To hear some commentators talk, one would think that America's trade-deficit woes would be miraculously erased with a swift devaluation. A too highly valued greenback makes imports "too cheap" and incentivizes Americans to buy from their foreign competitors. The corollary is that the expensive dollar is making American exporters unattractive to the rest of the world. The result is a trade deficit, whereby Americans buy more imports than they export each year, a phenomenon that seems to have gotten especially worse since the early 1970s.
Yet two effects of the standard relationship between a weak currency and a country's economic health bear commenting on. First, is it true that a weakened exchange rate makes one's exports cheaper? Second, are there harmful secondary effects from pursuing such a weak-currency policy? Let us address both points in turn, using Japan and the yen as an example.
A strong currency is typically seen as a double-edged sword. While most people enjoy looking at their bank statement and seeing lots of money, they only do so if that money means something. Strong currencies enable money holders to enjoy more goods that are imported — trips to foreign lands, or exotic electronics become more affordable. The flip side is that the producers of these goods — the foreigners with the relatively strengthening currency — are typically viewed as being at a cost disadvantage.
Some anecdotal evidence from Japan… (Read more)
Source: Mises.org
No comments:
Post a Comment