In the real and truly woebegone – i.e. of an inferior or deplorable condition – world of monetary affairs, central bankers and their finance ministry masters are engaged in a global race to the bottom. It seems that each country feels entitled to grow at the expense of its trading partners. Each wants a weaker currency. Each wants a trade surplus. Each feels above average; perhaps more accurately each feels below average.
But weaker has no meaning without stronger, nor exports without imports, nor surplus without deficit.
If time forgot Lake Wobegon, the monetary authorities seem to have forgotten the lessons of our not so distant history. The currency wars of the 1930s were very bit as destructive as the tariff wars that are universally recognized as a major contributing cause of the global Great Depression and the ensuring world war. Tariff wars have been effectively inhibited by the GATT/WTO system, but the monetary “system” – if that term can be fairly applied to the chaos that now reigns – lacks clear rules and effective enforcement mechanisms. So, the destructive dynamic of competitive currency depreciation rumbles on.
History and logic tell us that a race to the bottom always ends in a crash. Some might lose less than others, but everyone loses in the end. There is no salvation for a single nation. Either we solve the problem together, or market forces will chasten us all. Apparently, it takes an exceptional individual or an exceptional government to put a stop to this real-world folly. Where are such people now that we need them?
May 27, 2013