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A dollar devaluation by another name

September 25, 2009 2 comments
Devaluations can be addictive

Devaluations can be addictive

British Prime Minister Gordon Brown said on Tuesday there was substantial support among the Group of 20 nations for creating a new framework to tackle global economic imbalances … Analysts said the United States’ drive to agree a roadmap for a more balanced global economy could meet resistance from China which is unlikely to agree reforms that would threaten its growth … A document outlining the US position ahead of the September 24-25 summit said big exporters, which include China, Germany and Japan, should consume more, while debtors like the United States ought to boost savings … The euro hit a one-year high against a sliding dollar ahead of a federal reserve meeting and the G20 talks on rebalancing, a process which is likely to require a weaker dollar.

Like Quicktake has pointed out in earlier posts, the US has alternated between an overvalued currency to gain ownership over large sections of world economy – and now with a devalued dollar, it seeks to gain an upper hand in merchandise exports. The three main points that one needs to understand are: -

One – It reduces the real value of US debt. The Chinese, the Rest of BRICS and the Others need to be paid a lot less in the future. (as pointed out earlier in various posts linked here.) Two – It makes US exports artificially competitive. (as pointed out earlier in linked posts). Three – The US competitiveness will be anchored to assets purchased with over-valued dollars.

Factor US Germ

any

Japan China ASEAN India
Labour High High High Low Med. Low
Welfare Costs High High High Low Med. Low
Entrepre

neurship

Med. Med. Low Low Low High
Domestic market Large Med. Med. Med. Small Large
Raw materials

(Self-owned)

High Low Low Med Med Med

What the US is proposing is that the Chinese Yuan must become ‘stronger’ – and the dollar must become weaker. This will mean a real reduction in US debt – and a subsidy for US exports. Of course, a devaluation has never helped any regime in the long run – but in the short run it reduces imports and increases exports. But is a ‘fix’ that the patient begins to row dependant on!

Is that the US is wanting to do to itself?

Related Quicktakes

  • Toward a robust globalisation
  • Fitch cuts Russian debt rating, sparks memories of ‘98 crash- Internation…
  • Leadership in the Developing World
  • Resolving global imbalances aka currency manipulation

    Some time in the future
    Some time in the future

    The Obama administration is increasingly signalling that the US will not continue to be the world’s consumer and importer of last resort. The clearest statements came last month from Larry Summers, White House economics director, in a speech at the Peterson Institute for International Economics and in an interview with the Financial Times. The US, he said, must become an export-oriented rather than a consumption-based economy and must rely on real engineering rather than financial wizardry.

    This long-run vision for US growth entails greater exports and probably a smaller current account deficit than where it is now (about 3 per cent of gross domestic product). Although Mr Summers did not and could not say so, the vision will require an end to the remaining overvaluation of the dollar.

    Put starkly, Mr Summers has stated that China can no longer behave like China because the US intends to behave much more like China. The world economy cannot have two, or even one-and-a-half, Chinese growth strategies from its two most important economies. Which will prevail? (via Fred Bergsten & Arvind Subramanian: Resolving global imbalances).

    In the last 50 years, the US dollar has swung from being grossly overvalued to slightly overvalued. The inertia of the Bretton Woods system has kept this overvaluation going. How has this benefitted the US?

    It has allowed the US to use its overvalued (and over-printed) currency to buy vast tracts of the world economy. And now having captured these segments of the world economy (especially raw material sources), with an over-valued currency, it will achieve two objectives.

    The US is in no position to pay off its nearly US$4 trillion, it owes the Rest of the World – equal to about 1 years GDP (my estimate, in PPP terms). This kind of dollar devaluation does three things at one stroke.

    Kojak Haircut Series – A Greenspan-Bernanke Production

    Kojak Haircut Series – A Greenspan-Bernanke Production

    One – It reduces the real value of its debt. The Chinese, the Rest of BRICS and the Others need to be paid a lot less in the future. (as pointed out earlier in various posts linked here.) Two – It makes US exports artificially competitive. (as pointed out earlier in linked posts). Three – The US competitiveness will be anchored to assets purchased with over-valued dollars.

    Readers can take courage from the fact that each such ‘process’ gives the US lesser returns and fewer options. The Law of Diminishing Marginal Utility. Or in plain language ‘crying wolf’ often never paid off.

    But the smart answer is to go out and buy one kilogram of gold. If each reader of Quicktake and 2ndlook blogs were to do this, the world would become a safer and fairer world in the next 10-20 years.

    Swear!

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