Beggar Thy Neighbor
In the deserts of Sudan,
And the gardens of Japan,
From Milan to Yucatan,
Every woman, every man,
In the dock of Tiger Bay
On the road to Mandalay
From Bombay to Santa Fé
Over hills and far away
Hit me with your rhythm stick,
It's nice to be a lunatic!
Ian Dury, 1978
“The euro”, opined JC Juncker, head of the euro-group of finance minister on Tuesday, “is dangerously high”.
If the currency is 'dangerously high', one must assume that the ability of euro area residents to buy more goods and services with their income from abroad than previously has somehow made them poorer. This is the tortured logic of the “currency warriors” that are popping up everywhere these days.
We point you to Ludwig von Mises' retort to this nonsense, which we included in a post on the Japanese currency ninjas yesterday.
“The euro’s 8 percent gain against the U.S. dollarin the past six months is posing a fresh threat to the European economy just as it shows signs of escaping the debt crisis, said Jean-Claude Juncker, who leads the group of euro-area finance ministers.
Echoing policy makers from Switzerland to Japan in bemoaning strong exchange rates, Juncker late yesterday called the euro’s value “dangerously high” after the 17-nation currency this week traded above $1.34 against the dollar for the first time since February last year.
So this absurdity is 'echoed' all over the globe, but it is not only policymakers making the argument, they are supported in this by a number of bien pensants in the economics profession:
“Harvard University professor Martin Feldstein, long a critic of the euro, said on Jan. 5 that European policy makers should consider a coordinated approach to weaken the euro as a way to rally growth via exports.
“A lower euro would make each of the euro-zone countries more competitive relative to the countries outside the euro zone,” Feldstein said.”
There you have it. Even in Harvard they just know somehow that once your money buys less, you've actually become richer. It seems to be the modern-day version of the philosopher's stone. Alchemists everywhere recommend it!
The astonishing breadth of this movement becomes clear as the article continues:
“Policy makers from many of the world’s leading economies have entered the new year advocating weaker currencies as an impulse for stronger economic growth with monetary and fiscal policies running out of room. Switzerland is already blocking the franc’s appreciation against the euro, while newly elected Japanese Prime Minister Shinzo Abe’s campaign to spur growth and seek a more aggressive central bank has driven down the yen.
Bank of England Governor Mervyn King said on Nov. 14 that while he never called for changes in exchange rates, sterling’s increase over the previous year was “not a welcome development.” The Bank of Canada said on Dec. 4 that “persistent strength” in its dollar was hobbling exports.”
Oh good, so they're at least all of one mind, right? There are several small problems with this idea though: Let us hypothetically assume that we have entered Orwell-land ('war is peace!') and one can actually get richer by lowering the value of one's currency. One problem is obviously that not everybody can do it at the same time. If one wants to cheapen one's currency, other currencies must by necessity increase in value. The next problem is how does one go about it? How can one's currency become worth less than that issued by others? The only solution seems to be to increase its supply – at a rate that exceeds that of the competition. This process is also known as 'inflation'. So in other words, what the wise gentlemen listed above are all advocating is that one should attempt to get rich by means of inflation.
Pure genius! No-one has ever thought of that one! No, wait, a few people have:
Rudolf von Havenstein, Ben Bernanke … making the nation richer by means of inflation
(Photo via Wikimedia Commons)
The modern era grand-daddy of inflationism: John Law. It somehow didn't work out well when he tried it.
(Painting by Casimir Balthazar)
This recent global eagerness to devalue has now alarmed Russia, as well as Sweden, Norway and South Korea.
“The world is on the brink of a fresh “currency war,” Russia warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.
“Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference today in Moscow.
The alert from the country that chairs the Group of 20 came as Luxembourg Prime Minister Jean-Claude Juncker complained of a “dangerously high” euro and officials in Norway and Sweden expressed exchange-rate concern.
The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room. The risk is as each country tries to boost exports, it hurts the competitiveness of other economies and provokes retaliation.
Yesterday “will go down as the first day European policy makers fired a shot in the 2013 currency war,” said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London.”
How can anyone read this and not roll on the floor with laughter? “We're going to retaliate by making ourselves poorer than you have just made yourself!”
Is this some kind of Kwakwaka'wakw potlatch? In case you're wondering what that is:
“Some groups, such as the Kwakwaka'wakw, used the potlatch as an arena in which highly competitive contests of status took place. In some cases, goods were actually destroyed after being received.”
Here is what the Scandinavians and South Koreans had to say:
“In Norway, Finance Minister Sigbjoern Johnsen said in an interview that a strong krone challenges the economy and that the government must ease pressure on the Norges Bank to avoid krone strengthening by conducting a “tight” fiscal policy. Norges Bank Deputy Governor Jan F. Qvigstad said yesterday that if the krone remains strong until policy makers meet in March, “that of course has an obvious effect on the interest rate.”
That pushed the currency, which has emerged as a haven from the European crisis, to its lowest level in more than two months versus the euro.
Meantime, Riksbank Deputy Governor Lars E. O. Svensson said today that a strong Swedish krona would be “yet another reason” to lower borrowing costs. He last month argued for a deeper cut than the 0.25 percentage point move to 1 percent that colleagues supported. “It’s obvious that the economy would manage better in this very difficult, weak economy with a lower rate and a weaker krona,” Svensson said in Stockholm.
Elsewhere, Bank of Korea Governor Kim Choong Soo said Jan. 14 that a steep drop in the yen could provoke an “active response to minimize any negative impacts on exports and investor confidence.”
For the Riksbank deputy governor it is “obvious” that a strong currency is bad, and that the “economy would manage better” without it. He neglects to mention why that should be so, but then again, why should he? It is after all “obvious”!
For a brief period, a currency devaluation will tend to boost exports, but whatever advantage is derived from this will soon disappear as prices in the devalued currency catch up. So where does this crazy idea that one can devalue oneself to prosperity come from?
The Mercantilist View of the World
It is a shibboleth among economic policymakers and many economists that in trade, it is better for a nation to have a “surplus” than a “deficit”. This misconceives a basic economic truth. A trade by definition only takes place when both parties to the trade find it beneficial. Ipso facto, there can only be winners in trade.
Another major error underlying this way of thinking is the assumption that national borders have economic significance. However, “nations” do not trade with each other. Although everybody tends to talk about nations and their capitals as though they were living beings (as in: “Brussels hints at devaluation”; “Seoul is not amused”; etc.), they are not. Trade is not between nations, it is between individuals. It makes exactly as much sense to belly-ache about the trade deficit between the US and Japan as it would to worry about the trade deficit between Muck City, Alabama, and Deadhorse, Alaska.
The problem is that Mercantilism, a philosophy and policy that once severely retarded economic development in continental Europe (especially in France), when it was vigorously pursued in the 17th century, apparently continues to be seen as somehow “correct in principle”. However, it is based on a fundamental fallacy, namely that in trade, one man's gain is another man's loss.
Mercantilism is not based on any economic theory as it were. Similar to inflation, it does produce profits for a tiny minority though, so all arguments that have ever been forwarded in its favor were originally cooked up by said minority (in the main established businesses that wanted 'protection' from competition). In the longer run, the economic damage it inflicts can be so debilitating though that even those that initially profit from its implementation can end up impoverished.
The main propagator of Mercantilism in France in the 17th century was the controller-general of finances, Jean-Baptiste Colbert. He certainly grew personally rich, but by the time he died he was hated like few other men in France. Among his best-known bon-mots is one that shows that he did not grasp the difference between money and wealth: "It is simply, and solely, the abundance of money within a state which makes the difference in its grandeur and power."
French mercantilist Jean-Baptiste Colbert. Another of his famous sayings was: "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing" – and he obtained plenty, much of which went to finance the endless wars of the Sun King, Louis XIV.
(Painting by Philippe de Champaigne)
It should be obvious that if economics really were a zero-sum game in which one party always loses what another gains, there could never be any economic progress at all. Nevertheless, the world's economic policymakers have apparently all concluded that devaluation and currency wars are the way to go and that economic laws can be safely ignored.
We stand in awe before this monumental display of economic ignorance.
Jean-Claude Juncker, modern-day European mercantilist.
(Photo source: untraceable, The Web)
The one currency they cannot devalue is incidentally doing quite well – via StockCharts – click for better resolution.
“Der Juncker in seinem grünen Janker,
blickte finster aus seinem Fenster
als wir auf seinem Anwesen unser Unwesen trieben”
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12 Responses to “The Currency War Idiocy”
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