to the Euro.
This is another component of the emerging "economic/currency wars"...
"Oil Not Priced in Dollars by 2018?: Some oil producing countries and big buyers are hatching a plan to move away from pricing oil in dollars—a potential blow to the greenback's prestige" (http://www.businessweek.com/globalbiz/content/oct2009/gb2009...)
Reducing the value of the dollar overseas to sell more sounds like madman logic to me - it only makes the wealthy, more weathy, not the average consumer.
We don't reduce the subsidies to those exporting more, so they will do fine.
But for the average person it will just make all your goods and services more expensive.
So, give the wealthy the opportunity to ship twice the number of widgets at half the profit and they'll just have to give someone a job, regardless if it's the lowest possible paying jobs that will only be temporary anyway until the cost to make the widget also increases because of the supplies they need will now also cost twice as much.
Then when China out-deflates us to make the widgets even cheaper, all that temporary labor will be on unemployment and need taxpayer provided benefits and health care. Win-win for the factory owner.
A key point, as discussed in the Charlie Rose/Gordon Brown interview (above), is in the next 10-20 years when China's emerging middle class becomes consumers.
If the US is still in a position where its technology is superior and China's ~600 million new consumers demand and buy US technology, then it will result it massive US exports, windfall profits, and the perceived debt problem goes away.
Part of the US strategy is to make sure it's in a position where China's new middle class demand and buy US technology.
The average consumer is in a huge amount of dollar debt, and those dollars will become weaker too. It's people who are owed money (the wealthy) who are generally the inflation fighters.
Sounds good on the face of it, except that the evidence points in a completely different direction.
Have you ever seen any of these wealthy people you mention go to Washington to champion a strong dollar policy? I haven't. Have you ever seen Hu Jintao go to Washington to call for a stronger dollar? I have. We all have.
Perhaps the truth is closer to this: The US is in a huge amount of dollar debt, and those dollars will become weaker. It's the countries who are owed money (China) who are generally the inflation fighters.
So, are you saying that this is a good thing? I don't quite follow. Care to give a TL;DR explanation for those of us with more programming sense than fiscal sense?
I'm saying it's the reality of an emerging "economic war" between China and the US. In the article, Kenneth Rogoff (http://www.economics.harvard.edu/faculty/rogoff/), a Harvard economics professor and former chief economist at the International Monetary Fund, says "A weak dollar isn’t necessarily a bad thing -- it can make the United States more competitive, bolster exports and help domestic companies that are vying against imported goods here in the United States."
The article goes on to say, "[Devaluing the dollar] effectively would be playing the China card against China in a battle for manufacturing jobs...Many fund managers say the only way out of that box is a weaker dollar, reducing the value of the massive amount of U.S. debt held by foreigners and increasing the value of American investments abroad, such as Buffett’s.
"'Countries like the United States do race to the bottom,' said Gross (http://en.wikipedia.org/wiki/William_H._Gross), though he added that Treasury Secretary Timothy F. Geithner would never say so. A weaker currency 'makes them more competitive and reduces the burden of debt,' Gross added. Americans own about half of the outstanding federal debt, but Gross said the rest is owed 'as Tennessee Williams would say, to strangers, outside the U.S. If the United States can devalue the value of those dollars that they owe, then all the better.'"
What makes it a "race" if the US can just halve it's dollar value tomorrow by simply printing money? Isn't the value arbitrarily set by the feds using inflation and supply?
Too much state looting (and printing money is a way to loot) discourages production and investment besides causing political trouble. So there's a limit to how much any state can devalue.
To illustrate, your employer could make itself more competitive by cutting wages. But if it cuts wages too much you would stop working for it and find other employment. So there's a limit to how competitive you employer can be by cutting wages. The better, easier way to competitiveness is to increase productivity by enticing more productive workers with higher compensation.
By devaluing money, a government effectively cuts wages for the entire population, thus making the country as a whole more "competitive," i.e., foreigners can afford to buy more of the country's goods and services. But, just like cutting wages in a single firm is not generally effective, so inflation is not the best way to become nationally competitive.
The better, easier way to competitiveness is to increase productivity by enticing more productive workers with higher compensation.
It's a great time for startups because it looks like investors are encouraging another Internet "bubble" -- the US economy boomed in the last one, and it was a significant contributor to the record economic surpluses we had under Clinton (http://pragcap.com/visualizing-the-destruction-of-the-clinto...).
"Races to the bottom can be described in game theory by the prisoner's dilemma game. This is an exercise where the optimal outcome for the entire group of participants results from cooperation of the participants, but is put in danger by the fact that the optimal outcome for each individual is to not cooperate while the others do cooperate.
An economic example of racing to the bottom is tax competition between governments. Each government may benefit from higher tax revenues by having a high tax on corporate profits.
However, governments can benefit individually with a lower corporate tax rate relative to the other governments in order to attract businesses away from the jurisdictions of other governments. This action would hurt all governments except the one that undercut the others. In order to maintain the equilibrium, each of the other governments would have to lower their corporate tax rates to match the "defector" (the government that first lowered the tax rate). The end result is that each government adopts a lower corporate tax rate and thus collects less revenue overall. The optimal option for all governments would be an agreement to maintain tax harmonization" (http://en.wikipedia.org/wiki/Race_to_the_bottom).
As an aside, Robert Axelrod's famous and fascinating book "The Evolution of Cooperation" (http://en.wikipedia.org/wiki/The_Evolution_of_Cooperation) on game theory and the "prisoner's dilemma" presents an algorithm called "Tit for Tat" (http://en.wikipedia.org/wiki/Tit_for_tat) that describes an approach to interaction that promotes generosity and forgiveness while not to being exploitable, and it so simple that it can be understood by everyone (which is to say, it's easy for others to understand your actions and adapt theirs to yours so that you both get the most benefits).
Comments
To understand what's going on, make sure you read the last sentence on the first page, continue on to the second page, and then watch this Charlie Rose interview with Gordon Brown (http://en.wikipedia.org/wiki/Gordon_Brown) where he also talks about the US/China "currency wars" and the "race to the bottom" (http://www.charlierose.com/view/interview/11343).
China artificially lowers its currency so its goods are relatively cheaper ("it's pegged to the dollar"), which keeps its foreign trade prices down and therefore boosts its exports. So how does the US "compete" with an artificially-lowered foreign currency to discount its debt and keep its exports up? Or, in other words, how does the US devalue its own currency in a "race to the bottom"...?
Currency devaluation is a way for governments to tax their populations surreptitiously. All governments that have control of the money devalue it to some extent, but generally not too much for the same reason they don't directly overtax or over-regulate: too much state looting discourages production and investment.
If China is over-looting (relative to other countries), then investors should be leaving China, not queuing to get in.
Currency devaluation is a tax on savers and a tax cut for debtors. So there is one group of people that is surreptitiously taxed and another one that is surreptitiously bailed out. Since the US is a net debtor nation, the Fed and the government creating inflation amounts to a net tax relief for the US population.
To clarify: that only goes for the inflation beyond the expected inflation. The expected inflation is priced into the interest rates. The current level of inflation of the dollar does not amount to a tax on savers.
it does because many of them are holding fixed rate notes at very low interest rates. For those with resetting interest rates it is no big deal, but grandma holding CD's or bonds bought in the last few years is going to get killed.
This is FUD, here's why.
The price of the US Dollar is decided by international markets. The US does not manipulate its currency prices. Most economists in the US are very happy with this situation.
The only governmental force which might change the value of the dollar on purpose, by increasing or decreasing the amount of dollars available, is the Fed. The Fed's primary goal right now is to prevent deflation. All of its actions have been entirely consistent with its goal of preventing deflation, and just about every economist in the universe agrees qualitatively with the Fed's behavior, though there's wide disagreements on just how much they should print.
Deliberately printing money for the purposes of a trade war would be inflationary stupidity and would be a shocking move from an institution that had, in the past, actually prolonged a recession in order to maintain a stable currency. (Inflation doves like Paul Krugman would suggest that the Fed is doing that a second time, right now.)
REP. HENRY WAXMAN: Do you feel that your ideology pushed you to make decisions that you wish you had not made?
ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not.
And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.
REP. HENRY WAXMAN: You found a flaw in the reality…
ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?
ALAN GREENSPAN: That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.
(http://pragcap.com/resources/understanding-modern-monetary-s...)
That's an interesting quote, but I'd like you to clarify what it has to do with what I'm saying. Judging by the actions and commentary of just about everyone, neither Greenspan nor anybody else seems willing to throw out monetary policy entirely, and I caution you not to misread Greenspan's words that way.
Read the linked-to page.
Why should I read what you're linking if you can't even be bothered to tell me why?
That, and your attitude of "this blog post disproves conventional wisdom" is a serious red flag.
Much of "conventional wisdom" is political meme. There has been a shift in perspective (an "ideological change") among many economists (though Krugman is not necessarily one of them). MMT goes against "conventional wisdom" -- I am saying read the link for an overview of MMT.
Like the conventional wisdom that house prices can only go up? Or there's no more boom and bust? There is no conventional wisdom, it's all speculation, especially as it tends to play out over generations and not political terms.
We've got a strong communist partially planned economy in a capitalist market, which has a currency that's got a weird valuation from a centrally planned bank fighting a currency war.
And that bank is deliberately manipulating the price of the dollar.
When has it happened before? So what wisdom can there be?
To say that it's FUD and that the Fed isn't going to at least consider what to do about that and they are going to always stick to a particular course regardless of the actions of the Chinese seems premature.
How the hell can anyone know what's going to happen? Or how the Chinese are going to act in the next 5-10 years?
I agree with your assessment of the Fed's influence on the dollar, but I think it's wrong to say that it's the "only governmental force." For example, if Congress decides to cut spending by 50% (hypothetical obviously :P), assuming the anti-bias government provisioning system, some of the cuts will come from goods abroad. That reduces the demand for, say, the Euro relative to the Dollar, and thus causes the Dollar to rise relative to the Euro.
This is another component of the emerging "economic/currency wars"...
"Oil Not Priced in Dollars by 2018?: Some oil producing countries and big buyers are hatching a plan to move away from pricing oil in dollars—a potential blow to the greenback's prestige" (http://www.businessweek.com/globalbiz/content/oct2009/gb2009...)
For more, see "petrodollar warfare", (http://en.wikipedia.org/wiki/Petrodollar_warfare), AKA the "oil currency wars"
that's full of "citation needed" and "which economists?"
Reducing the value of the dollar overseas to sell more sounds like madman logic to me - it only makes the wealthy, more weathy, not the average consumer.
We don't reduce the subsidies to those exporting more, so they will do fine.
But for the average person it will just make all your goods and services more expensive.
Nonsense. A cheap currency promotes exports and reduces imports, and will strongly stimulate job grows, which is exactly what the U.S. needs now.
Job growth is also the reason why China is keeping its currency cheap: mass unemployment means instability.
Ah okay, trickle-down economics 2.0
So, give the wealthy the opportunity to ship twice the number of widgets at half the profit and they'll just have to give someone a job, regardless if it's the lowest possible paying jobs that will only be temporary anyway until the cost to make the widget also increases because of the supplies they need will now also cost twice as much.
Then when China out-deflates us to make the widgets even cheaper, all that temporary labor will be on unemployment and need taxpayer provided benefits and health care. Win-win for the factory owner.
A key point, as discussed in the Charlie Rose/Gordon Brown interview (above), is in the next 10-20 years when China's emerging middle class becomes consumers.
If the US is still in a position where its technology is superior and China's ~600 million new consumers demand and buy US technology, then it will result it massive US exports, windfall profits, and the perceived debt problem goes away. Part of the US strategy is to make sure it's in a position where China's new middle class demand and buy US technology.
These effects work for all industries, not just widget factories. Microsoft's highly paid engineers profit too.
And twice the number of widgets at half the profit - how is that a good deal for factory owners?
Finally, Portugal is a country with a very expensive currency. Because of that, unemployment is huge and they're in big trouble.
>it only makes the wealthy, more weathy, not the average consumer.
I mean honestly, who would have expected that?
The average consumer is in a huge amount of dollar debt, and those dollars will become weaker too. It's people who are owed money (the wealthy) who are generally the inflation fighters.
Sounds good on the face of it, except that the evidence points in a completely different direction.
Have you ever seen any of these wealthy people you mention go to Washington to champion a strong dollar policy? I haven't. Have you ever seen Hu Jintao go to Washington to call for a stronger dollar? I have. We all have.
Perhaps the truth is closer to this: The US is in a huge amount of dollar debt, and those dollars will become weaker. It's the countries who are owed money (China) who are generally the inflation fighters.
So, are you saying that this is a good thing? I don't quite follow. Care to give a TL;DR explanation for those of us with more programming sense than fiscal sense?
I'm saying it's the reality of an emerging "economic war" between China and the US. In the article, Kenneth Rogoff (http://www.economics.harvard.edu/faculty/rogoff/), a Harvard economics professor and former chief economist at the International Monetary Fund, says "A weak dollar isn’t necessarily a bad thing -- it can make the United States more competitive, bolster exports and help domestic companies that are vying against imported goods here in the United States."
The article goes on to say, "[Devaluing the dollar] effectively would be playing the China card against China in a battle for manufacturing jobs...Many fund managers say the only way out of that box is a weaker dollar, reducing the value of the massive amount of U.S. debt held by foreigners and increasing the value of American investments abroad, such as Buffett’s.
"'Countries like the United States do race to the bottom,' said Gross (http://en.wikipedia.org/wiki/William_H._Gross), though he added that Treasury Secretary Timothy F. Geithner would never say so. A weaker currency 'makes them more competitive and reduces the burden of debt,' Gross added. Americans own about half of the outstanding federal debt, but Gross said the rest is owed 'as Tennessee Williams would say, to strangers, outside the U.S. If the United States can devalue the value of those dollars that they owe, then all the better.'"
What makes it a "race" if the US can just halve it's dollar value tomorrow by simply printing money? Isn't the value arbitrarily set by the feds using inflation and supply?
Too much state looting (and printing money is a way to loot) discourages production and investment besides causing political trouble. So there's a limit to how much any state can devalue.
To illustrate, your employer could make itself more competitive by cutting wages. But if it cuts wages too much you would stop working for it and find other employment. So there's a limit to how competitive you employer can be by cutting wages. The better, easier way to competitiveness is to increase productivity by enticing more productive workers with higher compensation.
By devaluing money, a government effectively cuts wages for the entire population, thus making the country as a whole more "competitive," i.e., foreigners can afford to buy more of the country's goods and services. But, just like cutting wages in a single firm is not generally effective, so inflation is not the best way to become nationally competitive.
The better, easier way to competitiveness is to increase productivity by enticing more productive workers with higher compensation.
It's a great time for startups because it looks like investors are encouraging another Internet "bubble" -- the US economy boomed in the last one, and it was a significant contributor to the record economic surpluses we had under Clinton (http://pragcap.com/visualizing-the-destruction-of-the-clinto...).
"Races to the bottom can be described in game theory by the prisoner's dilemma game. This is an exercise where the optimal outcome for the entire group of participants results from cooperation of the participants, but is put in danger by the fact that the optimal outcome for each individual is to not cooperate while the others do cooperate. An economic example of racing to the bottom is tax competition between governments. Each government may benefit from higher tax revenues by having a high tax on corporate profits.
However, governments can benefit individually with a lower corporate tax rate relative to the other governments in order to attract businesses away from the jurisdictions of other governments. This action would hurt all governments except the one that undercut the others. In order to maintain the equilibrium, each of the other governments would have to lower their corporate tax rates to match the "defector" (the government that first lowered the tax rate). The end result is that each government adopts a lower corporate tax rate and thus collects less revenue overall. The optimal option for all governments would be an agreement to maintain tax harmonization" (http://en.wikipedia.org/wiki/Race_to_the_bottom).
As an aside, Robert Axelrod's famous and fascinating book "The Evolution of Cooperation" (http://en.wikipedia.org/wiki/The_Evolution_of_Cooperation) on game theory and the "prisoner's dilemma" presents an algorithm called "Tit for Tat" (http://en.wikipedia.org/wiki/Tit_for_tat) that describes an approach to interaction that promotes generosity and forgiveness while not to being exploitable, and it so simple that it can be understood by everyone (which is to say, it's easy for others to understand your actions and adapt theirs to yours so that you both get the most benefits).