5 ms·

To understand what's going on, make sure you read the last sentence on the first page, continue on to the second page, and then watch this Charlie Rose intervie

by espeed 16y ago

To understand what's going on, make sure you read the last sentence on the first page, continue on to the second page, and then watch this Charlie Rose interview with Gordon Brown (http://en.wikipedia.org/wiki/Gordon_Brown http://en.wikipedia.org/wiki/Gordon_Brown) where he also talks about the US/China "currency wars" and the "race to the bottom" (http://www.charlierose.com/view/interview/11343 http://www.charlierose.com/view/interview/11343). China artificially lowers its currency so its goods are relatively cheaper ("it's pegged to the dollar"), which keeps its foreign trade prices down and therefore boosts its exports. So how does the US "compete" with an artificially-lowered foreign currency to discount its debt and keep its exports up? Or, in other words, how does the US devalue its own currency in a "race to the bottom"...?

fingerprinter 16y ago
So, are you saying that this is a good thing? I don't quite follow. Care to give a TL;DR explanation for those of us with more programming sense than fiscal sense?
- espeed 16y ago
  I'm saying it's the reality of an emerging "economic war" between China and the US. In the article, Kenneth Rogoff (http://www.economics.harvard.edu/faculty/rogoff/ http://www.economics.harvard.edu/faculty/rogoff/), a Harvard economics professor and former chief economist at the International Monetary Fund, says "A weak dollar isn’t necessarily a bad thing -- it can make the United States more competitive, bolster exports and help domestic companies that are vying against imported goods here in the United States." The article goes on to say, "[Devaluing the dollar] effectively would be playing the China card against China in a battle for manufacturing jobs...Many fund managers say the only way out of that box is a weaker dollar, reducing the value of the massive amount of U.S. debt held by foreigners and increasing the value of American investments abroad, such as Buffett’s. "'Countries like the United States do race to the bottom,' said Gross (http://en.wikipedia.org/wiki/William_H._Gross http://en.wikipedia.org/wiki/William_H._Gross), though he added that Treasury Secretary Timothy F. Geithner would never say so. A weaker currency 'makes them more competitive and reduces the burden of debt,' Gross added. Americans own about half of the outstanding federal debt, but Gross said the rest is owed 'as Tennessee Williams would say, to strangers, outside the U.S. If the United States can devalue the value of those dollars that they owe, then all the better.'"
  - windsurfer 16y ago
    What makes it a "race" if the US can just halve it's dollar value tomorrow by simply printing money? Isn't the value arbitrarily set by the feds using inflation and supply?
    - espeed 16y ago
      "Races to the bottom can be described in game theory by the prisoner's dilemma game. This is an exercise where the optimal outcome for the entire group of participants results from cooperation of the participants, but is put in danger by the fact that the optimal outcome for each individual is to not cooperate while the others do cooperate. An economic example of racing to the bottom is tax competition between governments. Each government may benefit from higher tax revenues by having a high tax on corporate profits. However, governments can benefit individually with a lower corporate tax rate relative to the other governments in order to attract businesses away from the jurisdictions of other governments. This action would hurt all governments except the one that undercut the others. In order to maintain the equilibrium, each of the other governments would have to lower their corporate tax rates to match the "defector" (the government that first lowered the tax rate). The end result is that each government adopts a lower corporate tax rate and thus collects less revenue overall. The optimal option for all governments would be an agreement to maintain tax harmonization" (http://en.wikipedia.org/wiki/Race_to_the_bottom http://en.wikipedia.org/wiki/Race_to_the_bottom). As an aside, Robert Axelrod's famous and fascinating book "The Evolution of Cooperation" (http://en.wikipedia.org/wiki/The_Evolution_of_Cooperation http://en.wikipedia.org/wiki/The_Evolution_of_Cooperation) on game theory and the "prisoner's dilemma" presents an algorithm called "Tit for Tat" (http://en.wikipedia.org/wiki/Tit_for_tat http://en.wikipedia.org/wiki/Tit_for_tat) that describes an approach to interaction that promotes generosity and forgiveness while not to being exploitable, and it so simple that it can be understood by everyone (which is to say, it's easy for others to understand your actions and adapt theirs to yours so that you both get the most benefits).
    - dpatru 16y ago
      Too much state looting (and printing money is a way to loot) discourages production and investment besides causing political trouble. So there's a limit to how much any state can devalue. To illustrate, your employer could make itself more competitive by cutting wages. But if it cuts wages too much you would stop working for it and find other employment. So there's a limit to how competitive you employer can be by cutting wages. The better, easier way to competitiveness is to increase productivity by enticing more productive workers with higher compensation. By devaluing money, a government effectively cuts wages for the entire population, thus making the country as a whole more "competitive," i.e., foreigners can afford to buy more of the country's goods and services. But, just like cutting wages in a single firm is not generally effective, so inflation is not the best way to become nationally competitive.
ck2 16y ago
Reducing the value of the dollar overseas to sell more sounds like madman logic to me - it only makes the wealthy, more weathy, not the average consumer. We don't reduce the subsidies to those exporting more, so they will do fine. But for the average person it will just make all your goods and services more expensive.
- JonnieCache 16y ago
  >it only makes the wealthy, more weathy, not the average consumer. I mean honestly, who would have expected that?
- mdemare 16y ago
  Nonsense. A cheap currency promotes exports and reduces imports, and will strongly stimulate job grows, which is exactly what the U.S. needs now. Job growth is also the reason why China is keeping its currency cheap: mass unemployment means instability.
  - ck2 16y ago
    Ah okay, trickle-down economics 2.0 So, give the wealthy the opportunity to ship twice the number of widgets at half the profit and they'll just have to give someone a job, regardless if it's the lowest possible paying jobs that will only be temporary anyway until the cost to make the widget also increases because of the supplies they need will now also cost twice as much. Then when China out-deflates us to make the widgets even cheaper, all that temporary labor will be on unemployment and need taxpayer provided benefits and health care. Win-win for the factory owner.
    - merloen 16y ago
      These effects work for all industries, not just widget factories. Microsoft's highly paid engineers profit too. And twice the number of widgets at half the profit - how is that a good deal for factory owners? Finally, Portugal is a country with a very expensive currency. Because of that, unemployment is huge and they're in big trouble.
    - 16y ago
espeed 16y ago
This is another component of the emerging "economic/currency wars"... "Oil Not Priced in Dollars by 2018?: Some oil producing countries and big buyers are hatching a plan to move away from pricing oil in dollars—a potential blow to the greenback's prestige" (http://www.businessweek.com/globalbiz/content/oct2009/gb2009106_736291.htm http://www.businessweek.com/globalbiz/content/oct2009/gb2009...)
- espeed 16y ago
  For more, see "petrodollar warfare", (http://en.wikipedia.org/wiki/Petrodollar_warfare http://en.wikipedia.org/wiki/Petrodollar_warfare), AKA the "oil currency wars"
  - johnny22 16y ago
    that's full of "citation needed" and "which economists?"
dpatru 16y ago
Currency devaluation is a way for governments to tax their populations surreptitiously. All governments that have control of the money devalue it to some extent, but generally not too much for the same reason they don't directly overtax or over-regulate: too much state looting discourages production and investment. If China is over-looting (relative to other countries), then investors should be leaving China, not queuing to get in.
- fauigerzigerk 16y ago
  Currency devaluation is a tax on savers and a tax cut for debtors. So there is one group of people that is surreptitiously taxed and another one that is surreptitiously bailed out. Since the US is a net debtor nation, the Fed and the government creating inflation amounts to a net tax relief for the US population.
  - merloen 16y ago
    To clarify: that only goes for the inflation beyond the expected inflation. The expected inflation is priced into the interest rates. The current level of inflation of the dollar does not amount to a tax on savers.
    - triviatise 16y ago
      it does because many of them are holding fixed rate notes at very low interest rates. For those with resetting interest rates it is no big deal, but grandma holding CD's or bonds bought in the last few years is going to get killed.
cynicalkane 16y ago
This is FUD, here's why. The price of the US Dollar is decided by international markets. The US does not manipulate its currency prices. Most economists in the US are very happy with this situation. The only governmental force which might change the value of the dollar on purpose, by increasing or decreasing the amount of dollars available, is the Fed. The Fed's primary goal right now is to prevent deflation. All of its actions have been entirely consistent with its goal of preventing deflation, and just about every economist in the universe agrees qualitatively with the Fed's behavior, though there's wide disagreements on just how much they should print. Deliberately printing money for the purposes of a trade war would be inflationary stupidity and would be a shocking move from an institution that had, in the past, actually prolonged a recession in order to maintain a stable currency. (Inflation doves like Paul Krugman would suggest that the Fed is doing that a second time, right now.)
- espeed 16y ago
  REP. HENRY WAXMAN: Do you feel that your ideology pushed you to make decisions that you wish you had not made? ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact. REP. HENRY WAXMAN: You found a flaw in the reality… ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak. REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working? ALAN GREENSPAN: That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well. (http://pragcap.com/resources/understanding-modern-monetary-system http://pragcap.com/resources/understanding-modern-monetary-s...)
  - cynicalkane 16y ago
    That's an interesting quote, but I'd like you to clarify what it has to do with what I'm saying. Judging by the actions and commentary of just about everyone, neither Greenspan nor anybody else seems willing to throw out monetary policy entirely, and I caution you not to misread Greenspan's words that way.

by espeed 16y ago

fingerprinter 16y ago

So, are you saying that this is a good thing? I don't quite follow. Care to give a TL;DR explanation for those of us with more programming sense than fiscal sense?

espeed 16y ago
I'm saying it's the reality of an emerging "economic war" between China and the US. In the article, Kenneth Rogoff (http://www.economics.harvard.edu/faculty/rogoff/ http://www.economics.harvard.edu/faculty/rogoff/), a Harvard economics professor and former chief economist at the International Monetary Fund, says "A weak dollar isn’t necessarily a bad thing -- it can make the United States more competitive, bolster exports and help domestic companies that are vying against imported goods here in the United States." The article goes on to say, "[Devaluing the dollar] effectively would be playing the China card against China in a battle for manufacturing jobs...Many fund managers say the only way out of that box is a weaker dollar, reducing the value of the massive amount of U.S. debt held by foreigners and increasing the value of American investments abroad, such as Buffett’s. "'Countries like the United States do race to the bottom,' said Gross (http://en.wikipedia.org/wiki/William_H._Gross http://en.wikipedia.org/wiki/William_H._Gross), though he added that Treasury Secretary Timothy F. Geithner would never say so. A weaker currency 'makes them more competitive and reduces the burden of debt,' Gross added. Americans own about half of the outstanding federal debt, but Gross said the rest is owed 'as Tennessee Williams would say, to strangers, outside the U.S. If the United States can devalue the value of those dollars that they owe, then all the better.'"
- windsurfer 16y ago
  What makes it a "race" if the US can just halve it's dollar value tomorrow by simply printing money? Isn't the value arbitrarily set by the feds using inflation and supply?
  - espeed 16y ago
    "Races to the bottom can be described in game theory by the prisoner's dilemma game. This is an exercise where the optimal outcome for the entire group of participants results from cooperation of the participants, but is put in danger by the fact that the optimal outcome for each individual is to not cooperate while the others do cooperate. An economic example of racing to the bottom is tax competition between governments. Each government may benefit from higher tax revenues by having a high tax on corporate profits. However, governments can benefit individually with a lower corporate tax rate relative to the other governments in order to attract businesses away from the jurisdictions of other governments. This action would hurt all governments except the one that undercut the others. In order to maintain the equilibrium, each of the other governments would have to lower their corporate tax rates to match the "defector" (the government that first lowered the tax rate). The end result is that each government adopts a lower corporate tax rate and thus collects less revenue overall. The optimal option for all governments would be an agreement to maintain tax harmonization" (http://en.wikipedia.org/wiki/Race_to_the_bottom http://en.wikipedia.org/wiki/Race_to_the_bottom). As an aside, Robert Axelrod's famous and fascinating book "The Evolution of Cooperation" (http://en.wikipedia.org/wiki/The_Evolution_of_Cooperation http://en.wikipedia.org/wiki/The_Evolution_of_Cooperation) on game theory and the "prisoner's dilemma" presents an algorithm called "Tit for Tat" (http://en.wikipedia.org/wiki/Tit_for_tat http://en.wikipedia.org/wiki/Tit_for_tat) that describes an approach to interaction that promotes generosity and forgiveness while not to being exploitable, and it so simple that it can be understood by everyone (which is to say, it's easy for others to understand your actions and adapt theirs to yours so that you both get the most benefits).
  - dpatru 16y ago
    Too much state looting (and printing money is a way to loot) discourages production and investment besides causing political trouble. So there's a limit to how much any state can devalue. To illustrate, your employer could make itself more competitive by cutting wages. But if it cuts wages too much you would stop working for it and find other employment. So there's a limit to how competitive you employer can be by cutting wages. The better, easier way to competitiveness is to increase productivity by enticing more productive workers with higher compensation. By devaluing money, a government effectively cuts wages for the entire population, thus making the country as a whole more "competitive," i.e., foreigners can afford to buy more of the country's goods and services. But, just like cutting wages in a single firm is not generally effective, so inflation is not the best way to become nationally competitive.

ck2 16y ago

Reducing the value of the dollar overseas to sell more sounds like madman logic to me - it only makes the wealthy, more weathy, not the average consumer. We don't reduce the subsidies to those exporting more, so they will do fine. But for the average person it will just make all your goods and services more expensive.

JonnieCache 16y ago
>it only makes the wealthy, more weathy, not the average consumer. I mean honestly, who would have expected that?
mdemare 16y ago
Nonsense. A cheap currency promotes exports and reduces imports, and will strongly stimulate job grows, which is exactly what the U.S. needs now. Job growth is also the reason why China is keeping its currency cheap: mass unemployment means instability.
- ck2 16y ago
  Ah okay, trickle-down economics 2.0 So, give the wealthy the opportunity to ship twice the number of widgets at half the profit and they'll just have to give someone a job, regardless if it's the lowest possible paying jobs that will only be temporary anyway until the cost to make the widget also increases because of the supplies they need will now also cost twice as much. Then when China out-deflates us to make the widgets even cheaper, all that temporary labor will be on unemployment and need taxpayer provided benefits and health care. Win-win for the factory owner.
  - merloen 16y ago
    These effects work for all industries, not just widget factories. Microsoft's highly paid engineers profit too. And twice the number of widgets at half the profit - how is that a good deal for factory owners? Finally, Portugal is a country with a very expensive currency. Because of that, unemployment is huge and they're in big trouble.
  - 16y ago

espeed 16y ago

This is another component of the emerging "economic/currency wars"... "Oil Not Priced in Dollars by 2018?: Some oil producing countries and big buyers are hatching a plan to move away from pricing oil in dollars—a potential blow to the greenback's prestige" (http://www.businessweek.com/globalbiz/content/oct2009/gb2009106_736291.htm http://www.businessweek.com/globalbiz/content/oct2009/gb2009...)

espeed 16y ago
For more, see "petrodollar warfare", (http://en.wikipedia.org/wiki/Petrodollar_warfare http://en.wikipedia.org/wiki/Petrodollar_warfare), AKA the "oil currency wars"
- johnny22 16y ago
  that's full of "citation needed" and "which economists?"

dpatru 16y ago

Currency devaluation is a way for governments to tax their populations surreptitiously. All governments that have control of the money devalue it to some extent, but generally not too much for the same reason they don't directly overtax or over-regulate: too much state looting discourages production and investment. If China is over-looting (relative to other countries), then investors should be leaving China, not queuing to get in.

fauigerzigerk 16y ago
Currency devaluation is a tax on savers and a tax cut for debtors. So there is one group of people that is surreptitiously taxed and another one that is surreptitiously bailed out. Since the US is a net debtor nation, the Fed and the government creating inflation amounts to a net tax relief for the US population.
- merloen 16y ago
  To clarify: that only goes for the inflation beyond the expected inflation. The expected inflation is priced into the interest rates. The current level of inflation of the dollar does not amount to a tax on savers.
  - triviatise 16y ago
    it does because many of them are holding fixed rate notes at very low interest rates. For those with resetting interest rates it is no big deal, but grandma holding CD's or bonds bought in the last few years is going to get killed.

cynicalkane 16y ago

This is FUD, here's why. The price of the US Dollar is decided by international markets. The US does not manipulate its currency prices. Most economists in the US are very happy with this situation. The only governmental force which might change the value of the dollar on purpose, by increasing or decreasing the amount of dollars available, is the Fed. The Fed's primary goal right now is to prevent deflation. All of its actions have been entirely consistent with its goal of preventing deflation, and just about every economist in the universe agrees qualitatively with the Fed's behavior, though there's wide disagreements on just how much they should print. Deliberately printing money for the purposes of a trade war would be inflationary stupidity and would be a shocking move from an institution that had, in the past, actually prolonged a recession in order to maintain a stable currency. (Inflation doves like Paul Krugman would suggest that the Fed is doing that a second time, right now.)

espeed 16y ago
REP. HENRY WAXMAN: Do you feel that your ideology pushed you to make decisions that you wish you had not made? ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact. REP. HENRY WAXMAN: You found a flaw in the reality… ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak. REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working? ALAN GREENSPAN: That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well. (http://pragcap.com/resources/understanding-modern-monetary-system http://pragcap.com/resources/understanding-modern-monetary-s...)
- cynicalkane 16y ago
  That's an interesting quote, but I'd like you to clarify what it has to do with what I'm saying. Judging by the actions and commentary of just about everyone, neither Greenspan nor anybody else seems willing to throw out monetary policy entirely, and I caution you not to misread Greenspan's words that way.