Circular Devaluation


printing-money1 1

It seems to me that it’s pretty uncontroversial to assert that exchange rates influence net exports and therefore short-term GDP growth and employment. Pretty much everyone believes that. And I think it’s also uncontroversial to assert that if the Fed created some new dollars and used those dollars to buy euro-denominated financial assets, that this would cause the dollar to decline relative to the Euro. Similarly, if the ECB created some new euros and used those euros to buy yen-denominated assets, that would cause the euro to decline relative to the yen. Or if the Bank of Japan were to create some new yen and use it to buy dollar-denominated assets, that would cause the yen to decline relative to the dollar.

So uncontroversially, any of those moves in isolation would boost short-term employment in any of the three regions in question.

So what happens if you do all three simultaneously? I say this would be equivalent to Joe Gagnon’s plan for coordinated monetary stimulus and would boost employment throughout the developed world. But a lot of people seem to be Gagnon-skeptics. So I wonder what it is that they think the results of this kind of circular devaluation would be. Would the velocity of money crater so that m * v stays constant? If so, why would that happen? If not, why is this not just as good a way of increasing aggregate demand (which equals m * v) as anything else?