April 09, 2012

More Strong Currency Joy!

OK, so it's really a followup on my March 1 post, but it fulfills my personal requirement of posting at least once a month.

Rousseff seeks US support in ‘currency war’
In a meeting that highlighted the occasionally uneasy relationship between the two countries despite their potential to be strong partners, Ms Rousseff said that excessive monetary expansion in the US and Europe was hampering growth in countries such as Brazil.
Duh. As I keep saying, if you like the idea of a strong dollar, well, you should be careful what you wish for. You might get it.


Dividist said...

As the noted currency trader Albert Einstein once said "It's all relative."

With Keynesian's triumphant in central banks and governments worldwide, it is a race to the bottom with all major fiat currencies. In that situation, you can only call this a "strong dollar" in the sense that our Kenesians (Geithner and Bernanke) cannot seem to devalue the dollar as quickly as the Keynesians in charge of the Euro, Real and Yen.

I'll admit, that with the extraordinary levels of money printing we've seen in recent years, I expected a day of reckoning with the dollar before now.

You are right that a truly strong dollar policy may not feel very good (except to savers and retirees on fixed incomes who are really hurting now). But I'm not sure that "feeling good" should be the basis for monetary policy.I expect that last heroin overdose feels pretty good to an addict for a while.

Tully said...

Hey, I did NOT call ours a "strong dollar." I suggested that those wishing for one might want to re-examine their premises. Inflation is painful, but deflation is even more so. Ask any underwater homeowner.

I generally agree with you on competitive devaluation. As does Brazil. They're getting a strong real whether they want it or not, and it's very very painful for them. That's what both posts are about.

Since I've not used the phrase "feeling good" in those posts, that part of your comment puzzles me.

Dividist said...

I was connecting a few dots, perhaps incorrectly.

The starting dot was this from your post:"...if you like the idea of a strong dollar, well, you should be careful what you wish for. You might get it." - by which I infer you are suggesting that a strong dollar will not "feel good".

I do prefer policies that would lead to a strong and stable dollar, and I don't think it would feel very good in the short term, but ultimately believe it is a necessary condition to restoring our economy to health.

The longer we wait to wean ourselves from our addiction to easy debt fueled consumption and public spending, the worse the withdrawal is going to feel.

At this point, I don't think there is any way to avoid it feeling like this.

Tully said...

I'm not sure you understand exactly what a strong dollar is, from your comment "strong and stable." Generally speaking, if it's stable, it's neither strong nor weak. "Strong" in the sense of currency means appreciating against other major currencies, and like many things, this can be both good and bad at the same time. Likewise with a "weak" currency, one that is depreciating against other currencies.

We had a very strong dollar in the years 1929-1933 before FDR took us off of the gold standard. How'd that work out for us? The world is a lot more interconnected nowadays than it was back then -- the effects of a stronger dollar would be proortionally greater.

In today's world, a "strong" dollar pretty much guarantees easy debt. It suppresses exports and encourages imports. For every 1% of increase of the value of the $ against major currencies, exports decline by about $20B and 125K+ jobs are destroyed. Conversely, during a recession or sputtering-economy scenario, a weak dollar promotes exports and jobs by making US goods cheaper. As I said, a mixed bag either way.

Brazil's complaint is that the major currencies ($ & €) have been intentionally weakened by monetary easing (true) and that this is forcing up the real (also true). For an export-driven ecnomy like Brazil, that's really painful.

Tully said...

So you don't get "strong and stable." If it's either strong or weak, it's not stable, it's moving against other currencies.

Very strong would lead to very painful deflation, very weak, inflation. Stable, OTOH, is just that, and would be a good deal for most of us. Right now we are staying fairly stable against other major currencies (because they are easing too) but weakening against the lesser currencies, such as the real. Which hurts them more than us.

Dividist said...

Strong and stable are not mutually exclusive.

Tully said...

For currencies, the intersection of "stable" and "strong" falls right around "stagnant." Like Japan in the 1990's.