A Weak Currency may Boost Exports but it will Raise all Prices Businesses and Consumers Pay

Posted by PITHOCRATES - February 24th, 2013

Week in Review

China created a booming economy thanks to a healthy export market.  In part because of their cheap labor.  An in part by keeping their currency weak.  For when you buy goods from China you first have to exchange your currency for theirs.  If your currency is stronger than theirs is you will get a lot more of theirs in exchange for yours.  Allowing you to buy a lot more Chinese goods with your stronger currency.  This is why China likes to have a weak currency.  And takes actions to keep it artificially weak.  Something her trading partners don’t like.  For their weaker currency tends to make the net flow of goods in international trade with China flowing from China to everyone else.  Thus giving China a healthy export market.  At the expense of everyone else’s export market.

But China is a developing economy.  Things change when you become an advanced economy.  Because you don’t have impoverished masses filling your factories manufacturing goods for export.  You have a thriving middle class.  With a high standard of living.  With good jobs giving them disposable income.  And few of them work in the export economy.  So despite all the talk about unfair trade practices of China most people in an advanced economy don’t worry that much about trade deficits.  For they’re buying a lot of imported goods.  From smartphones to coffee beans.  And a weak currency makes these items more expensive.

So there are two sides to the value of your currency.  If you have impoverished masses filling factories to build export goods a weak currency is good.  It lets the state sell more of those export goods.  In an export-dominated economy.  And provides a lot of low-paid factory jobs.  If you have a thriving middle class a strong currency is good.  For it lets the people buy a lot of stuff.  Creating a lot of better paying non-factory jobs.  In a non-export-dominated economy.  Basically the difference between free market capitalism.  And mercantilism (see Is the World on the Brink of a Currency War? by Michael Sivy posted 2/21/2013 on Time).

Currency wars – and trade wars generally – have their origins in a 17th and 18th century economic theory known as mercantilism. The idea was that a country’s wealth comes from selling more than it buys. A colonial empire could achieve this positive balance of trade by acquiring cheap raw materials from its colonies and then ensuring that it exported more finished goods than it imported. This was usually accomplished with tariffs that made imports very expensive.

Such an approach couldn’t work in the modern world. Countries don’t get cheap raw materials from colonies anymore. They have to buy them – especially oil – on the open market. So while currency devaluation makes exports cheaper for foreign buyers, it also makes essential imports more expensive. For Europe in particular, which imports so much of its energy, devaluation isn’t necessarily a plus…

The Federal Reserve’s quantitative easing – buying bonds to swell the money supply – is aimed principally at stimulating domestic demand. European advocates of a cheaper euro currency, meanwhile, are hoping to make national debt easier to finance, not trying to pump up exports. In fact, the continent’s greatest exporter, Germany, is the country least amenable to currency devaluation…

So forget all the talk of a currency war. What’s going on has nothing to do with trade and everything to do with debt and growth and inflation. If the global economy is in danger of reliving the past, it will not be a repeat of the 1930s. Rather, it will be a repeat of the 1970s, when the Federal Reserve expanded the money supply to offset the economic slowdown caused by the oil crisis – and ended up encouraging double-digit inflation.

The double-digit inflation of the Seventies really devalued the currency.  Raised prices.  Greatly limiting the amount of stuff people could buy.  Even though printing money then didn’t work these nations believe it will work now.  Because it will make their exports cheaper for foreigners to buy.  Despite making everything more expensive inside their own country.

But there is another reason they love to print money.  It lets them spend more.  And it makes old debt easier to pay off.  We call it monetizing the debt.  For example, if a nation has a GDP of $1 million and a debt of $500,000 that debt is huge.  It’s 50% of GDP.  But if we turn on the printing presses and devalue the currency to one tenth of its original value that GDP is now $10 million ($1 million divided by 1/10).  Making that outstanding debt only 5% of GDP.  And a whole lot easier to repay.  But what is one person’s debt is another person’s retirement savings.  So not only does inflation increase prices it destroys our retirement savings.  And all this just so we can boost the small sliver of our economy we call exports.

If this is so bad on so many levels why do governments print money then?  For one simple reason.  To get people to vote for them.  Because all the people see is the free stuff the politicians are giving them.  The damage it causes comes later.  And they can always blame that on Republicans.  Who refuse to raise tax rates on rich people to make them pay their fair share.

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FT114: “One of the most effective ways to get privilege is to force fairness on others.” -Old Pithy

Posted by PITHOCRATES - April 20th, 2012

Fundamental Truth

Voters are so Greedy and Selfish with their Hard-Earned Money that they’re not going to Vote to be Subjugated

History is strewn with people oppressing others to gain privilege for themselves.  Kings, emperors and nobles were always a small minority of civilizations.  But they had the power.  And the wealth.  While the masses suffered abject poverty and went hungry.  Or suffered through famines.    And died.  With early civilizations this was just the way of life.  Because there was no middle class.  No free market capitalism.  And no rule of law.  Life was for the most part subsistence farming.  Where most ate only what they grew.  While the kings, emperors and nobles enjoyed lots of food and drink.  Even enjoyed having a little fun.  Unlike the impoverished masses.  Having privilege made life better.  Which is why the privileged worked hard to keep it.  By forcing others to work hard to provide that better life for them.

But times change.  Privileged ruling classes fall.  And middle classes rise.  Creating vibrant economies.  And representative government.  Then one day the privileged find that they are no longer privileged.  That wealth isn’t automatically theirs.  Instead it belongs to the people who earn that wealth.  And if the once-privileged want wealth then they, too, have to work to get it.  So they, too, can have nice things.  And that they can only have these things if they earned enough to afford them.  Which is a great problem if you don’t want to work.  Don’t have any ability to earn a high income.  Or if you have a feeling of entitlement.  Like in days of yore.  Where you didn’t need anything but a good last name to live the good life.  On the backs of those who didn’t live the good life.

Feelings of entitlement don’t die, though.  They don’t go away once the middle class starts sharing the wealth.  Well, not so much sharing it but earning it.  And keeping it.  Instead of giving it to a privileged ruling class.  Which poses a problem for those who aspire to join a ruling class.  Especially now that we have those pesky elections.  Because voters are so greedy and selfish with their hard-earned money that they’re not going to vote to be subjugated.  They’re not going to vote in a privileged ruling class so they can live like royalty.  While those who pay for that royal lifestyle don’t.  ‘Vote for me so I can live better than you’ is just not a winning political platform.  So that’s why politicians lie.

The Privileged Elite uses Class Warfare to take other People’s Wealth

What do you need to live a privileged life?  Lots of money.  No secret here.  But the secret is how to get that money.  In particular, how do those who don’t want to work or have no talent or have no ability create wealth?  Here’s the secret.  They don’t create wealth.  They take wealth.  By going into government.

Only government has the power to tax.  Which can be a great source of wealth.  Other people’s wealth.  Which is any privileged class’ second favorite kind of wealth.  Second only to the wealth they already took from others.  Because that’s what they want.  Other people’s wealth.  And they’ve found a clever way of taking it.  By making the world a fairer place.  And who’s against fairness?  They’re going to make sure that the poor and children have access to food and affordable housing.  And who’s against the poor?  The children?  You’d have to be a pretty vicious, heartless bastard to be against the children.  And the poor.  They’re going to make sure that women have access to reproductive health care.  For who hates women?  I’ll tell you who.  Anyone that opposes raising taxes.  They hate women.  Children.  The poor.  For the world is full of haters.  And just who are these haters?  Aanyone that earns a lot of money and doesn’t want to pay higher taxes.  These people hate anyone not as wealthy as they are.  Because they hate fairness.  And paying their fair share.  Because they’re greedy.  And hate women and children.  And puppies, too.

This is the way the privileged take other people’s wealth.  Class warfare.  And it’s very effective.  By being the party of the poor, disadvantaged, children, women and puppies, they’re kind and benevolent.  With other people’s money, of course.  But those people are evil so it’s okay.  People hate them.  But they like their kind government benefactors.  Who are looking out for their best interests.  Not rich people.  Or corporate profits.  No, our kind government benefactors make sure those greedy rich people and corporations pay their fair share.  Because that’s all that they want.  It’s all anyone wants.  To be fair.

North Korea is pretty much at the End of the Fairness Road

Later incarnations of the privileged ruling class used the fairness approach to give themselves a better life.  While oppressing their people.  Even killing them.  Through famine.  Or deliberate acts of violence.  All in the name of fairness.  And nothing better epitomizes this than communism.  Where everyone was equal.  Brothers.  Comrades.  There were no profits.  No capitalism.  No competitiveness.  No.  Everyone was equal.  They paid everyone the same.  They dressed everyone the same.  They housed everyone the same.  They fed everyone the same.  Very little.  For one thing you never saw in a communist country was obesity.  Instead you probably heard the rumbling of tummies as most people were hungry all of the time.  There was no income inequality.  No gender inequality.  No.  In communism they had nothing but equality.  Life was fair.  Because no one had anything more than anyone else.  As they perfectly distributed the misery and poverty equally among the impoverished masses.

That was for the masses.  It was quite a different thing for the privileged ruling elite.  Those in the party apparatchik.  And the inner party members themselves.  Who were more equal than others.  These people dressed better.  They had better housing.  Even cars.  They ate better.  Some so well that they grew obese.  North Korea suffers from recurring famines to this day but Kim Jong IL had a bit of a weight problem.  As his son does.  Kim Jong-un.  No, life is very good for the privileged ruling elite.  And hell for those living under them.  Who the ruling elite let die of hunger.  And send to concentration camps if they dare speak of their displeasure.  For only under communism is life fair.  And they just can’t risk the unhappy masses to spoil it for the privileged few.

North Korea is pretty much at the end of the fairness road.  The country is so poor and impoverished and hungry that people will risk their lives to try and escape this land of fairness.  To get somewhere that isn’t so fair.  Like South Korea.  Where they have capitalism.  And inequality.  Where someone can come with nothing, work hard and earn a better life.  Allowing them to pay for housing.  And put food in their rumbling bellies.  For a fair and oppressive government surely cannot.  All they can do is create great inequality between the people and the ruling class.  Far greater than that between the rich and poor in any capitalist country.  For the poor in countries like the UK, Canada and the United States are living far better than anyone outside the ruling elite in North Korea.  This is where the fairness road ends.  But it starts with class warfare.  Where a privileged few live the good life through high taxes.  Taxes they use to force fairness on others.  While those at the top manage that fairness.  Skimming a lot off the top of those taxes for themselves.  And what’s left they spend on the poor, disadvantaged, children, women and puppies.  Just enough to make sure the people love their very rich and wealthy government benefactors.  So they can win the next election.  At least while they still have to deal with those pesky elections.

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