Despite all the AG trashing that I've done, I realized something yesterday that made me pause.
Just what DO you do when your trading partners engage in competitive devaluation?
Our two major trading "partners" (hard to call 'em partners when you run an immense deficit with them), China and Japan, both engage in currency devaluation. Their central banks are actively managing their currencies, Japan to suppress the Yen, China to maintain an explicit peg. The result is fiendishly clever. Much like the dope pusher that gives away the first few hits, they lure away our investment and manufacturing base with a few years of cheap imports. Then, when we're hooked on their imports, they release the peg and the trap snaps shut. We're dependent upon them, and forced to pay higher prices, forking over bigger chunks of our financial "wealth" to get the same goods.
Of course the impact would be to reduce demand in the US, but it still benefits them to make this "investment" - hook us on cheap imports, then raise the prices.
I'm not sure if this is the rationale behind the approach, but the outcome is the same. And how would you combat such a thing? Simple, flood the world with dollars. Print all they want to hold to devalue their currencies. From that perspective, given the ongoing overvaluation of the dollar, perhaps we aren't printing fast enough.
Of course, the price of fighting the competitive devaluation in this manner is a domestic bubble, clearly too high a price to pay. A simpler strategy would be (gulp - never ever thought I'd say this) higher import tarriffs to combat the currency differential.
Regardless, this beggar-thy-neighbor strategy is another contributor to the global problems.
BC |
