Policies Hurting the Economy by Boosting Exports, Not Fixing Trade Balance
The US dollar’s is the world’s reserve currency and America is the world’s biggest consumer. Other countries whose economies are centered on exports rely heavily on America’s consumption. Therefore, a falling dollar is an issue many countries cannot afford to ignore. With the Federal Reserve’s big guns of quantitative easing locked, loaded and ready to fire, further devaluation of the dollar is sure to come. The near-inevitable move would set up a frantic race for the bottom among world currencies and the ramifications are serious for everyone. That was the good news. That bad news is that this race to the bottom is one the United States is likely to win.
Most countries are either trying to boost or maintain export levels. The most popular tool being utilized by world governments is to devalue their country’s currency. The ultimate goal is to create jobs. This is where the fundamental flaw behind their methods becomes apparent. People do not work simply because they enjoy doing it, they work because their labor can be traded for currency, which will be used to purchase the workers items of consumption. The basic reason anyone works is so they can consume. Theory in general states that a nation will only export production rather than consuming it to gain a comparative advantage. If a country can produce one type of good at a surplus and at good quality, it can trade that good for other goods it cannot make as efficiently or at all at home. The entire reason for trade is so citizens can consume more than they would be able to without trade.
When a country devalues its currency to gain sales overseas and increase exports, that country will indeed increase exports, but it will receive less in return from trade if its currency was still strong. Currency debasement allows for increased exports while ignoring whatever problem caused a radical trade imbalance in the first place. In the case of the United States, it is and was the hemorrhaging of our manufacturing base. If we adopt a policy of currency debasement, our comparative advantage will be severely blunted and our citizens will be forced to consume less. The portion of domestic goods that we consume will indeed increase, but that is only because we will be consuming less overall and our dollar will be unable to purchase as many goods, foreign or otherwise. In other words, as a nation’s currency devalues, its citizens are forced to work harder for less money (consumption).
Suppose a department store held a sale offering 50 percent off your purchase. Surely, you would be more willing to buy and the store will surely sell a lot more stuff. Although the store sold more stuff, it would have made more if it did not have to rely on a severe price cut. This is how currency debasement works. The problem is that America does not have a surplus of goods waiting to be sold. We are already selling more than we buy and to sell our items cheaper would only make matter worse.
Consider the small-scale version for the unemployed worker. One way for an unemployed individual to increase his chances of landing a job would be to accept lower wages. The worker will be much more likely to get a job if he accepts a 50 percent income reduction, but would he really be better off?Relative to being unemployed, yes, but if he could have found work at full pay he’d be much better. Currency debasement, like a pay cut, allows the same system that failed to work in the past to remain in place while providing the illusion of better prosperity. Selling some of our stuff is surely better than selling nothing, but in the end the total value of our trade will diminish and prosperity will continue to disintegrate.
The politics surrounding currency debasement are really quite simple. For example, Japan’s economy is centered on exports to American consumers. The problem for Japan is that Americans cannot really afford to buy as much as they could just a few short years ago or, rightfully so, they are unwilling to. Rather than look for new customers (like China’s citizens who currently “enjoy” a massive trade surplus), manufacturers in Japan have uses their political clout to essentially force a bailout for their traditional U.S. customers.
Whether they are aware of it or not, world governments are basically supporting the elite few by surreptitiously forcing workers to take pay cuts via inflation. Despite the extra effort, workers will fail to achieve higher standards of living. In fact, even as employment rises, overall consumption will fall.
The horizon looks darkest for those in the the United States. The sad reality? Our plan for currency debasement can have very little to do with saving jobs related to exports because we simply do not have many left to save. The only logical conclusion one can build from the government’s decision to debase the dollar is that it merely intends to ‘pay’ its own bills, preserve the status quo on Wall Street (bank profits and bonuses) and “allow” us to keep buying homes we cannot really afford, mostly on credit. This will actually prevent many workers in the service-sector from finding more productive jobs (for them and our country). In the end, currency debasement is a way to perpetuate the same economic model that has kept middle class incomes stagnant for over 3 decades while expanding the wealth of the top 1 percent by over 300 percent. So, yes, we probably will “win” the currency “war”, but in the process we will lose the real battle, the battle to improve and even maintain our quality of life.