Barry Eichengreen did a column yesterday offering a more historically and economically authoritative version of my case that a round of competitive currency devaluation, though not optimal public policy, would still constitute a major improvement over the status quo since it’d be a kind of backdoor monetary stimulus:
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.
I think this is the point you need to remember when you watch Senators spar with Tim Geithner about China’s currency policy. Tragically, members of congress of both parties like to blame foreigners for things and members of congress of both parties hate talking about monetary policy. But while it would be very nice if Geithner could wave a magic wand and make Chinese officials implement the policies we prefer, he doesn’t actually have this power. By contrast, the Federal Reserve’s Open Market Committee does in fact have the power to wave a magic wand and increase the worldwide supply of dollars.
If you increase the supply of dollars, the price of dollars will fall. If other economic leaders around the world respond in a rational manner to this turn of events, then we’ll all be better off for it. If they don’t, then at least the USA will still be better off than under the status quo. Either way, it will be much more efficacious and carries much less downside risk than a policy based on grandstanding and attempted coercion.
I know this can all seem technical and boring at times, but everyone should take a deep breath and ponder whether it really makes sense to think that The World’s Sole Remaining Superpower (GDP $14 trillion) could have its currency unilaterally propped up by the People’s Republic of China (GDP $5 trillion)? The United States is not a pitiful, helpless giant that’s incapable of reducing the value of its own money.