Here is an issue for the Dems: the futility of devaluing your currency to encourage exports. We are often told that devaluing your currency will lead to export growth. How does this happen? The country, say Mexico, declares that the peso which had traded at 10 per the dollar, will now trade at 11 per dollar. Goods produced in Mexico that used to be worth $1 are now worth 90 cents, which encourages sales.
Unfortunately for the Mexican worker, he has little power in the trade he makes with his employer for his labor. So if he made 100 pesos a day, after the devaluation he still makes 100 pesos, but the value of his pay has actually gone down by 10%. If he has managed to save anything, the value of his savings is slashed by 10%. Maybe he decides to cross the border to the USA, where people will freak out about his presence, even though their own government has pressured the Mexicans to devalue.
Now say this happens in the USA. The dollar which was worth 1 euro is devalued so now it is only worth .9 euros. The worker in the export factory may eventually notice that even though his wage has stayed the same he can’t buy as much. If he is lucky, he has the power to bargain his wage back at least to where it was before. Poof, the competitive advantage of his product is gone.
Why was it done in the first place? To give the export factory owner a backdoor way to cut the wages of his employees. The price advantage comes straight out of the hide of his employees.
Now that you understand what is happening to the dollar, you will see that China has not been “overvaluing” its currency. It has simply kept the Chinese currency pegged to the dollar, devaluing right along with us, offering no fleeting export advantage to US manufactures. That is what has Senator Charles Schumer so mad.
But what about you and I and the export worker? Haven’t we seen the dollar slump to where it buys 1/5 the gold it did? Don’t we see prices for gas and food rising? Don’t we feel the stagnation of our standard of living? Don’t we count in this?
The growing danger today is currency protectionism-what students of the 1930s will remember as competitive devaluation or “beggar-thy-neighbor” policies. As economic historian Charles Kindleberger describes in his classic “The World in Depression,” nations under domestic political pressure sought economic advantage by devaluing their national currency to improve their terms of trade.
But that advantage came at the expense of everyone else. “As with exchange depreciation to raise domestic prices, the gain for one country was a loss for all,” Kindleberger writes. “With tariff retaliation and competitive depreciation, mutual losses were certain.”
We can see signs of similar behavior today, especially in the global economy’s main potential flash point of U.S.-China relations. This week, the U.S. House of Representatives voted 348 to 79 to impose tariffs on Chinese goods if Beijing does not revalue its currency. Ominously, the vote was bipartisan. While the Senate has so far restrained itself, a similar rout in that body can’t be ruled out after the elections-especially in the absence of Presidential leadership.
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