The Folly of Competitive Currency Devaluations
By David Galland
During our just-concluded Casey’s Gold & Resource Summit, Doug Casey spoke out about the folly that central bankers commit when they set out to deliberately weaken their currencies in the hope of gaining an advantage for their export goods and, therefore, for their economy. I dropped Doug a note asking him to quickly recap his thoughts in favor of a strong, versus weak, currency – his response follows…
- A strong currency only hurts exports over the short run. Nobody seems to remember that the German mark was at .25, and the Japanese yen at 300 before the Nixon devaluation of 1971. The mark afterwards quintupled, and the yen has almost quadrupled since then.
- A strong currency reduces the cost of imports, helping to keep prices in check. If the price of your currency doubles, the price of imported oil, machinery, technology, and everything else is cut in half.
- Strong currencies attract foreign capital and encourage domestic savings. Businesses prefer to invest in a place where values tend to rise with the currency.
- A strong currency encourages producers to be as efficient as possible. When domestic costs rise with the currency, producers run a tighter ship and substitute technology for labor. That is the path to progress. Using cheap workers instead of technology is a poor alternative.
- Conversely, devaluing the currency simply makes everyone poorer. Most people keep their savings in the national currency, so are directly impoverished by devaluation. The only people helped (and only over the short term) are the relatively few companies that export.
In point of fact, governments have no business fixing the prices of currencies. It creates distortions, just like fixing the price of anything does. The idea of devaluing the currency to make things better is at least as stupid as the idea of printing money to stimulate the economy. And they have the same economic premises.