Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.
What do Hillary Clinton, Bernie Sanders, and Donald Trump have in common? Well, they claim that weak currencies are a key that gives producers a competitive edge. This claim fuels their furor with China and its currency, the renminbi (RMB). According to the candidates, a manipulated, weak RMB allows China to push aside U.S. producers.
The idea that weak currencies work wonders is as old as the hills. Mercantilists of all stripes have drunk this Kool-Aid forever. For them, the advertised goal of a devaluation is an increase in the price of foreign produced goods and services and a decrease in the price of domestically produced goods and services. These changes in relative prices are supposed to switch domestic and foreign expenditures away from foreign produced goods and services towards those produced domestically. This is supposed to improve a devaluing country’s international trade balance and balance of payments at the expense of its trade partners, who haven’t devalued their currencies.
For the public, this argument has a certain intuitive appeal. It works on the campaign trail. After all, a devaluation is seen as nothing more than a price reduction for domestically produced exports, and price reductions are always seen as a means to increase the quantity of goods sold. When it comes to currency devaluation, the analysis is not that simple, however. Even if we use a narrow, Marshallian partial equilibrium model (one consistent with the common man’s economic intuition) to determine the effects of a devaluation, the analysis becomes quite complicated. Contrary to the common man’s conclusion, a devaluation will often result in a reduction of exports and a deterioration in a country’s trade balance and balance of payments. When the models become more general and inclusive, a light shines even more brightly on just how confusing and contradictory the arguments favoring devaluations are.
But, without entering the technical weeds of economic analysis, it is clear why a devaluation strategy is a loser’s game. In 1947, the famous Cambridge don Joan Robinson penned “Beggar-My-Neighbor Remedies for Unemployment.” She not only coined the phrase “beggar-my-neighbor,” but concluded that so-called competitive devaluations would be unsuccessful in achieving their advertised objectives. Among other things, Robinson wrote that a devaluation would prompt a retaliation in the form of a competitive devaluation. Thus, the initiator of a devaluation could, and would, always be neutralized.
But, what does a reality check looks like, when applied to China? Well, the evidence contradicts conventional wisdom. As the accompanying chart shows, the RMB, in real terms, has mildly appreciated against the greenback in the 1995 – 2014 period, contrary to the claims of the candidates. And, contrary to what the devaluationists would have you think, Chinese exports have soared. These data not only poke a hole in the mercantilists’ notions about the wonders of weak currencies, but also illustrate just how ignorant of the facts Clinton, Sanders, and Trump are. They literally don’t know what they’re talking about.
via Zero Hedge http://ift.tt/1Rul7WR Steve H. Hanke