In 2010 America was accused of purposely suppressing our currency in order to decrease imports and increase exports. Although many countries believed this to be the case, it is truly meant to increase domestic spending and investment. We are currently coming out of a difficult situation due to the monetary and fiscal policies implemented. These are not traditional ways to bolster an economy but needed to be done in order to stay competitive.
http://www.economist.com/news/leaders/21571888-world-should-welcome-monetary-assertiveness-japan-and-america-phoney-currency-wars
4 comments:
Isn't it really meant to do both? By increasing domestic spending, you are in turn likely to reduce the amount of imports demanded.
The article raises a very good point. Basically, loose monetary policies can only harm the economy when it has inflation. In this case, to boost domestic demand, inflation is needed for Japanese economy. They have no option except for depreciating their currency given the fact that deflation has tortured the country for over the last two decades. Furthermore, the world has changed, while Japanese people can't keep the habit of saving due to interest rate is extremely low, their only option is to consume. Key to success is that Japan needs to find a way to restore the confidence in the economy that has been crippled for too long. This requires the government have flexible pursuit that consolidates their confidence in purchasing power while increasing export at the same time. That is, it is not possible to keep their currency low too long, it needs to have alteration between expansionary and contrationary monetary policy... this is hard and really an art if Japan wants to succeed and get back on the race.
To the first point I think improving net exports could certainly be a reason for the continued quantitative easing we are seeing. Simply put, as the quantity of U.S. dollars increases, the demand for dollars decreases which depreciates their value internationally. A cheaper U.S. dollars means cheaper U.S. goods which increases demand for our good internationally thus decreasing imports b/c we will choose to buy our own goods b/c they are cheaper compared to international substitutes and our exports will increase.
Inflation only boosts the economy short-term. In the long run, it's bad. It takes pressure from the economy to be inventive, to produce high quality goods. It also makes it easier for the Chinese to buy everything up. It makes imported inputs more expensive, which is not a good option for Europe. Currency devaluation would not be a problem if instead of money, you have something of "real value" such as gold. However, you can lose up to everything if you are a saver. It also doesn't boost consumption when the money goes away because of high energy prices.
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