Beggar Thy Currency Or Thy Self?

Devaluing Life

China s Daring Depreciation

It was a term of abuse, in effect.

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Since then, many calls for coordination have lamented the outbreak of currency wars, otherwise known as competitive depreciation an old phenomenon that recalls the tit for tat devaluations of the 1930s. Now, as then, the fear is that if all countries try to depreciate their currency to gain export competitiveness and boost their economies, all will fail.

These are reasonable objections, but they should not be allowed to lead to unreasonable conclusions. The alternatives on offer are internal and external devaluation.

Given these factors, it seems likely that the recent devaluation was driven by a different goal. And, in fact, an announcement made on the same day as the devaluation one that has been largely overshadowed by the panic offers an important indication of what that goal was.

A Devaluation Option for Southern Europe

Of course, the renminbi s recent depreciation was much smaller than the de facto currency devaluations engineered by the United States and the United Kingdom after the financial crisis of 2008. It was also nowhere near as significant as the devaluation that the Bank of Japan has pursued since 2012.

You write the check, and instantly it depreciates 30 percent.

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The value of the dollar declines as the rate of inflation rises.

But the euro s depreciation is too recent to have made much difference yet. Historical evidence, not to mention Japan s experience with a falling yen, suggests that it takes several quarters, or even years, before the positive impact of currency depreciation on net exports is felt.

The won has been devalued sharply, making exports more viable.

But, since none of these countries has a national currency to devalue, they must substitute internal devaluation for external devaluation. They have to cut wages, pensions, and other costs in order to achieve the same gain in competitiveness needed to substitute external demand for internal demand.

Some have accused Japan of fueling a global currency war. Anticipation of aggressive monetary expansion has sharply weakened the yen, which has fallen by almost 20 against the dollar in just over four months.

Finally, the renminbi s recent decline against the dollar was only 2.5 , from CN 6.2 to CN 6.35 far below the double digit declines of the Japanese yen, the euro, and the British pound. So, on an overall trade weighted basis, the renminbi is substantially higher relative to the currencies with which it competes.

The standard way to buffer the effects of austerity is to marry domestic cuts to devaluation of the currency. Devaluation renders exports more competitive, thus substituting external demand for the domestic demand that is being compressed.

The dollar shortage created depreciation pressures on the CNY, which the PBoC declined to offset. The CNY was thus bound to fall, which it did last September.

But also we do not want to relegate to poverty in the rural areas.

depreciation of nonconvertible currencies.

Take the same country s current account deficit and ask how large a real depreciation is needed (making some assumptions about trade elasticities along the way) to close that external gap. If the recent real depreciation achieves that threshold, no further change in the exchange rate should be expected.

If the euro falls by 20 25 , bringing it close to parity with the dollar and weakening it to a similar extent against other currencies, the current account deficits in Italy, Spain, and France would shrink and their economies would strengthen. German exports would also benefit from a weaker euro, boosting overall economic demand in Germany.

In fact, as China pursues structural reforms aimed at ensuring its continued development, forced depreciation is about the last thing it needs. It would also be highly problematic for the global economy.

The RMB middle price is registered at 6.4401, a depreciation of 66 basis points. The rising slows down.

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And when I say, just a story, I'm not trying to belittle my work.

But some depreciation of the euro would provide a bridge to reach internal governance reform. And, like it or not, rising pressure on the euro is likely to force European officials to cross it.

This reflected a decrease in real terms, due to inflation and the devaluation of the dollar.

This is the craft that was going on, but there are a few collectors who also collect art which can depreciate.

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Both act as a wealth levy inflation means that bondholders suffer a real loss in proportion to their wealth and the size of the devaluation. If taxes on capital are not adjusted, holders of domestic stocks suffer a comparable loss.

But the main beneficiary would be Germany. And, in order for the euro to fall far enough, the risk of default in Greece would need to be so large, and the contagion to sovereign spreads of PIIGS so severe that the widening of those spreads would cause a double dip eurozone recession before currency depreciation could yield benefits.

One need not be an economist to figure out that, while all currencies can (and do) depreciate against something else (like gold, land, and other real assets), by definition they cannot all weaken against each other. In order for some currencies to depreciate, others must appreciate.

And yet negative bonds yields are also occurring in countries and regions where the currency is depreciating and likely to depreciate further, including Germany, other parts of the eurozone core, and Japan. So, why are investors holding such assets?

The first answer, of course, is that the trade weighted dollar has fallen by more than 15 in real terms since its peak in early 2002. Yet the US deficits have persisted, and even risen, since then.

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A sharp weakening of the euro towards parity with the US dollar, which is unlikely, as the US is weak, too.

Poverty increased, the currency suffered repeated devaluations, foreign and domestic debt registered an increase and the growth rate of the economy fell.

Vicious circles of economic instability, devaluation, and capital flight have brought down seemingly unbreakable regimes throughout history. This probably explains the whiff of panic that followed China s tiny, but totally unexpected, devaluation of the renminbi.

The French economy, in turn, is suffering because its customers in southern Europe are in trouble. According to a study by Goldman Sachs, France would have to depreciate by around 20 relative to the eurozone average, and by about 35 vis à vis Germany, to restore external debt sustainability.

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But there is a more fundamental point From an economic viewpoint, currency manipulation or unfair undervaluation are exceedingly hard to pin down conceptually. The renminbi's slight depreciation against the dollar in 2014 is not evidence of it many other currencies, most notably the yen and the euro, depreciated by far more last year.

Depreciation of the euro would be the best medicine for restoring international price competitiveness to the periphery countries and reviving their export sectors. Of course, they would devalue on their own had they not given up their currencies for the euro ten years before the crisis (and if it were not for their euro denominated debt).