Competitive Devaluation; Not the Way To Run an Economy

Last night, the People’s Bank of China devalued their currency 1.9% relative to the value of the US Dollar.  China’s economy is more than sputtering.  It’s out of gas.  They have already banned short selling and manipulated their stock market.

The EU has allowed the Euro to slip in value relative to the US Dollar too.
Euro to US Dollar Exchange Rate Chart

Euro to US Dollar Exchange Rate data by YCharts

The Greece debacle took the Euro to new lows and recently it’s rebounded a little.  Japan has been on a steady Yen devaluation course as well. This chart is Dollar/Yen not Yen/Dollar, hence the upticks.
US Dollar to Japanese Yen Exchange Rate Chart

US Dollar to Japanese Yen Exchange Rate data by YCharts

Of course, this puts the US Federal Reserve in a box when it comes to raising interest rates. There is still a disconnect between low rates and money velocity. Money is just not turning over in the economy.

If the Fed raises rates, US corporates that do a lot of export/import business will scream.  Companies in commodity businesses will scream too.  All world trade is done in US dollars and as the value of the dollar gets stronger, the price of commodities drops.  Gold and Crude Oil were down overnight.  The other day my friend Yra Harris wrote a bit about what he sees going on inside the US Fed.

Competitive devaluation is not the way to grow an economy.  This reminds me of the 1930’s when the entire world became protectionist and enacted tariffs to protect local industries.  That didn’t work out so well either.  Recall that the New Deal was initiated in 1933.  It petered out by 1937-38.  The timing of the start and fail of Keynesian economics in that period is what has spread the false myth that World War Two brought us out of the Depression.  If that’s the case, let’s go break some windows.

Interestingly, in the early 1980’s the US pursued a strong dollar policy with huge tax cuts.  That caused generational economic expansion.  When taxes are cut, it doesn’t just mean that the government decreases the burden on businesses and individuals.  It also means that freedom and individual liberty are transferred from the government domain to individuals.  Individuals build GDP more sustainably, and faster than centralized governments.

China has used a centrally planned communist bureaucracy to build their economy.  They overbuilt.  They are paying the price.  Japan has used quantitative easing since the mid 90’s to try and stimulate their economy.  It hasn’t worked and they are paying the price.  The EU has incredible problems and they are continuously devaluing their currency.  High unemployment in the southern EU isn’t changing.  Devaluation in the EU hasn’t worked either.

The US Federal Reserve has screwed the pooch too.  It kept interest rates on 0% for far, far too long.  I can’t help but think it was pure politics and not economics that drove the decision making.  If it was economics, then it was pretty shitty decision making and the Fed ought to be giving some transparent mea culpas to the marketplace.

Things aren’t normal in the US.  They aren’t anywhere near normal.  The headline unemployment number is low, but the labor participation rate is at a record low too.  Less people are working and it’s not because software has eaten people.  The government continues to pay more and more people not to work through transfer payments, which consume 63% of the federal budget.  The US regulatory overlords continue to grow.  US GDP continues to sputter.  Keeping rates at 0% isn’t going to change any of that.

China, Japan and the EU are all talking how the devaluations will help tourism.  If that’s the case, what citizens from what region are going to be able to afford to do all the touring?