02 Jun 2011

Murphy Twin Spin on International Trade and Currencies

Economics, Shameless Self-Promotion, Trade 6 Comments

To get you warmed up, I tell people to stop worrying about the yuan in the Freeman. An excerpt:

When Krugman and others complain about the Chinese keeping their currency “artificially weak,” what they really mean is that the Federal Reserve—under both Alan Greenspan and Ben Bernanke—has been out-inflating the rest of the world. Under those circumstances the dollar ought to be sinking against other currencies. (Indeed, from February 2001 to February 2011, the dollar fell 31 percent against a trade-weighted basket of currencies.) In this context, if the Chinese stubbornly refuse to let the dollar weaken against their own currency, they are accused of “manipulation” to benefit themselves at the expense of the world.

To add yet more irony to the situation, notice that since June 2010 the Chinese have in fact been allowing their currency to steadily strengthen against the dollar. (This is the falling squiggly line at the end of the chart.) This has gone hand in hand with their slowdown in purchases of new debt issued by the U.S. Treasury. Yet rather than praising the Chinese for creating American jobs, most analysts are fretting over the fate of the dollar and U.S. interest rates if the Chinese don’t resume financing more of Uncle Sam’s deficits! If U.S. officials really want to eliminate an “overvalued dollar,” they should tell Bernanke to stop printing so many dollars.

Then I take it to the next level at Mises.org, where Mises refutes Dean Baker from the grave:

Last week I testified before a Congressional subcommittee on the Fed’s role in rising gasoline prices. All of the economists on the panel agreed that oil prices were rising (partly) because of the dollar’s fall against other currencies. However, Dean Baker — prominent Keynesian pundit and codirector of the Center for Economic and Policy Research — testified that the dollar’s fall was inevitable, and even a good thing in light of the US trade deficit.

At the time, I knew I disagreed with Baker, but I didn’t get a chance to explain why. A few days later, while working on the Mises Institute’s study guide to The Theory of Money and Credit, I was amazed to discover that Mises had devoted an entire section to this very issue.

Incidentally, our own Bob Roddis in the comments to my Mises article found this interesting quote from Baker from his own book Meltdown (not to be confused with Tom Woods’ volume of the same name):

Tax cuts directed at low and moderate-income families are a good way to jump-start the economy, as would be government investment aimed at neglected infrastructure needs, such as re-building New Orleans and preventing the collapse of more bridges. Pushing down the value of the dollar should also be a top priority. There is no way to correct our trade imbalance with an overvalued dollar providing a massive subsidy for imports and imposing a tariff on U.S. exports. A lower dollar will make U.S. manufactured goods far more competitive in the [p.130] world economy, and will thus create a large number of relatively high-paying jobs. One benefit of the housing meltdown is that it should be much easier to get our trading partners to go along with a lower dollar now that we can show them how much money they lost by investing in U.S. financial assets that have gone bad.

I’m not sure why by that last point strikes me as really funny.

6 Responses to “Murphy Twin Spin on International Trade and Currencies”

  1. Bob Roddis says:

    That other “Meltdown” book was put out by “The Nation” and is a collection of short articles and essays by a vast swarm of economic illiterate leftists.


    The book, like the real life “meltdown”, was obviously fueled by greed: The greed of money-hungry leftists trying to make a buck off of economically illiterate book buyers.

    Baker may be the smartest of the bunch. His mastery of complex Keynesian-style BS jargon is something to behold. Note that Baker’s quote provides us with insight into the Keynesian and “progressive” mindset. Average people are simply too stupid to set their own prices and wages and require that they be surreptitiously lowered by the much smarter and benevolent central bank through money dilution. Otherwise, they would all starve by the side of the road like in Socialist Ukraine in 1932.

  2. English Bob says:

    Baker’s argument for a cheaper dollar is mad. It’s like telling a roofer that all his problems will go away if only he would slash his prices and start paying much more for shingles.

  3. MamMoTh says:

    Mises discovered internal devaluation? Blimey, what a brilliant guy.

    Pity he didn’t discover they don’t work that well especially during a balance sheet recession like the current one, when the private sector is still paying down its debt. Fortunately the PIGS are showing it doesn’t work.

    • Bob Roddis says:

      Keynesian jargon alert: “Balance sheet recession”.

      That’s a post-boom Keynesian bust that occurs after the boom just plays itself out and dies of it’s own internal contradictions and malinvestments instead of being stopped by the raising of rates. The causes (funny money and Keynesians) are the same as other recessions as is the cure. Continued low rates are a catastrophic impediment to curing the recession because true free market interest rates cannot come into existence and economic calculation is fatally impaired, especially for long term projects.

    • Bob Roddis says:

      HAYEK: [I]n the usual discussion there is quite a wrong emphasis. There are many bad effects of inflation, but the worst is that it draws labor into employments where they can be kept employed only by an accelerating inflation. And the point is inevitably arises where inflation cannot be accelerated sufficiently fast to keep them in that [employment].


    • bobmurphy says:

      Mises discovered internal devaluation? Blimey, what a brilliant guy.

      If you drop the sarcasm for a moment, you might realize that Mises was advocating the opposite of internal devaluation. And yes, he was brilliant. And don’t call me Blimey.