Keynesians Show Their Hand---Dollar Devaluation

Below is an article from uber-Keynesian Barry Eichengreen whose main claim to fame was his work on the gold standard and the Depression. His "brilliant" insight, if you can call it that, was that countries who left the gold standard first recovered more quickly than other countries who maintained the monetary peg. The reason I am showing this article is because it reveals the Keynesian mindset and offers a glimpse into what their ultimate plan is regarding the dollar. As we know, every member of the Fed is a Keynesian. From the article, which was written back in March 2009:

Every day it seems more likely that we are destined – or should one say doomed? – to replay the disastrous economic history of the 1930s. We have had a stock market crash to rival 1929. We have had a banking crisis comparable to 1931. With the economic meltdown in eastern Europe we have the prospect of a financial crisis in Vienna, exactly as in 1931. We have squabbling among the major economies over the design of rescue loans, just as when the Bank for International Settlements was hamstrung in its efforts to contain the crisis in Austria. We have the prospect of a failed world economic conference in London to dash remaining hopes for a co-operative response, just as in 1933.

And if all this wasn't enough, now we have the dreaded spectre of competitive devaluation. In the 1930s, one country after another pushed down its exchange rate in a desperate effort to export its way out of depression. But each country's depreciation only aggravated the problems of its trading partners, who saw their own depressions deepen. Eventually even countries that valued currency stability were forced to respond in kind.

In the end competitive devaluation benefited no one, it is said, since all countries can't devalue their exchange rates against each another. The only effects were to fan political tensions, heighten exchange rate uncertainty, and upend the global trading system. Financial protectionism if you will.

Now, we are warned, there are signs of the same. The Bank of England is not exactly discreetly encouraging the pound to fall. And just last week the Swiss National Bank intervened in the foreign exchange market to push down the franc. Will Japan, the United States and China be long to follow? Will we all yet again end up shooting ourselves in the foot?

In fact, this popular account is a misreading of both the 1930s and the current situation. In the 1930s, it is true, with one country after another depreciating its currency, no one ended up gaining competitiveness relative to anyone else. And no country succeeded in exporting its way out of the depression, since there was no one to sell additional exports to. But this was not what mattered. What mattered was that one country after another moved to loosen monetary policy because it no longer had to worry about defending the exchange rate. And this monetary stimulus, felt worldwide, was probably the single most important factor initiating and sustaining economic recovery.

It is true that the process was disorderly and disruptive. Better would have been for the countries concerned to co-ordinate their moves to a more stimulative monetary policy without sending exchange rates on a roller-coaster ride. But, not for the first time, they failed to agree. Those in the most precarious positions had no choice but to pursue the new policy unilaterally.

In any case, monetary easing achieved through a process of "competitive devaluation" was better than no monetary easing. Those countries that shifted in this direction first were also first to recover. But in the end – the end coming after an excruciating five years – they had all moved in the requisite direction, and they all began to recover.

This almost sounds as it were written by Zimbabwe Ben himself--the self-proclaimed expert on the Depression, so they say. Whenever the Keynesian policies of borrowing, spending, and inflating plunges the economic system into trouble, their solution is to simply hit the reset button through large scale currency devaluations. To the Keynesians, devaluation is a way to stimulate more borrowing and debt to fund more consumption and investment and hence economic growth. Best of all, the government automatically lowers its debt in real terms, allowing it to spend even more. Nobody gets hurt, except the honest saver and this is acceptable because they should have spent that money anyway.

You will notice in the article, the author argues that while competitive currency devaluations did not work because everyone else was doing the same thing, it was still a good idea nonetheless. What is particularly disingenuous about this article is the artificial distinction between currency devaluation used in the 1930's and monetary easing of today. No doubt this is to confuse people and prevent them from understanding the dire economic conditions we face. You print money to debase your currency despite what the Keynesians say. Even Bernanke has said that QE will eventually lower the value of a currency. But the Fed does not want to openly state that their goal is to debase the dollar, so they call it QE. Quantitative easing has a better ring to it than devaluation, especially when you claim the goal is to "help" increase economic growth. The media runs story after story supporting this action, stating "Fed boosts asset purchases to boost economy" and other such propaganda. To the layman reading the paper, it almost sounds as if the Fed is looking out for the average Joe and trying to create jobs. However, the reality is very different. A currency devaluation/quantitative easing is nothing more than an illegal confiscation of wealth from responsible savers to the government. And best of all, it can be done without a popular vote!

One part of the article I agree with is the contention that we are facing a worldwide race to the currency bottom. This is especially true for the US, which is desperately trying to lower the dollar to increase exports. However, at the same time, all of our trading partners (mainly the Asians) are preventing their currencies from rising to maintain their export advantage. The end result is that the exchange rate moves very little. But money printing has real world consequences, as we have seen commodity prices surge across the board for little fundamental reason. Do you really think oil would be trading at $85 if the US and the world were not printing money? The fundamentals do not support it, especially considering the weak economic outlook for the US, EU, and Japan.

The real question for the Fed and other Keynesians is: What's next? They have printed $2.1 trillion only to "discover" that printing money does not help the real economy. Real unemployment remains high at around 17% and threatens to turn into structural (e.g. permanent) unemployment and remain a burden on the economy for years to come. About the only thing QE has done is boost asset prices, especially commodity prices, which is disastrous during prolonged economic stagnation. People's wages are flat to down adjusted for inflation, and yet their cost of living goes up at a furious rate as a result of currency debasement. The one asset they own--their homes are in free fall and could fall another 10% a least in 2011.

If Bernanke's own statements are to be taken seriously--which they should. The next step is to print more money until economic conditions improve (this would be in addition to QE 2). This seems like an overly simplistic action for a former economics professor with decades of experience, but in the end it is the only tool left for the Keynesians who want to preserve this flawed economic system at all costs. You note that Mr. Eichengreen, the author of the above article, stated that currency debasement/QE was better than nothing. It is perhaps revealing that in the roughly 70 years of Keynesian economic thought, Keynesian practitioners could never conceive of a better idea than currency debasement, which has been the tried and true method of every dictator throughout history.

Keynesianism has failed, but will not go down without taking the whole world down with it. As countries around the world race to print money and devalue, commodity prices will continue to rise. This dynamic will lead to millions of people starving in the third world and a lower standard of living for the Western economies. The last ditch effort will, of course, be a war, which history shows helps reinvigorate an economy.

Black Swan Insights

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Keynesians Show Their Hand---Dollar Devaluation