Whether it's the 1930s or the 2010s, depressions are the only casualties in a currency war
I don't know how it compares to peeing in your bed, as one anonymous senior Fed official put it, but a currency war is one of the surest ways to end a global slump. Despite what you may have heard, it was a big part of what stopped the vicious circle of the Great Depression.
Currency wars are the best type of wars. Nobody dies, and everybody can recover, as long as everybody plays along. Here's how it works. One country devalues its currency -- in other words, prints money -- which, in a time of weak global demand, puts pressure on other countries to do the same, lest they lose out on trade. Then another country devalues, and so on, in a cascade of looser money. It's the invisible hand pushing for expansionary monetary policy when it's needed most.
But there are a few caveats. For one, a currency war only makes sense during a global depression when short-term interest rates are mostly stuck at zero. It's about boosting monetary stimulus when conventional methods are out of ammo. For another, devaluing forever (a là China) is not a sustainable growth strategy. It might make sense for developing nations to subsidize export industries early on, but, eventually, this will only cause imbalances to build up, while robbing the domestic population of purchasing power. And finally, there's a risk that a currency war could turn into a trade war. In other words, countries will retaliate to expansionary monetary policy not with expansionary monetary policy of their own, but with tariffs. Presumably that's what our silver-tongued senior Fed official was getting at with this head-scratcher of a quote:
Devaluing a currency is like peeing in bed. It feels good at first, but pretty soon it becomes a real mess.
This fear of a currency war begetting a trade war is certainly serious, but it's made to sound more serious thanks to some bad history. Here's the erroneous story you might have heard (especially now that Japan's talk of more aggressive easing has revived fears of a currency war):
After the Great Crash of 1929, countries abandoned the gold standard and devalued their currencies in a beggar-thy-neighbor battle to the bottom. This currency war turned into a trade war, with countries eventually resorting to tariffs and counter-tariffs, as they tried to grab a hold on an ever-shrinking pie of demand. The consequent collapse in world trade is what made the Great Depression so great, and set the stage for the trade war to turn into an actual one.
Scary stuff. But not quite true. The reality is the trade war started before the currency war, and the latter jump-started recovery wherever it was tried. The infamous Smoot-Hawley tariff in the U.S., the first salvo in the trade war to come, was actually passed in June 1930, more than a full year before any country devalued its currency. It wasn't until September 1931 that Britain abandoned the gold standard ... and that's when things get a bit complicated. It's hard to accuse Britain of "competitive" devaluation here, because it had no choice but devaluation; it had simply run out of gold. Nonetheless, other countries responded to Britain's increased competitiveness by increasing their trade barriers; in this case, the currency war, such as it was, did exacerbate the ongoing trade war, as Gavyn Davies of the Financial Times points out.
But then a funny thing happened. The punishment for Britain's economic weakness was a recovery. Ditching gold gave Britain (and everybody else who did so) the freedom to pursue more aggressive monetary and fiscal policies than the "rules of the game" of the gold standard had allowed.* As you can see in the chart below (via Brad DeLong) from Barry Eichengreen's magisterial work on the depression, Golden Fetters, recovery followed devaluation everywhere. There was no reward for financial orthodoxy in the 1930s. The countries that stayed with the gold standard the longest, the so-called Gold Bloc of France, Belgium, and Poland, were the last to begin growing again. In other words, the currency war didn't deepen the depression; it ended it.
And that brings us to one last, stupid question. How did beggar-thy-neighbor policies kickstart growth even after world trade had already collapsed? In other words, how did stealing a trade advantage help so much when there wasn't much trade to steal? Well, it's not entirely, or even mostly, about stealing trade. Indeed, as Scott Sumner points out, the U.S. trade balance actually worsened in 1933 after FDR took us off gold, even as the economy quickly reversed its death-spiral and began a virtuous cycle. It's easiest to frame devaluation as grabbing demand from abroad, but it's really about increasing demand at home. Devaluation means printing money, and more money during a liquidity trap means more demand, period. It also allows more stimulus spending than a fixed-exchange rate system (like the gold standard) would. The next time you hear someone lamenting the "destructive devaluations that followed the Great Depression," remember to ask them -- what was so destructive about ending the most destructive depression in modern history?
The only thing we have to fear is fear of currency wars itself. Depressions are the only casualties in these kind of conflicts.
* There were two exceptions. The gold standard did not constrain looser monetary policy in the U.S. and France in the early years of the depression, as both had more than enough gold to back more credit growth, but chose instead to sterilize their gold inflows out of fear of nonexistent inflation in the face of actual deflation. This stockpiling drained everybody else of gold, and consequently made staying on the gold standard impossible. Even the U.S. and France had to eventually abandon it to reverse years of deflation.
The bureau successfully played the long game in both cases.
The story of law enforcement in the Oregon standoff is one of patience.
On the most obvious level, that was reflected in the 41 days that armed militia members occupied the Malheur National Wildlife Refuge near Burns. It took 25 days before the FBI and state police moved to arrest several leaders of the occupation and to barricade the refuge. It took another 15 days before the last of the final occupiers walked out, Thursday morning Oregon time.
Each of those cases involved patience as well: Officers massed on Highway 395 didn’t shoot LaVoy Finicum when he tried to ram past a barricade, nearly striking an FBI agent, though when he reached for a gun in his pocket they finally fired. Meanwhile, despite increasingly hysterical behavior from David Fry, the final occupier, officers waited him out until he emerged peacefully.
The Life of Pablo debuted at Madison Square Garden with a mixture of joyful chaos, careful choreography, and boredom.
If anything’s been made clear in the run-up to Kanye West’s seventh album, it’s that the man is not, in the traditional understanding of the term, a perfectionist. The p-word’s been assigned to him before due to the opulence of his music and precision of his taste: He mixed “Stronger” 50 times in 2007 before he had a version he felt okay about, and he made a fuss about the gilded restroom specifications at his wedding in Versailles. But no one for whom the impression of flawlessness was the goal would let the public see him waffle about his album title and track listing right up to the release date, or promote his fashion line with lo-res JPEGs in his twitter feed, or use that same feed to commit PR suicide by calling Cosby innocent.
Today’s empires are born on the web, and exert tremendous power in the material world.
Mark Zuckerberg hasn’t had the best week.
First, Facebook’s Free Basics platform was effectively banned in India. Then, a high-profile member of Facebook’s board of directors, the venture capitalist Marc Andreessen, sounded off about the decision to his nearly half-a-million Twitter followers with a stunning comment.
“Anti-colonialism has been economically catastrophic for the Indian people for decades,” Andreessen wrote. “Why stop now?”
After that, the Internet went nuts.
Andreessen deleted his tweet, apologized, and underscored that he is “100 percent opposed to colonialism” and “100 percent in favor of independence and freedom.” Zuckerberg, Facebook’s CEO, followed up with his own Facebook post to say Andreessen’s comment was “deeply upsetting” to him, and not representative of the way he thinks “at all.”
Einstein’s gravitational waves rest on a genuinely radical idea.
After decades of anticipation, we have directly detected gravitational waves—ripples in spacetime traveling at the speed of light through the universe. Scientists at LIGO (the Laser Interferometic Gravitational-wave Observatory) have announced that they have measured waves coming from the inspiral of two massive black holes, providing a spectacular confirmation of Albert Einstein’s general theory of relativity, whose hundredth anniversary was celebrated just last year.
Finding gravitational waves indicates that Einstein was (once again) right, and opens a new window onto energetic events occurring around the universe. But there’s a deeper lesson, as well: a reminder of the central importance of locality, an idea that underlies much of modern physics.
The number of American teens who excel at advanced math has surged. Why?
On a sultry evening last July, a tall, soft-spoken 17-year-old named David Stoner and nearly 600 other math whizzes from all over the world sat huddled in small groups around wicker bistro tables, talking in low voices and obsessively refreshing the browsers on their laptops. The air in the cavernous lobby of the Lotus Hotel Pang Suan Kaew in Chiang Mai, Thailand, was humid, recalls Stoner, whose light South Carolina accent warms his carefully chosen words. The tension in the room made it seem especially heavy, like the atmosphere at a high-stakes poker tournament.
Stoner and five teammates were representing the United States in the 56th International Mathematical Olympiad. They figured they’d done pretty well over the two days of competition. God knows, they’d trained hard. Stoner, like his teammates, had endured a grueling regime for more than a year—practicing tricky problems over breakfast before school and taking on more problems late into the evening after he completed the homework for his college-level math classes. Sometimes, he sketched out proofs on the large dry-erase board his dad had installed in his bedroom. Most nights, he put himself to sleep reading books like New Problems in Euclidean Geometry and An Introduction to Diophantine Equations.
When four American women were murdered during El Salvador’s dirty war, a young U.S. official and his unlikely partner risked their lives to solve the case.
On December 1, 1980, two American Catholic churchwomen—an Ursuline nun and a lay missionary—sat down to dinner with Robert White, the U.S. ambassador to El Salvador. They worked in rural areas ministering to El Salvador’s desperately impoverished peasants, and White admired their commitment and courage. The talk turned to the government’s brutal tactics for fighting the country’s left-wing guerrillas, in a dirty war waged by death squads that dumped bodies in the streets and an army that massacred civilians. The women were alarmed by the incoming Reagan administration’s plans for a closer relationship with the military-led government. Because of a curfew, the women spent the night at the ambassador’s residence. The next day, after breakfast with the ambassador’s wife, they drove to San Salvador’s international airport to pick up two colleagues who were flying back from a conference in Nicaragua. Within hours, all four women would be dead.
In New Hampshire, he won working class men without college diplomas—and most every other demographic group.
Earlier this year, when Mona Chalabi wanted to describe a Donald Trump voter in The Guardian, she conjured a 45-year-old male named Michael who never attended college, works 9-hour days as an exterminator, and earns $33,000 per year. Trump “is more popular among Americans that are white than those who aren’t, and more popular among Americans with penises than those without,” she wrote. “Often, these white men are also working or middle class and middle-aged.”
The New Hampshire primary didn't contradict that conventional wisdom. The billionaire won among voters who never attended college; the working class; and the middle-aged.
Then again, Trump won almost every other demographic, too.
The exit polls couldn’t be clearer. As Ramesh Ponnuru put it, “They raise questions about what we think we know about the Trump phenomenon.” Since the Granite State is so white, it didn’t test the candidate’s performance among minorities. But Trump proved an ability to best all his rivals among the following groups:
Why the Syrian war—and the future of Europe—may hinge on one city
This week, the Syrian army, backed by Russian air strikes and Iranian-supported militias including Hezbollah, launched a major offensive to encircle rebel strongholds in the northern city of Aleppo, choking off one of the last two secure routes connecting the city to Turkey and closing in on the second. This would cut supplies not only to a core of the rebellion against Syrian President Bashar al-Assad, but also to the city’s 300,000 remaining civilians, who may soon find themselves besieged like hundreds of thousands of others in the country. In response, 50,000 civilians have fled Aleppo for the Turkish border, where the border crossing is currently closed. An unnamed U.S. defense official toldThe Daily Beast’s Nancy Youssef that “the war is essentially over” if Assad manages to seize and hold Aleppo.
By mining electronic medical records, scientists show the lasting legacy of prehistoric sex on modern humans’ health.
Modern humans originated in Africa, and started spreading around the world about 60,000 years ago. As they entered Asia and Europe, they encountered other groups of ancient humans that had already settled in these regions, such as Neanderthals. And sometimes, when these groups met, they had sex.
We know about these prehistoric liaisons because they left permanent marks on our genome. Even though Neanderthals are now extinct, every living person outside of Africa can trace between 1 and 5 percent of our DNA back to them. (I am 2.6 percent Neanderthal, if you were wondering, which pales in comparison to my colleague James Fallows at 5 percent.)
This lasting legacy was revealed in 2010 when the complete Neanderthal genome was published. Since then, researchers have been trying to figure out what, if anything, the Neanderthal sequences are doing in our own genome. Are they just passive hitchhikers, or did they bestow important adaptations on early humans? And are they affecting the health of modern ones?