The New York Times joins the ‘currency war worriers’ – that is a mistake

It is very frustrating to follow the ongoing discussion of ‘currency war’. Unfortunately the prevailing view is that the world is heading for a ‘currency war’ in the form of ‘competitive devaluations’ that will only lead to misery for everybody. I have again, again and again stressed that when large parts of the world is caught in a low-growth quasi-deflationary trap then a competition to print more money is exactly what the world needs. ‘Currency war’ is a complete misnomer. What we are talking about is global monetary easing.

Now the New York Times has joined the discussion with a pretty horrible editorial on ‘currency war’.

This is from the editorial:

If all countries were to competitively devalue their currencies, the result would be a downward spiral that would benefit no one, but could lead to high inflation. Certainly in Europe, altering exchange rates is not the answer; reviving economies will require giving up on austerity, which is choking demand and investment.

It is just frustrating to hear this argument again and again. Monetary easing is not a negative or a zero sum game. In a quasi-deflationary world monetary easing is a positive sum game. The New York Times claims that “competitive devaluations” will lead to increased inflation.

Well, lets start with stating the fact a that the New York Times seems to miss – both the Bretton Woods and the gold standard are dead. We – luckily – live in a world of (mostly) freely floating exchange rates. Hence, nobody is “devaluing” their currencies. What is happening is that some currencies like the Japanese yen are depreciating on the back of monetary easing. The New York Times – and French president Hollande and Bundesbank chief Weidmann for that matter – also fails to notice that the yen is depreciating because the Bank of Japan is implementing the exact same monetary target as the ECB has – a 2% inflation target. After 15 years of failure the BoJ is finally trying to get Japan out of a low-growth deflationary trap. How that can be a hostile act is impossible for me to comprehend.

Second, the New York Times obviously got it right that if we have an international “competition” to print more money then inflation will increase. But isn’t that exactly what we want in a quasi-deflationary world? Can we really blame the BoJ for printing more money after 15 years of deflation? Can we blame the Fed for doing the same thing when US unemployment is running at nearly 8% and there are no real inflationary pressures in the US economy? On the other hand we should blame the ECB for not doing the same thing with the euro zone economy moving closer and closer to deflation and with unemployment in Europe continuing to rise.

When the New York Times joins the “currency war worriers” then the newspaper effectively is arguing in favour of a return to internationally managed exchange rates – either in the form of a gold standard or a Bretton Woods style system. Both systems ended in disaster.

The best international monetary system remains a system where countries are free to pursue their own domestic monetary objectives. Where every country is free to succeed or fail. A system of internationally coordinated monetary policy is doomed to fail and end in disaster as was the case with both the gold standard and Bretton Woods – not to mentioned the ill-faited attempts to coordinate monetary policy through the Plaza and Louvre Accords.

The New York Times and other ‘currency war worriers’ seem to think that if countries are free to pursue their own domestic monetary policy objectives then it will not only lead to ‘currency war’, but also to ‘trade war’. Trade war obviously would be disastrous. However, the experiences from the 1930s clearly show that those countries that remained committed to international monetary policy coordination in the form of staying on the gold standard suffered the biggest output lose  and the biggest rise in unemployment. But more importantly these countries were also much more likely to implement protectionist measures – that is the clear conclusion from research conducted by for example Barry Eichengreen and Douglas Irwin.

‘Currency war’ is what we need to get the global economy out of the crisis and monetary easing is much preferable to the populist alternative – protectionism and ‘deflationism’.

HT William Bruce.

Update: It seems like Paul Krugman – who of course blogs at the New York Times – disagrees with the editors of the New York Times.

Leave a comment


  1. PoachedWonk

     /  February 15, 2013

    Yes but the impact on the developing countries, a relative strengthening of their currencies is surely unfair?

  2. Thanks for your comment PoachedWonk, but no there is something unfair about the strengthening of developing countries (or Emerging Markets’) currencies. These countries can always counteract or neutralise the impact on money policy by lowering interest rates or conducting quantitative easing. I discuss that in this post:

    It is important to notice that in a world of floating exchange rate national central banks are fully in control of how tight or easy monetary policy is in the country. Bank of Japan or the Fed cannot determine Brazilian or Mexican monetary policy as the local central banks can always counteract any impact on local aggregate demand.

    • PoachedWonk

       /  February 15, 2013

      You have a fair point, but there are many economies where looser monetary policy is not possible.

      I think at issue for me, is the inherent contradiction in the G7’s actions.
      Historically, the G7 have been a driving force, and the main proponents of free trade and free floating exchange rates. For them to then backtrack surely damages the prospects of free trade accross the world?

      Is this not one big step towards protectionism?

  3. Ravi

     /  February 15, 2013

    This seems a very important point that people don’t get: “more importantly these countries was also much more likely to implement protectionists measures”. Not to mention other misguided policies such as raising minimum wages etc. But I think MMs must continue to emphasize that we don’t support monetary intervention for the sake of “stimulus” but more as a rules-based approach.

    • Ravi, I strongly agree. I strongly dislike discretionary “stimulus” measures and I certainly worry that what we are seeing now for example in Japan is a unwarranted politicization of monetary policy. That BoJ “independence” have not exactly brought good results. Rules are much more important that “independence”.

  4. You have the impeccable logic of an old-time bloodletter. If the patient doesn’t improve, bleed him some more. Printing trillions of dollars, pounds, euros, and yen has utterly failed to cure the world economy, so let’s print more money for politicians to buy votes with!

    The best monetary policy is none at all. We need absolute separation of Bank and State — no government ownership, no regulation, no bailouts, and no corporate shield for failed banks.

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