Hi tippit, <<How can the US "devalue"? … without agreement and coordination with other countries? … I don't understand "competitive" devaluation … same place we started at? How would that be worse? … supposing that were a goal)>>
There is much I do not understand about the current global economic situation, because what seems like normal economic common sense is being skewed quite severely by two New Ec Tech machines, namely information and financial engineering. These two machines, like all machines, are able to leverage ordinary human acts to extraordinary effects.
The examples of what I am talking about are plentiful: stocks going up on good news and bad news, weak dollar is good, strong dollar is also good, what is systemically bad for Nokia is not bad for Motorola, etc.
The speed of information (internet, media), together with the concentration of financial power (large pools of managed money coupled with schemes of leverage) now allow politicians to have more immediate power, but probably and thankfully not more lasting power, over the markets. The power to destroy is, as usual, more readily available than the power to construct.
More specifically on how the US can devalue? By firstly and simply wanting to do so, and then by openly announcing a target exchange rate vis-à-vis the other two major currencies (Euro, Yen), along with a CNBC sound-bite rationale. The market place, leveraging on speed of information and concentration of leverage-able financial power, will do the rest, in a hurry. Witness what the Central Bank announcements of philosophy on gold sales did to the price of gold.
How else can the US devalue, or, maintain / enforce a devaluation? What CB and Joel suggested as traditional would certainly work (buy Euro and Yen), or buy gold, or do exactly what the US is doing now, but more, flood the system with USD, lower FED discount rate, spend until all indebted is saved via inflation.
Now, my question does not implicitly say that the US should or will devalue. I have so far not made a stand on the current economic problems other than noting private sector and total debt is higher than normal, a lot of capital was wasted, a lot of NAV was vaporized, the economy is terminating jobs, and folks are still spending on SUVs and homes, without much equity, running down their savings and capital gains. I have also not made a stand on the solutions to the present problems, other than noting a cleansing process is necessary. The current situation is not one in which I want to invest my equity, because the situation is in transition, not in equilibrium, and I do not know the total ‘badness’ during the transition process. I wait for absolute compelling value, as opposed to relative trading value.
Devaluation can be part of the transition process. There can be many reasons for wanting a devaluation (industrial competitiveness, cheat the creditor), and there are many reasons to resist a devaluation (prevent runaway inflation, maintain attraction for capital). Which way the US goes depends on how out of alignment the US economy gets to compared to what is necessary to maintain a standard of living. The folks do want their politicians to help sustain a standard of living as much as possible, as painlessly as possible, and the policy tools are actually very limited in ingenuity.
If the US wanted to devalue its currency, it can easily do so. Should the other nations not agree, they can in turn announce intents to competitively devalue, and the market will do their bidding as well. As you say, after much volatility, we then get back to the original starting point and start yet again. The problems comes when the politicians of each country, including the US, start to back up their words with action, namely a looser monetary policy, coupled with a still less disciplined fiscal policy, and to deliberately poison the money. In such event, all currencies aiming to be devalued will be devalued, but not so much against each other, but against monetary gold and against certain finite resources (oil, forests, mines, number of hours available in the labor pool).
In such a case, we then presumably can have inflation in all participating countries, and economic stagnation in the same countries. Fun.
Chugs, Jay |
