Let's see if I can explain this. [he's trying to explain sterilization] A business sells $ billion dollars worth of widgets to the US. When it comes back to the country, the business needs local currency to pay suppliers and employees, so they convert it to the local currency. This increases the money supply. At some point, that is inflationary,
i'm not sure he really understands what he's trying to explain. simply converting dollars to the local currency is NOT inflationary. if there is excess demand for local currency (due to a trade surplus), then attempts to buy local currency and sell dollars will drive up the value of the local currency. ceteris paribus, this is DEflationary as the local currency increases in value.
however, this deflationary effect also reduces the export competitiveness of the country (and hence causes terrible deflation in the capitalized value of export-oriented industries, companies, and other assets--a most important point), so the local CB tries to prevent the local currency from rising. there are two ways to do this: the pay me now way (money printing) or the pay me later way (sterilization).
when the CB simply prints local currency to buy the excess dollars, THAT is inflationary, since the result is more local currency relative to the supply of goods that can be bought (inflationary, at least, until the country reaches late stage Mercantilism a la Japan, where excess funds become money pushing on a string). on the plus side, however, the CB achieves to some extent the goal of currency stability, which is very important for the Asian Mercantilists and their ludicrous Japan-style policies of permanent trade surpluses.
however, the very large and ongoing accumulations of excess dollars from trade surpluses means that the local currency explosion will eventually be inflationary in one way or another (as it was in the Japanese bubbles of the 1980s, in combination with policies aimed at local asset inflation, the gains from which were deposited in the banking system and then used to fund dollar purchases--note that this asset inflation, whereby real estate and stock values were raised, was in effect also currency intervention which taxed the purchasers of RE, etc. as they made the landholders rich...these newly wealthy landsellers then flooded the postal bank with stable yen deposits, providing a great new source of funds for the famous 1908s boondoggles like golf courses and the Rockefeller Center). therefore, an advanced-stage Mercantilist will also have to turn to Door Number 2, i.e., sterilization...
so the local central banks issues government debt to soak up the excess cash and try and maintain a stable money supply.
whereas money printing can be thought of as a monetary policy, sterilization gets into fiscal policy, because the government actually issues local-denominated debt as part of its budget, in order to fund further purchases of excess dollars brought in by exporters. since the government is funded by taxpayers, and since the govt must pay interest on the sterilization bonds, the taxpayers directly pay for this type of currency intervention, and in effect subsidize the exporters' low cost structure (cheap currency).
on the other hand, these same taxpayers may be direct beneficiaries of this structure, as they are employees of the exporters, or secondary or tertiary beneficiaries in the form of suppliers to the exporters or else count their employees as customers. so, in a sense the whole country has a stake in the cheap-currency regime (with certain parties having a more direct benefit).
That local debt has to eventually be paid. It is a real cost. If the dollar goes down, so does the value of its reserves, yet its debt in local currency has stayed the same. Someone (read taxpayer) has to make up the local currency losses.
i don't think the Mercantilists are really worried about the paper losses, at least compared to their other, countervailing worries about what would happen if their currency explodes and they lose competitiveness. Japan, for instance, would basically go bankrupt if the USD were to approach a level where trade equilibrium is achieved.
this gets back to the inherently export-oriented capital formations of the Mercantilists. basically, their capacity is greater than their domestic needs, so they must export or die... |
