The Folly of Competitive Currency Devaluations

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By David Galland

During our just-concluded Casey’s Gold & Resource Summit, Doug Casey spoke out about the folly that central bankers commit when they set out to deliberately weaken their currencies in the hope of gaining an advantage for their export goods and, therefore, for their economy. I dropped Doug a note asking him to quickly recap his thoughts in favor of a strong, versus weak, currency – his response follows…

  1. A strong currency only hurts exports over the short run. Nobody seems to remember that the German mark was at .25, and the Japanese yen at 300 before the Nixon devaluation of 1971. The mark afterwards quintupled, and the yen has almost quadrupled since then.
  2. A strong currency reduces the cost of imports, helping to keep prices in check. If the price of your currency doubles, the price of imported oil, machinery, technology, and everything else is cut in half.
  3. Strong currencies attract foreign capital and encourage domestic savings. Businesses prefer to invest in a place where values tend to rise with the currency.
  4. A strong currency encourages producers to be as efficient as possible. When domestic costs rise with the currency, producers run a tighter ship and substitute technology for labor. That is the path to progress. Using cheap workers instead of technology is a poor alternative.
  5. Conversely, devaluing the currency simply makes everyone poorer. Most people keep their savings in the national currency, so are directly impoverished by devaluation. The only people helped (and only over the short term) are the relatively few companies that export. 
    In point of fact, governments have no business fixing the prices of currencies. It creates distortions, just like fixing the price of anything does. The idea of devaluing the currency to make things better is at least as stupid as the idea of printing money to stimulate the economy. And they have the same economic premises.

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17 Comments
  1. jimh009 says

    Ed,

    What’s your view on currency devalutation? Is it a folly or does it have its place?

    I personally can find nothing to argue about regarding the above post. Over the medium to longer term, it’s seems fairly obvious that a lower currency leads to lower living standards for the reasons outlined in this post, at least for developed countries. But I can also see where currency devaluation really can work for emerging countries whose economies are “export dependent.”

    1. Edward Harrison says

      It seems to me that debasing your currency only makes your people poorer. You may ‘steal’ an advantage but only through artificially boosting employment in specific favoured sectors of the economy.

  2. Olivier Travers says

    These are all good points but they sometimes collide with a) political reality and b) where a country actually is in its development cycle.Point #4 makes a lot of sense for countries whose economy is already well developed and adds a lot of value on top of its imported inputs. Whereas China mostly assembles components in its manufacture, Japan or Germany apply their advanced engineering and can benefit much more from cheap imports because of where they fit in the global value chain.However, saying that you should use technology instead of cheap labor in developing countries whose economies are driven by commodities and have more cheap labor than capital, well, that’s easier said than done. If you’re Brazil or Chile, you don’t become Germany overnight, even if you really, really wanted to. Even Italy or France were devaluing all the time in the 80s because their firms didn’t compete well with their German or Japanese competitors (think cars, home appliances).

    PS: I posted a comment to another article yesterday that seems stuck in Disqus moderation. This one was posted directly. It had a couple hyperlinks in it which I guess might have something to do with it.

    1. Edward Harrison says

      I will look to find out what’s wrong with the moderation and release that comment Oliver. Cheers.

    2. Edward Harrison says

      I just whitelisted you to prevent the moderation check. Don’t go crazy, now. As to the comments you made, I agree that there is no reason to debase the currency to give a boost to economic sectors that should be trying to boost on their own. Galland’s point does hold for the Germanys of the world. Appreciate the comments on Chile and Brazil.

  3. alison says

    If you have an unskilled population and have not completed the transition to an urbanized and industrialized economy a weak currency is a good way to attract FDI and investment. This works well with tax incentives to boost investment. However, there is little to recommend a weak currency for mature economies hoping to restart export lead growth. The US with its services based economy that has already deindustrialized and has high wages and an anti-business tax regime cannot be saved by a weak dollar. The dollar has already weakened over 20% against trade partners since 2003! We got a housing bubble not exports

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