The advantage of devaluing is that you catch the Americans at their game. The problem is that once the US cuts consumption it will become a less attractive export market and a less attractive market period.
The Euro zone is a challenge. Huge debt in Former E. Germany, quotas up the ying yang (UK farmers paid not to plant anything, for example, as UK has hit quota), distrustful of Turkey (and they chastise the US!), each country still tracking the Euro in circulation with their CB's name on it, debt caps being broken all the time. With so much on their plate will it work? Remember when Russia or China replaces USD with Euro in their foreign reserves it is not because they 'like' the Euro, rather they like the USD a little less than before. the Euro isn't great, and they'll have to devalue. Japan will have a huge fight trying to keep the Yen from going to 50 (just as America's trade deficit has to equalize, maybe with a 50% devaluation, Japan's surplus needs to neutralize, maybe at 50 Yen). Japans debt/GDP 8.6%, US 4.3%. (So why aren't people dumping Yen, well the debt is internally financed, another possible solution in the US)
So, first everyone devalues. CB interest rate rises are put on hold extending the housing bubble a littler longer, which might be a good thing if it prevents a crash.
I initially thought the US would import inflation but if everyone devalues, the likelihood of this happening are less. Places like China and India should enjoy increases in productivity, purchasing power and standard of living, but if they slow down most commodities will be hit.
So everyone ends up competing with China to preserve jobs and amid devaluation to stay competitive everyone in the West tries to preserve wealth. |
