Currency Wars Are Good!
Currency wars get a bad rap. The trouble starts with that second word. Wars, as we all know, are very bad. And a currency war — where countries compete to lower their exchange rate to boost their exports — reminds people of the kind of trade protectionism that killed some economies in the 1930s. But currency wars are the best kind of war. Nobody dies. Everybody can profit. In fact, currency wars didn’t contribute to the Great Depression. They ended it.
The reason why has everything to do with peer pressure. Sometimes, we engage in certain behaviors to keep up with our group. If our friends work out more, we might work out more. If they start bragging about charity donations, we donate to a charity. If they flaunt their community service experience, we grudgingly do more service. In all of these situations, we are acting out of pure selfishness and social competitiveness. But our selfishness is having the side-effect of improving ourselves and the world. This is what economists call a “positive externality.”
If war is politics by other means, a currency war is stimulus by other means.
The same goes for currency wars. A currency war begins, simply enough, when a country decides to push down the value of its currency. This means either printing money or just threatening to print money. A cheaper currency makes exports cheaper, and more competitive exports means more growth and happier people. Well, everybody except people in other countries who were just undersold and lost exports. That’s why economists call this kind of devaluation a “beggar-thy-neighbor” policy: Countries boost exports at the expense of others.
This sounds bad. Rather than cooperating, countries are fighting over trade. But in this case, some fighting is good, and more fighting is better. Countries that lose exports want to get them back. And the best way to do that is to devalue their own currencies too. This, of course, causes more countries to lose exports. They also want to get their exports back, so they also push down their currencies. It’s devaluation all the way down. All thanks to economic peer pressure.
The downside of devaluation is that no country gains a real trade advantage, and weaker currencies means the prices of commodities like oil shoot. But — and here’s the really important part — devaluing means printing money. There isn’t enough money in the world. That’s the simple and true reason why the global economy fell into crisis and has been so slow to recover. It’s also the simple and true reason why the Great Depression was so devastating. We know from the 1930s that such competitive devaluation can turn things around.