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.
He lives near San Francisco, makes more than $50,000 per year, and is voting for the billionaire to fight against political correctness.
For several days, I’ve been corresponding with a 22-year-old Donald Trump supporter. He is white, has a bachelor’s degree, and earns $50,000 to $60,000 per year.
He lives near San Francisco.
“I recently became engaged to my Asian fiancée who is making roughly 3 times what I make, and I am completely supportive of her and proud she is doing so well,” he wrote. “We’ve both benefitted a lot from globalization. We are young, urban, and have a happy future planned. We seem molded to be perfect young Hillary supporters,” he observed, “but we're not. In 2016, we're both going for Trump.”
At first, we discussed Bill Clinton.
Last week, I wrote an article asking why Trump supporters aren’t bothered that their candidate called Clinton a shameful abuser of women who may well be a rapist. After all, Trump used to insist that Clinton was a victim of unfair treatment during his sex scandals. Either Trump spent years defending a man that he believed to be a sexual predator, even welcoming him as a guest at his wedding, or Trump is now cynically exploiting a rape allegation that he believes to be false.
Finally, an explanation for Bitchy Resting Face Nation
Here’s something that has always puzzled me, growing up in the U.S. as a child of Russian parents. Whenever I or my friends were having our photos taken, we were told to say “cheese” and smile. But if my parents also happened to be in the photo, they were stone-faced. So were my Russian relatives, in their vacation photos. My parents’ high-school graduation pictures show them frolicking about in bellbottoms with their young classmates, looking absolutely crestfallen.
It’s not just photos: Russian women do not have to worry about being instructed by random men to “smile.” It is Bitchy Resting Face Nation, seemingly forever responding “um, I guess?” to any question the universe might pose.
This does not mean we are all unhappy! Quite the opposite: The virile ruler, the vodka, the endless mounds of sour cream—they are pleasing to some. It’s just that grinning without cause is not a skill Russians possess or feel compelled to cultivate. There’s even a Russian proverb that translates, roughly, to “laughing for no reason is a sign of stupidity.”
Demonizing processed food may be dooming many to obesity and disease. Could embracing the drive-thru make us all healthier?
Late last year, in a small health-food eatery called Cafe Sprouts in Oberlin, Ohio, I had what may well have been the most wholesome beverage of my life. The friendly server patiently guided me to an apple-blueberry-kale-carrot smoothie-juice combination, which she spent the next several minutes preparing, mostly by shepherding farm-fresh produce into machinery. The result was tasty, but at 300 calories (by my rough calculation) in a 16-ounce cup, it was more than my diet could regularly absorb without consequences, nor was I about to make a habit of $9 shakes, healthy or not.
Inspired by the experience nonetheless, I tried again two months later at L.A.’s Real Food Daily, a popular vegan restaurant near Hollywood. I was initially wary of a low-calorie juice made almost entirely from green vegetables, but the server assured me it was a popular treat. I like to brag that I can eat anything, and I scarf down all sorts of raw vegetables like candy, but I could stomach only about a third of this oddly foamy, bitter concoction. It smelled like lawn clippings and tasted like liquid celery. It goes for $7.95, and I waited 10 minutes for it.
The Democratic insurgent’s campaign is losing steam—but his supporters are not ready to give up.
SANTA MONICA, Calif.—This is how a revolution ends: its idealism tested, its optimism drained, its hope turned to bitterness.
But if Bernie Sanders’s revolution has run aground in California, which will be one of the last states to vote in the Democratic primary on June 7, he was not about to admit it here, where thousands gathered on a sun-drenched high-school football field of bright green turf.
“We are going to win here in California!” Sanders said, to defiant cheers. In the audience, a man waved a sign that said, “Oh HILL no!”
This is Sanders’s last stand, according to the official narrative of the corrupt corporate media, and if there is anything we have learned in the past year, it is the awesome power of the official narrative—the self-reinforcing drumbeat that dictates everything.
Three Atlantic staffers discuss “Blood of My Blood,” the sixth episode of the sixth season.
Every week for the sixth season of Game of Thrones, Christopher Orr, Spencer Kornhaber, and Lenika Cruz will be discussing new episodes of the HBO drama. Because no screeners are being made available to critics in advance this year, we'll be posting our thoughts in installments.
Narcissism, disagreeableness, grandiosity—a psychologist investigates how Trump’s extraordinary personality might shape his possible presidency.
In 2006, Donald Trump made plans to purchase the Menie Estate, near Aberdeen, Scotland, aiming to convert the dunes and grassland into a luxury golf resort. He and the estate’s owner, Tom Griffin, sat down to discuss the transaction at the Cock & Bull restaurant. Griffin recalls that Trump was a hard-nosed negotiator, reluctant to give in on even the tiniest details. But, as Michael D’Antonio writes in his recent biography of Trump, Never Enough, Griffin’s most vivid recollection of the evening pertains to the theatrics. It was as if the golden-haired guest sitting across the table were an actor playing a part on the London stage.
“It was Donald Trump playing Donald Trump,” Griffin observed. There was something unreal about it.
A rock structure, built deep underground, is one of the earliest hominin constructions ever found.
In February 1990, thanks to a 15-year-old boy named Bruno Kowalsczewski, footsteps echoed through the chambers of Bruniquel Cave for the first time in tens of thousands of years.
The cave sits in France’s scenic Aveyron Valley, but its entrance had long been sealed by an ancient rockslide. Kowalsczewski’s father had detected faint wisps of air emerging from the scree, and the boy spent three years clearing away the rubble. He eventually dug out a tight, thirty-meter-long passage that the thinnest members of the local caving club could squeeze through. They found themselves in a large, roomy corridor. There were animal bones and signs of bear activity, but nothing recent. The floor was pockmarked with pools of water. The walls were punctuated by stalactites (the ones that hang down) and stalagmites (the ones that stick up).
For centuries, philosophers and theologians have almost unanimously held that civilization as we know it depends on a widespread belief in free will—and that losing this belief could be calamitous. Our codes of ethics, for example, assume that we can freely choose between right and wrong. In the Christian tradition, this is known as “moral liberty”—the capacity to discern and pursue the good, instead of merely being compelled by appetites and desires. The great Enlightenment philosopher Immanuel Kant reaffirmed this link between freedom and goodness. If we are not free to choose, he argued, then it would make no sense to say we ought to choose the path of righteousness.
Today, the assumption of free will runs through every aspect of American politics, from welfare provision to criminal law. It permeates the popular culture and underpins the American dream—the belief that anyone can make something of themselves no matter what their start in life. As Barack Obama wrote in The Audacity of Hope, American “values are rooted in a basic optimism about life and a faith in free will.”
The U.S. president talks through his hardest decisions about America’s role in the world.
Friday, August 30, 2013, the day the feckless Barack Obama brought to a premature end America’s reign as the world’s sole indispensable superpower—or, alternatively, the day the sagacious Barack Obama peered into the Middle Eastern abyss and stepped back from the consuming void—began with a thundering speech given on Obama’s behalf by his secretary of state, John Kerry, in Washington, D.C. The subject of Kerry’s uncharacteristically Churchillian remarks, delivered in the Treaty Room at the State Department, was the gassing of civilians by the president of Syria, Bashar al-Assad.