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?

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UPDATED BELOW

Following up a bit on yesterday's deconstruction of David Brooks and his disingenuous attempt to frame the Democratic and Republican approach to Medicare as a philosophical choice between "bottom-up" engineering and "top-down" central planning . . .

It occurred to me that the right wing in this county has a sort of schizophrenic take on how to address economic problems. On the one hand, they are filled with rhetoric about how "small businesses" and "entrepreneurs" are the heart and soul of our economy, and that if we only unleash the forces of the Free Market then those forces will solve any problem we might have cleanly and efficiently, without involving the government or any kind of central planning.

On the other hand, despite this rhetoric it seems pretty clear that they don't really believe in bottom-up solutions to anything when it comes to the economy. No matter the economic situation, whether boom or bust, whether the government runs a surplus or a deficit, their prescription is always the same: more and more tax cuts for the wealthy, large corporations and financiers, less and less corporate and financial regulation. And the justification is always the same too: these are the people and entities who create jobs and drive the economy. Not the people at the bottom, not the working class or the hard-working middle class -- nope, true wealth is generated by the wealthy at the top. Especially the banksters.

Sadly, the Democratic party leadership has bought into this idea nearly as much as the Repubicans have. Matt Taibbi warned us long ago to keep in mind that Wall Street financiers provided the largest part of Obama's presidential campaign donations, and despite Wall Street's public wailing whenever Obama says something that hurts their delicate feelings, Wall Street has made out pretty well under Obama. After nearly crashing the global financial system the banksters received what amounted to a strings-free bailout, and profits are now higher than ever on Wall Street, as are salaries and bonuses -- all at the same time the rest of America is still suffering through the worst economy since the Great Depression. And it doesn't strike me that this is entirely the result of political payback for campaign contributions. I get the sense that Obama really has bought into the idea -- as has pretty much everybody in the leadership of both parties -- that it is the Titans of Wall Street who are the fundamental drivers of our economy.

I think this is exactly wrong. America's FIRE (finance, insurance and real estate) economy is now the largest sector of our national GDP, but that doesn't mean it produces any actual wealth. Money is shifted around and interest is paid on debt, but no actual goods or services get produced by the FIRE economy. Nor does it employ a lot of people. Back when GM was the largest company in America that meant a lot of actual people were employed, both because automobile manufacturing was a (relatively) labor-intensive industry -- someone had to work the assembly lines -- and because all the suppliers to GM were also labor-intensive. But you don't need a 40,000 member workforce to shift money between electronic accounts. So while the vast amount of money that GM generated back in the 50's and 60's necessarily was spread out among many employees, all of whom then spent it themselves and thereby kept tons of other people employed, we don't have that with the FIRE economy. Now vast amounts of money are concentrated in the hands of relatively few people.

But the real wealth of any society resides in its natural resources and the goods and services that society can produce; while this wealth may end up concentrated in a few hands at the top level of society, actual wealth always -- always -- is created from the bottom up.

Whenever I think about this subject I am always reminded of feudal Japan. The Samurai class may have had all the wealth and the power in that society, but it didn't generate that wealth. The wealth was generated by the rice farmers at the bottom of society -- a circumstance recognized in Japan by the fact that up until the mid-19th century taxes were paid, not in money, but in actual bushels of rice. That -- the basic ability to feed its people -- was recognized as the nation's real wealth.

But I watch the fiscal and monetary decisions being made by our government today, and I don't get the feeling that anyone in charge really believes any longer that it is the great mass of people, toiling day in and day out, that actually created the wealth our society now has.

When the Fed is less concerned about doing something to bring down unemployment than it is about making sure inflation doesn't hurt the creditor class, when Republicans insist on shifting taxes away from the already wealthy because "they create the jobs" (a patent lie), when the salvation of the bond market is obviously more important to both parties than is our educational system, our infrastructure, our health care or -- as near as I can tell -- pretty much anything at all . . . .

Well, I get the sense that the people we put in charge really think that their job consists in making sure that the other elites in our society are basically free to do what they please because they are the only ones who "really matter." The rest of us -- the non-wealthy -- seem to be regarded more or less as livestock that can be herded, occasionally put to use (when the "real people" need consumers, debtors, or cannon fodder) but can also generally be safely ignored. The reasoning seems to be that if the richest of us are taken care of, then the rest of us will somehow naturally be taken care too.

How do they think that works? I dunno, but they seem to believe it. Maybe they think it's magic, or just a natural law of some sort. In any event, it is the epitome of a top-down approach to the economy and it seems to have infected everyone with a grip on any of the levers of power in this country.

UPDATE: In his column today Krugman hits on many of the same points I made here, albeit in a more erudite and slightly less despairing way. Representative quote: "Consciously or not, policy makers are catering almost exclusively to the interests of rentiers -- those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone's expense." But do click over and read the rest of what he has to say about how policy makers are protecting the creditor class by, i.e. choosing to curb (nonexistent) inflation over doing something to end unemployment, etc.