There was a big story in this morning's Wall Street Journal talking about the apparent strategy of currency depreciation that is being followed by many countries, including the U.S. Here's an excerpt:
Tensions are growing in the global currency markets as political rhetoric heats up and countries battle to protect their exporters, raising concerns about potentially damaging trade wars.
At least half a dozen countries are actively trying to push down the value of their currencies, the most high-profile of which is Japan, which is attempting to halt the rise of the yen after a 14% rise since May. In the U.S., Congress is considering a law that targets China for keeping its currency artificially low....
http://online.wsj.com/article/SB10001424052748703882404575519372149380764.html?KEYWORDS=currency+waSimon Johnson, a professor at MIT and former IMF economist, is not surprised (BTW: I'm seeing Mr. Johnson next Monday at the Boston Security Analysts Society).
With U.S. domestic growth anemic, and no stimulus on the horizon, the only way to increase employment is to increase exports, which implies a weaker currency. Here's an excerpt from Johnson's piece on Bloomberg:
The main reason the U.S. isn’t bouncing back so fast is because of exports and the dollar. South Korea, Russia, and other emerging markets that go through severe crises usually undergo a sharp depreciation in the inflation-adjusted value of the currency, making them hypercompetitive, at least for a while. This makes it easier to replace imports with domestic goods and services and much more attractive to export.
In contrast, the global financial crisis actually strengthened the U.S. dollar as it was seen as a haven, although the dollar has fallen somewhat from its recent peak against major trading partners.
Interestingly, Johnson also argues that current government policies do not necessarily lead to inflation and higher interest rates:
The dollar is, therefore, likely to depreciate against all floating currencies. If this happens, the impact on U.S. interest rates will be minimal because the Fed will continue its easing. Inflation may rise slightly but high unemployment means the impact will be small, perhaps not even to the 2 percent annual rate that modern central banks quietly prefer.
The Obama administration is blamed for high unemployment -- the result of a financial mania that was emerged long before it came to power. It would be a nice irony if, also through no fault of the administration, jobs return faster than expected as we head into the 2012 presidential election.
I think that Johnson might be right over the next couple of years, but I worry about the longer term effect of competitive devaluations. The last time we saw countries fight trade battles using their currencies on a global scale was in the 1930's, when "beggar-thy-neighbor" policies were the norm, which of course ended badly.
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