In my previous post on Adam Posen’s article in FT, I had referred to his characterisation of my remarks in a discussion where we were both panelists as ‘non-sense’. I am quite tempted to stick that label on to this piece in ‘Free Exchange’ blog in ‘The Economist’.
I have to remind myself that this blog should be about issues and not about persons or labels. Therefore, to put it rather charitably, the articles sets up strawmen and knocks them down to argue in favour of open-ended, free-for-all currency debasement by all countries simultaneously so that all can benefit from a cheap currency. Am I exaggerating or representing the article accurately? I think the latter.
It draws inspiration from how all countries benefited by coming off the Gold Standard simultaneously and almost none was benefiting at the expense of the other. Hello?
If the author had visited the ‘Maddison Project Database’, he could have downloaded the Excel file on per capita income of countries from centuries ago and verified for himself the massive drop in per capita incomes in the US, in Japan, in the UK and in Germany, etc. for four years from 1929 to 1932. The drop in the industrial production in the US was more than 50% (peak to trough in the early 1930s) and the unemployment rate went up to over 25%. That was real global pain for all economies. The World War I must have destroyed a lot of infrastructure and capital assets on the ground. Then, in the 1920s, at least in the first half, Germany suffered from hyperinflation. The number of countries stimulating simultaneously were a lot less than now.
Here, we are now four years after the crisis when output had crossed the pre-crisis peaks in several emerging market countries. They do not need stimulus. They need to tighten policies. Even in OECD countries, the case is unclear. Germany perhaps does not need the ‘benefits’ of QE. The benefits of monetary reflation in the ageing Japan are hard to estimate and predict. Then, there are the signalling effects of easy money and cheap currencies. They have moral hazard written all over them.
Importantly, four years after the crisis occurred, if countries need to stimulate more, isn’t it an obvious first question to ask if the policy responses were not perhaps the most appropriate ones, to begin with? Especially after unprecedented fiscal stimuluses, rate cuts and money printing, when this is all that they have got to show for those efforts, surely it is a fair question to ask if the medicine was the right one to begin with. See chart no. 7 in the above link
When big economies stimulate simultaneously and capital goes in search of yields (unmindful of risk), there is the risk of asset bubbles in under-developed (in the institutional sense) economies where the political economy incentives to tackle asset bubbles do not exist. You might say that that is not the problem of OECD nations. But, the spillover effects will come back to hurt OECD nations. These countries, in anger, might impose capital controls and OECD countries need foreign savings to fund their fiscal deficits, incurred to bail out banks mostly.
Further, as Martin Feldstein famously argued in his ‘Foreign Affairs’ piece in March/April 1998, countries have the right to choose the pace, timing and sequencing of their own structural reforms – political and economic. Synchronised and simultaneous monetary easing and currency debasement in developed nations come in the way of that.
The blogger goes all the way back to the 1930s to buttress his case for ‘Positive sum currency wars’. He conveniently ignores the experiences of 2002-07 when the US Federal Reserve inspired monetary easing spawned loose credit conditions globally and the result was the crisis of 2008. I cannot quite see any positive sums there.
Sample these observations in the piece:
The analogy for today is that countries whose currencies are rising because of easier foreign monetary policy should ease monetary policy as well, assuming they, too, suffer from weak demand and low inflation.
The fact that global stock markets have been chasing the Nikkei higher as Mr Abe’s programme is put in place suggests investors believe this is virtuous, not vicious, cycle.
This also implies that the euro zone ought to respond with easier monetary policy which would both neutralize upward pressure on the euro and combat recession in the euro zone
There was no climate change then (in the 1930s) and there was no financialisation of the commodities markets then. He should read the Bank of Japan working paper on commodities published in 2009 on what loose monetary policy globally had done to the prices of commodities.
Even if all countries devalued their currencies against gold then, it still might not have resulted in ‘beggar-thy-neighbour’ outcomes because, perhaps, the private sector leverage then was too low. The world had gorged on debt for three decades now. There is indigestion of debt. How can more food help to relieve indigestion? Easy money and global currency debasement can only spur inflation and not growth, if not now, but in a few years.
Since when liquidity driven stock market became the barometer of sound macro policy? Was the stock market right before October 1987, March 2000 and October 2007?
The proponents of Keynesian stimuluses – fiscal and monetary – conveniently forget one thing. Keynes was intellectually consistent. He advocated policy stimulus in response to economic contractions but he also advocated capital controls. His followers are, unfortunately, neither intellectual nor consistent. Those who cherry pick on his legacy come up with muddled thinking.