Nations race to Devalue their Currencies to Boost Exports and Destroy Retirement Savings

Posted by PITHOCRATES - February 3rd, 2013

Week in Review

If you ever traveled to a foreign country you know what you had to do before buying foreign goods.  You had to exchange your currency first.  That’s why they have currency exchanges at border crossings and airports.  So people can convert their currency to the local currency.  So they can buy stuff.  And when traveling people liked to go to areas that have a weaker currency.  Because a stronger currency can get more of a weaker currency in exchange.  Allowing your own currency to buy a lot more in that foreign country.  And it’s the same for buying exported goods from another country.

The weaker a country’s currency the more of it people can get in exchange for their currency.  Allowing importers to buy a lot more of those exported goods.  Which helps the export economy of that nation with a weak currency.  In fact having a weak currency is such an easy way to boost your exports that countries purposely make their currencies weaker.  As they race each other to see who can devalue their currency more.  And gain the biggest trade advantage (see Dollar Thrives in Age of Competitive Devaluations by A. Gary Shilling posted 1/28/2013 on Bloomberg).

In periods of prolonged economic pain — notably the 2007-2009 global recession and the ensuing subpar recovery — international cooperation gives way to an every-nation-for-itself attitude. This manifests itself in protectionist measures, specifically competitive devaluations that are seen as a way to spur exports and to retard imports.

Trouble is, if all nations devalue their currencies at the same time, foreign trade is disrupted and economic growth is depressed…

Decreasing the value of a currency is much easier than supporting it. When a country wants to depress its own currency, it can create and sell unlimited quantities. In contrast, if it wants to support its own money, it needs to sell the limited quantities of other currencies it holds, or borrow from other central banks…

Easy central-bank policy, especially quantitative easing, may not be intended to depress a currency, though it has that effect by hyping the supply of liquidity. Also, low interest rates discourage foreign investors from buying those currencies. [Japanese] Prime Minister Shinzo Abe has accused the U.S. and the euro area of using low rates to weaken their currencies.

“Central banks around the world are printing money, supporting their economies and increasing exports,” Abe said recently. “America is the prime example. If it goes on like this, the yen will inevitably strengthen. It’s vital to resist this.”

So a cheap and devalued currency really helps an export economy.  But there is a downside to that.  In some of these touristy areas with a really weak currency it is not uncommon for some people to offer to sell you things for American dollars.  Or British pounds.  Or Eurozone euros.  Why?  Because their currency is so week it loses its purchasing power at an alarming rate.  So fast that they don’t want to hold onto any of it.  Preferring to hold onto a stronger foreign currency.  Because it holds its value better than their own currency.

When a nation prints money it puts more of them into circulation.  Which makes each one worth less.  And when you devalue your currency it takes more of it to buy the things it once did.  So prices rise.  This is the flipside to inflation.  Higher prices.  And what does a devalued currency and rising prices do to a retiree?  It lowers their quality of life.  Because the money they’ve saved for retirement becomes worth less just as prices are rising.  Causing their retirement savings to run out much sooner than they planned.  They may live 15 years after retirement while their savings may only last for 5 or 6 of those years.

Printing money to devalue a currency to expand exports hurts those who have lived most responsibly.  Those who have saved for their retirement.  Making them ever more dependent on meager state pensions.  Or welfare.  And when that’s not enough to cover their expenses they have no choice but to go without.  We see this in health care.  Where those soaring costs have an inflationary component.  With the government squeezing doctors on Medicare reimbursements doctors are refusing some life-saving treatment for seniors.  Because the government won’t reimburse the doctors and hospitals for these treatments.  Or doctors will simply not take any new Medicare patients.  As they are unable to provide medical services for free.  And with their savings gone seniors will have no choice but to go without medical care.

The United States, Britain, Europe, Japan—they are all struggling to provide for their seniors.  As China will, too.  And a big part of their problem is their inflationary monetary policies.  Coupled with an aging population.  The Keynesians in these nations have long discouraged their people from saving.  For Keynesians see private savings as leaks in the economy.  They prefer people to spend their money instead of saving it.  Trusting in state pensions and state-provided health care to provide for these people in their retirement.  Which is why the United States, Britain, Europe and Japan are struggling to provide for their seniors in retirement.  A direct consequence of printing too much money.  And not letting people take care of their own retirement and health care.


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