Competitive currency devaluation: Modern day mercantilism...

With all this talk of “competitive devaluation” in the currency markets there is something we really need to worry about:  the return of mercantilism.

Back in 17th, 18th and 19th Century Europe when Britain, Holland, France, Germany, Spain and Portugal were vying for continental supremacy, mercantilism was the developmental philosophy du jour.  The object of the trade policy of the day was simple: Export as much as possible and import as little as possible to grow rich.  The logic, of course, is self-defeating.  If everyone follows a mercantilistic policy the system eventually comes to a grinding halt, plagued by high tariffs, subsides, taxes, and eventually even wars.  At the end of the day a mercatilistic strategy is not only an affront to liberty, but it made the average man in the street worse off.  Products that could have been imported for cheaper under a free trade regime were made more expensive.  When the British opened up their economy to free(r) trade, that’s when it started to unlock economic progress and growth.

Competitive currency devaluation is nothing more than modern day mercantilism.  The rationale is the same and it leads in the same self-defeating direction.  As countries all try to competitively devalue their currencies, it leads ultimately to rising prices of all goods.  At this stage obviously leaders haven’t learnt that the point of trade is not to push as many exports as you can to the rest of the world, but to engage in mutually beneficial exchange so that all can be better off.

The best aspect of international trade must never be forgotten: buying stuff from foreigners for cheaper than we can make them, and selling stuff to them for cheaper than they can make them.  Competitive devaluation is a road back to the bad old days.