Silliness at the Central Banks.

Paul Krugman, winner of the Nobel Prize in Economics and poster child of modern Keynesian monetary policy, supports Currency War. He supports Central Banks like the Federal Reserve and the European Central Bank inflating their respective currencies, driving down their value in a “race to the bottom”. As Krugman says in a New York Times article:

“First of all, what people think they know about past currency wars isn’t actually true. Everyone uses some combination phrase like “protectionism and competitive devaluation” to describe the supposed vicious circle of the 1930s, but as Barry Eichengreen has pointed out many times, these really don’t go together. If country A and country B engage in a tit-for-tat of tariffs, the end result is restricted trade; if they each try to push their currency down, the end result is at worst to leave everyone back where they started.

And in reality the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy. In the 1930s this was because countries threw off their golden fetters — they left the gold standard and this freed them to pursue expansionary monetary policies. Today that’s not the issue; but what Japan, the US, and the UK are doing is in fact trying to pursue expansionary monetary policy, with currency depreciation as a byproduct.”

First of all, I take serious issue with his division of Currency War from Trade War.

What is currency? In a nutshell, currency is the most marketable asset up for trade in any economy. Currencies are traded internationally like commodities. Currency Wars, in which different nations purposefully devalue their own currency more than other nations to subsidize their own exports,  are a low-level form of Trade War. Currency War will still damage trade relations between nations.

Krugman is a Nobel Prize winner and I am not. He has years and years of training in economics compared to my self-taught one-and-a-half years. I do not pretend to be more clever than he is; but I have trouble understanding how he can arrive at these conclusions.

No credible economist would ever tell you to your face that a depreciating dollar is good for you. I suspect Krugman might try explaining things in context of the bigger-picture, but I cannot imagine that even he would admit a devalued and inflated dollar is good for you on an individual level. This does not make sense to me. By Krugman’s logic and the prevailing logic of the Central Banks, a depreciating currency is certainly bad for an individual; but it is good and healthy for the nation. The nation? What do they mean, “the nation”? The nation is a collection of individuals. At what point does an appreciating currency, good for the individual, become a negative impact for the collective group of individuals known as a “nation”? Which individuals get the honor of retaining their savings and purchasing power at the expense of other individuals? Obviously, there must be a line somewhere. These are questions that Central Bankers do not answer.

The Central Banks are out of ideas. All they have left is Quantitative Easing, basically an inflation of the currency. Quantitative Easing has been used to fuel crony capitalism and further intensify income inequality around the world. Of course, they do not talk about this. Politicians do not talk about this. They both understand the grave consequences of their actions, but neither wish to relinquish any control. Ceasing inflation will create a massive recession. The market would, after probably 3-5 years, fix itself. Even still, no politician or banker wants to be responsible for starting the recession. So they will continue to inflate. They will continue to put off the inevitable (Federal default) in the hopes that the next guy in charge, years from now, will be the poor sucker left to take the heat for their bad decisions.

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