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.
Freddie Gray's death on April 19 leaves many unanswered questions. But it is clear that when Gray was arrested in West Baltimore on the morning of April 12, he was struggling to walk. By the time he arrived at the police station a half hour later, he was unable to breathe or talk, suffering from wounds that would kill him.*
Gray died Sunday from spinal injuries. Baltimore authorities say they're investigating how the 25-year-old was hurt—a somewhat perverse notion, given that it was while he was in police custody, and hidden from public view, that he apparently suffered injury. How it happened remains unknown. It's even difficult to understand why officers arrested Gray in the first place. But with protestors taking to the streets of Baltimore since Gray's death on Sunday, the incident falls into a line of highly publicized, fatal encounters between black men and the police. Meanwhile, on Tuesday, a reserve sheriff's deputy in Tulsa, Oklahoma, pleaded not guilty to a second-degree manslaughter charge in the death of a man he shot. The deputy says the shooting happened while he was trying to tase the man. Black men dying at the hands of the police is of course nothing new, but the nation is now paying attention and getting outraged.
Where did it come from, and what are its intentions? The simplicity of these questions can be deceiving, and few Western leaders seem to know the answers. In December, The New York Times published confidential comments by Major General Michael K. Nagata, the Special Operations commander for the United States in the Middle East, admitting that he had hardly begun figuring out the Islamic State’s appeal. “We have not defeated the idea,” he said. “We do not even understand the idea.” In the past year, President Obama has referred to the Islamic State, variously, as “not Islamic” and as al-Qaeda’s “jayvee team,” statements that reflected confusion about the group, and may have contributed to significant strategic errors.
A magnitude 7.8 earthquake struck Nepal early on Saturday, centered 10 miles below the surface, less than 50 miles from the capital of Kathmandu. At least 1,100 are already reported to have been killed by the quake and subsequent avalanches triggered in the Himalayas. Historic buildings and temples were destroyed, leaving massive piles of debris in streets as rescue workers and neighbors work to find and help those still trapped beneath rubble. Below are images from the region of the immediate aftermath of one of the most powerful earthquakes to strike Nepal in decades. (Editor's note, some of the images are graphic in nature.)
In her new book No One Understands You and What To Do About It, Heidi Grant Halvorson tells readers a story about her friend, Tim. When Tim started a new job as a manager, one of his top priorities was communicating to his team that he valued each member’s input. So at team meetings, as each member spoke up about whatever project they were working on, Tim made sure he put on his “active-listening face” to signal that he cared about what each person was saying.
But after meeting with him a few times, Tim’s team got a very different message from the one he intended to send. “After a few weeks of meetings,” Halvorson explains, “one team member finally summoned up the courage to ask him the question that had been on everyone’s mind.” That question was: “Tim, are you angry with us right now?” When Tim explained that he wasn’t at all angry—that he was just putting on his “active-listening face”—his colleague gently explained that his active-listening face looked a lot like his angry face.
Four hours after learning about Saturday's devastating earthquake in Nepal, I received a Facebook notification I had never seen before: Sonia, a journalist friend based in northern India, was "marked safe." An hour later, the same notification about a different friend popped up. Then another. Soon, several of my friends wrote that they, too, had learned via this strange new notification that their friends in Nepal were okay.
A few hours later, the mystery was solved. On Saturday afternoon, Facebook CEO Mark Zuckerberg announced on his timeline that the notifications came from Safety Check, a service the company launched last fall. "When disasters happen, people need to know their loved ones are safe," he wrote, "It's moments like this that being able to connect really matters."
Today was the latest installment of the never-ending Clinton scandal saga, but it won’t be the last. Yet in some ways, the specifics are a distraction. The sale of access was designed into the post-2001 Clinton family finances from the start. Probably nobody will ever prove that this quid led to that quo … but there’s about a quarter-billion-dollar of quid heaped in plain sight and an equally impressive pile of quo, and it’s all been visible for years to anyone who cared to notice. As Jonathan Chait, who is no right-wing noise-machine operator, complained: “The Clintons have been disorganized and greedy.”
“All of this amounts to diddly-squat,” pronounced long-time Clinton associate James Carville when news broke that Hillary Clinton had erased huge numbers of emails. That may not be true: If any of the conduct in question proves illegal, destroying relevant records may also have run afoul of the law.
“People skills” are almost always assumed to be a good thing. Search employment ads and you will find them listed as a qualification for a startling array of jobs, including Applebee’s host, weight-loss specialist, CEO, shoe salesperson, and (no joke) animal-care coordinator. The notion that people smarts might help you succeed got a boost a quarter century ago, when the phrase emotional intelligence, or EI, entered the mainstream. Coined in a 1990 study, the term was popularized by Daniel Goleman’s 1995 book . Since then, scores of researchers have shown how being in touch with feelings—both your own and other people’s—gives you an edge: compared with people who have average EI, those with high EI do better at work, have fewer health problems,and report greater life satisfaction.
After more than a year of rumors and speculation, Bruce Jenner publicly came out as transgender with four simple words: “I am a woman.”
“My brain is much more female than male,” he explained to Diane Sawyer, who conducted a prime-time interview with Jenner on ABC Friday night. (Jenner indicated he prefers to be addressed with male pronouns at this time.) During the two-hour program, Jenner discussed his personal struggle with gender dysphoria and personal identity, how they shaped his past and current relationships and marriages, and how he finally told his family about his gender identity.
During the interview, Sawyer made a conspicuous point of discussing broadly unfamiliar ideas about gender and sexuality to its audience. It didn't always go smoothly; her questions occasionally came off as awkward and tone-deaf. But she showed no lack of empathy.
Lots of conservatives talk a good game about how citizens should resist federal control and devolve power to local governments. Few of them are willing to put their convictions into action in quite the same way that Sheriff Joe Arpaio is.
The man who calls himself "America's toughest sheriff" was already in trouble with Uncle Sam, on trial for contempt of court in a U.S. district court. It was only once that was under way that Arpaio and his lawyer apparently had the idea to sic a private investigator on the wife of the federal judge hearing his case. That shows toughness. It shows a willingness to use unorthodox tactics to resist federal interference. It's also not especially bright.
Reporters in the courtroom describe a somewhat shocking scene. Lawyers had completed their questioning when Judge Murray Snow announced he had some questions for Arpaio. After a series of queries, Snow asked: "Are you aware that I've been investigated by anyone?"
CHELSEA, Ma.—The woman Barry Berman saw sitting in the dining room of the nursing home was not his mother.
Or, at least, she was his mother, but didn’t look anything like her. His mother was vivacious, or she had been until she was felled by a massive stroke and then pneumonia, so he’d moved her into a nursing home so she could recuperate. He knew he could trust the nursing home, since he ran it, and knew it was lauded for the efficiency with which it served residents. But when he went to look for his mother a day or two after he moved her in, he barely recognized her.
“I’ll never forget the feeling as long as I live,” he told me. “I said, ‘Oh my God, there’s my mother, this old woman, in a wheelchair, lifeless. Look what my own nursing home did to my own mother in a matter of days.”