The Value of China s Devaluation

Currency undervaluation has become a substitute.

Some countries devalued their currencies.

Today, every country seems to want to depreciate its currency.

Currency undervaluation à la China will not go unnoticed.

But the undervaluation of the renminbi, which is currently 45 , has persisted for many years.

So it began to promote its industries through an undervalued currency instead.

A depreciated rupee should help revive Indian exports and lift growth.

There is a strong positive relationship across all developing countries between currency undervaluation and economic growth.

One way is as part of America s strategy of competitive devaluation.

But whether renminbi appreciation will work depends on reducing China s net capital inflows and current account surplus.

The financial sector was able to profit from the rising dollar, and a depreciation would have run counter to Ronald Reagan's administration's plans for bringing down inflation.

In 1920, the silver standard, maintained at .925 since 1552, was reduced to .500.

Those crisis countries that do not want to take it upon themselves to lower their prices should be given the opportunity to leave the eurozone temporarily in order to devalue prices and debts.

The trouble with currency undervaluation is that, unlike conventional industrial policy, it spills over into the trade balance.

If the US dollar needs to devalue because of fundamental disequilibrium in the US economy, the problems cannot be fixed by lowering the dollar s value alone.

One proposed solution is for these countries to engineer the equivalent of a devaluation a uniform decrease in wages.

But China s trade surplus with the US is not primarily due to undervaluing its currency.

Reserve accumulation was also a by product of China s deliberate currency undervaluation to promote export led growth strategy.

With China retaining its under valued currency policy, dollar depreciation can aggravate global deflationary forces.

That is why I believe that these countries and the eurozone more generally would benefit from euro depreciation.

And the recent rise in the value of the dollar relative to the euro and the British pound helps by reducing import costs.

During the first part of the decade, intervention was motivated by the desire to avoid devaluation, and therefore to support the inflation targeting objectives.

American politicians denounced it as predatory Europeans saw it as a step on the road to competitive devaluations.

The trouble began a dozen years ago, when Argentina had no choice but to devalue its currency and default on its debt.

When it is squandered, as in Greece, promises have no value, and governments have no choice but to cut spending immediately.

Devaluation renders exports more competitive, thus substituting external demand for the domestic demand that is being compressed.

So, if internal devaluation is to work, the value of debts, where they already represent a heavy burden, must be reduced.

During the Asian financial crisis of 1997 1998, Chinese officials did not engage in competitive devaluation of the renminbi.

There is a widespread suspicion that the US is deliberately pursuing dollar depreciation (or currency wars, in the words of Brazil s finance minister).

The CFA franc s fixed exchange rate is pegged to the euro and overvalued in order to shield French companies from euro depreciation.

Like Greece, Ireland, and Portugal, membership in the euro denies Italy and Spain devaluation and inflation as policy tools.

But the protection against inflation does not prevent a loss of value if real interest rates rise, depressing the value of the bonds.

Devaluation of the dollar could improve US competitiveness in the short run, but it is not a solution.

This solution limits the risk of contagion and the potential losses that financial institutions would bear if the value of debt principal were reduced.

But China retains its under valued exchange rate policy, so that the renminbi has appreciated relatively less against the dollar.

Third, we could adopt an alternative approach that directly reduces the value of underwater mortgages.

Moreover, the 17 European countries that currently use the euro cannot devalue their currency unilaterally.

The mission highlighted the need for participating countries to prioritize the expected outcomes of the Conference, including a reduction of the number of projects, with a view to achieving meaningful results.

In the banking world as a whole, expected write offs now considerably exceed the 400 billion mark projected just last spring.

Some of the ghosts of the 1930 s have returned, too in particular, the fear of unfair trade advantages caused by competitive devaluation.

But the euro s depreciation is too recent to have made much difference yet. Historical evidence, not to mention Japan s experience with a falling yen, suggests that it takes several quarters, or even years, before the positive impact of currency depreciation on net exports is felt.

The standard way to buffer the effects of austerity is to marry domestic cuts to devaluation of the currency. Devaluation renders exports more competitive, thus substituting external demand for the domestic demand that is being compressed.

Depreciation inside the eurozone in the form of deflation, on the other hand, would drive large parts of the real economy into excessive debt, because only the value of assets, not that of bank debts, would decline.

With one out of four mortgages in the US under water more owed than the house is worth there is a growing consensus that the only way to deal with the mess is to write down the value of the principal (what is owed).