Universal Translator

Tuesday, September 20, 2011

Let's Devalue the Dollar!

I just came across a couple of different ideas in rapid succession that left me wondering if perhaps the easiest way to do something about the sputtering U.S. economy might not be to simply print more dollars. I'm no expert on the matter, so if anyone reading this has any insight on the subject or can point out things I'm mistaken about, I'd consider it a kindness.

First up is the upbeat article Doom! Our Economic Nightmare is Just Beginning, by John Judis. Judis draws parallels between the current global malaise and the Great Depression and observes:
[I]n contrast to the ususal post-World War II recession, our current downturn, like the Great Depression, is global in character. . . . During the typical recession, a country suffering a downturn might hope to revive itself by cutting its spending. That might temporarily increase unemployment, but it would also depress wages and prices, simultaneously cutting the demand for imports and making a country's exports more competitive against those of its rivals. But, when the recession is global, you get what John Maynard Keynes called the "paradox of thrift" writ large: As all nations cut their spending and attempt to devalue their currencies (which makes their exports cheaper), global demand shrinks still more, and the recession deepens.
The thing is, though, it is my understanding that today not "all nations" can devalue their currencies; this is because the EU nations have all joined in the Euro and no longer have national currencies to devalue.

Now, I do note that Judis's description of a typical response to a recession is to both devalue the currency and to cut spending; but what if we only did one? Is it possible to so devalue the dollar - through action by the Fed alone - that we can jump start the U.S.'s export economy by taking advantage of the individual EU nations' inability to control their own monetary supply? Would doing so even be legal, or would it subject the U.S. to sanctions for currency manipulation?

But setting those questions aside for the moment, here are some of the potential benefits I see:

First, increasing the money supply so as to devalue the dollar is doable - there would be no need, as there would be, say, with another economic stimulus bill, to try to get anything through the current do-nothing Congress.

Second, pumping sheer dollars into the system would devalue the dollar, causing domestic inflation to rise. If people - or, more importantly, corporations now sitting on about $2 trillion in cash - think that prices are only going to keep going up, that increases the pressure on those currently hoarding cash to spend money now rather than wait until later, thereby increasing national demand.

Third, if the dollar is devalued against the Euro, which lacks the ability to be devalued by any individual EU nation, then America's exports become more attractive to those nations and further increases demand for American goods and services.

Fourth, a jolt of inflation would reduce the real effect of the "overhang of consumer and business debt" described by Judis that also reduces effective demand. In other words, we could reduce the drag our current debt level has on the economy by repaying that debt with devalued dollars . . . freeing up more real money to spent on other goods and services, which also increases demand.

Fifth and finally, allowing for an inflation rate of - say - 4% would drive up nominal interest rates, which would provide a working margin in which the Fed could then subsequently work to increase or decrease real interest rates; as it is now, interest rates are too close to zero to allow the Fed much room to maneuver. See Karl Smith, Matthew Yglesias, and Keven Drum all writing in favor of this last point.

So, anybody? Is this a possible way out?


  1. Well, one of the the weird things about the "liquidity trap" is that it's not clear that pumping money into the system would devalue the dollar (i.e. produce inflation). In Japan, they increased the monetary base by quite a bit and still experienced deflation. So, that's one of the debates. Richard Koo thinks you can't do it. Krugman has argued (back in 1998 re: Japan) that just printing money won't do it, but you can produce inflation IF you can impact expectations. Specifically, you need to convince people that you'll continue to do whatever is necessary to produce inflation AFTER the crisis is over.

    It's pretty much academic since it's pretty clear that the Fed isn't going to try it. (One of my first posts on my blog was about this).

  2. By the way, you should include your blog address on your Kos profile.

  3. Ah, thanks for the information. Krugman's take is interesting; when I was first kind of running the idea through my head it seemed to me that one of the biggest boosts might come from pumping up actual demand by providing an incentive for the cash hoarders to start purchasing long-term capital assets they know they will eventually need right by convincing them inflation will continue and will just drive up the costs of these eventual and necessary purchases.

    And that means the Fed's affect on expected inflation rates also presents an interesting issue. I've argued elsewhere that the Fed's concern w/keeping inflation down (at the expense of its other charge, to keep unemployment low) is detrimental to the economy and reflects a favoratism toward the Creditor Class. I guess another problem with this approach is that - because everyone has become complacently convinced the Fed will never allowed inflation to get too bad - there is no real danger in putting off long-term capital purchases for as long as one wants.

    By far the saddest thing, though, is the last point you made - the Fed would never try this anyway, so the issue is academic. Particularly since the "doability" of this plan was its first point in its favor that I Iisted. And that really is sad. I don't doubt that you are right - the Fed would never go along - but it could! y'know? I understand why nothing can get past Congress, our entire political system is designed to have as many veto points as possible and the people in Congress don't really strike me as the most economically literate group on the block.

    But the Fed is supposed to be run by the experts, people who can look at data and recognize when it is telling them how things work even if what it is telling them seems counter-intuitive (like your paradox of austerity). But nevertheless, the Fed won't do anything, and Congress can't do anything, so maybe Judis is right and we really and truly are Doomed! for the next couple of years.

    P.S. Thanks for the suggestion re: editing the profile. Here is how clueless I am about such things: I edited my profile a few months ago, when I began posting regularly, and had no idea what "home page" meant, so I left it blank. I listed "Casa Cognito" where it said 'blog' and then realized an hour later that I had inadvertently changed my Kos page from "swellsman" to "Casa Cognito" and had to go back and correct it. After that I just left well enough alone.

    But I clicked on your profile to see how you did it and now have made the changes so, once again, thanks.

  4. There was a time when currencies could be devalued or revalued at the stroke of a pen. This is not possible in a world of floating exchange rates, except maybe for the renminbi).

    Here at home there are deflationary pressures, notably the housing price collapse and the debt under which many Americans struggle.

    How to get money into an economy that has no need or will to borrow to the degree needed to jump start an upward wage/price spiral is the mystery befuddling a once self-assured Benjamin Bernanke.

  5. Hmmm, not sure how new this actually is to you. Here's straight forward explanation, http://honestinquiry.com/how-government-grows-its-the-economists-stupid/ .

    As the article eplains, inflation originally meant inflation of the money supply, which has the inevitable effect of raising prices, which is commonly measured by the CPI, so changes in price have come to called inflation.

    The Fed has been inflating like crazy, they just don't have to tell us and so often they don't. Half of all deficit spending is financed by inflating the currency.

    The of inflating the currency, while often thought of as coming 'out of thin' air, is actually 'paid' for in higher prices. In this way the Fed does in fact cause money to change hands as you suggest, but the mechanism is different than you describe.

    Inflating the currency all by itself increases investment and/or consumption (demand). This engine creates exhaust in the form of higher prices. This exhaust is the primary limit to the printing of money. So this is why it's not correct to think of inflation per se as a stimulant, it is the reflection of stimulation that has already taken place.