Mo Purchasing Power Mo Problems?

The U.S. is urging Japan to refrain from competitively devaluing the Yen. The United States, a prolific destroyer of currency value in its own right (the dollar has lost 95% of its purchasing power since the inception of the Federal Reserve), fears that the Japanese are turning up the printing presses in an attempt to increase their exports and decrease their imports from places such as America. The Department of Treasury says this is unfair because it enriches the Japanese at the expense of the American economy. When I read things like this, it scrambles my brain. So, I would like to take the time to attempt to unscramble it.

Our problem seems to germinate in the foreign exchange market. That's where international currencies are traded for one another. If I own a factory in Indiana and I wish to purchase materials from France, I need to acquire euros in order to pay for those materials. On the foreign exchange market, I trade my dollars for euros and I'm all set. But what if the EU decides to "competitively devalue" the euro? What is competitive devaluing and how will this affect my business in Indiana? For simplicity's sake, let's say that $2 will get you €1 and you wish to purchase a machine from France that is priced at €1,000. Obviously, this machine will cost you $2000. But the European Central Bank (ECB) then decides to announce that it will begin increasing the supply of euros. Increasing the supply of euros decreases the euro's purchasing power because as more currency units are pumped into the economy, prices are bid up. Speculators at the exchange market begin to dump euros and purchase relatively stronger currencies, such as the dollar, in an attempt to make a profit before the prices inevitably rise. Let's say the euro moves to par with the dollar and that now your $1 buys €1. That means that you can now buy 2 machines priced at €1000 with your $2000. The relative cheapness of the European goods will serve to stimulate French exports and American imports simultaneously. Mainstream economists say this is a bad thing for American industry. The ECB has used monetary policy in order to gain an unfair advantage for European industries.

Now let's go back to Japan. According to Bloomberg.com, the Bank of Japan (BOJ) has recently doubled its bond purchases (which it creates credit in order to do) and the yen has depreciated against all 16 of its most-traded peers since April 4th. Japan says they are merely trying to fight off deflation and that the resulting devaluation is incidental. The U.S. Treasury seems skeptical. But it seems to me that Americans stand to benefit a great deal from this move by the BOJ and it is the Japanese citizenry who should be lamenting this development. In my earlier example, a company from Indiana was able to purchase more goods from France with the same amount of dollars due to competitive currency devaluation. This is most certainly a beneficial development from the point of view of the Indiana business who saves $1000 with which it can buy another machine or increase its capital investments. Or maybe it can even spend the money domestically. It's like a gift from the devaluing country to the people of the countries with relatively strong currencies. But what about the exporters in the devaluing country? Shouldn't they celebrate the increase in exports? Ludwig von Mises, the greatest economist of the 20th century, explains why we should refrain from heaping encomiums on the inflating central banks of the world:

The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation's welfare. In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.

So, as is always the case, we find that the government cannot benefit any group of people without harming another group. And in this case, they're not even benefiting the people whom they claim to be. If the Treasury was really interested in helping the American economy, they would take steps to decrease their own burden on it and direct their scorn toward the inflationary measures of the Federal Reserve.