Currency war talk is so last year

The talk of “currency wars” by the media and politicians are really getting a little tired and old.  We have discussed these issues ad nauseam here at HA over the past year.  The topics some central bankers and the media have just recently cottoned onto are really old news if you understand economics.

In “Competitive currency devaluation: Modern day mercantilism…”, published in Dec 2009, freeman said that:

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.

In “Bringing sanity to currency idiocy”, published in Jan 2010, freeman explained that:

The problem with a push for a more “competitive currency” is that no government or central bank can make their money more or less ‘competitive’.  People and companies are the crux of competitiveness, not currency.  The transitory gains to some from a weaker exchange rate are always eventually offset by more important factors.  Grant correctly points to the fact that currency is simply a medium of exchange and unit of account, meaning that inflationary devaluation policies “separate…business planning from economic reality”.  Devaluation policies require lower interest rates than the market would deem appropriate, making long term investment decisions falsely attractive and resulting in mal-investments, poor capital allocation, and ultimately recession.

Perhaps Grant’s best and most important insight is the fact that deliberately weakening the currency imposes a tax on foreign capital inflows.  It effectively says to foreigners that SA has enough capital and skills and wants to slow inbound investment flows.

SA has a major deficiency of capital and skills, evidenced by lingering poverty and low average incomes.  More capital accumulation is needed to increase employment and real wealth and devaluing the rand is NOT the way to get there.

Next time you hear a hot-shot from Investec saying that the rand is too strong and that a weaker rand is the key to lifting South Africa out of the economic mire, add them to your “they-don’t-get-it” list.

A weaker currency cannot make productive processes any more efficient and will never, EVER, lead to prosperity for the masses.  So when anyone in your near vicinity calls for a weaker Rand to drive employment and job growth, refute it profusely; scream like you are being robbed.   Debauching the Rand will steal you and your family’s hard earned wealth.  Just remember, wealth and purchasing power stored in gold cannot be stolen by politicians through inflation, and this is why the gold price is going up in terms of every paper currency in the world.  UBS said this week its wealthiest clients are buying up gold by the tonne to protect themselves.  Anyways, I’m gonna leave it there, I’ve got a Scoin shop to get to.