Currency War – Why There Is No Such Thing

The term “currency war” is bandied about in the mainstream media, the theme being that countries are competing against each other to devalue their currency so their exports are more competitive. Unfortunately, it is nonsense.

There is a short-term effect when a currency is devalued, that is not disputable. But the effect is only short-term.

Over the medium to long-term it makes no difference if there are 100 Yen to the dollar or 1000.

A devaluation has an effect in the short-term because goods that were built during the pre-devaluation phase still have to be paid for. For example there are billions of Japanese built products in inventory throughout the world. If these products were sold in Yen then they will be cheaper after the devaluation than pre-devaluation but the effect does not last.

When these inventories are sold out and firms throughout the world start buying the products that were built post devaluation their cost will have increased to reflect the devaluation.

Take cars for example. The raw materials that go into an automobile in the most part have to be imported into Japan to be turned into finished products for the car industry.

Post devaluation these materials will be more expensive for Japanese companies to buy and these costs will be passed onto the car manufacturers who eventually buy them. These costs are in turn passed on to the final customer.

Another example is wages. People working in Japan will still want to purchase the same products and service they bought before. The products imported into Japan will all be more expensive post devaluation. This drives up wages as people start putting pressure on their employers for greater wages or by seeking work elsewhere in Japan.

So raw materials and wages will increase in price post devaluation and these costs will be passed onto final customers around the world.

As time goes on, the effects of devaluation will be cancelled out and real prices will return to their pre-devaluation levels.

It is inevitable.

In summary, the effects on a one-off currency devaluation will be cancelled out in the long-term.

The only way a country can increase its exports over the long-term is to decrease the cost of doing business.

Reducing taxes and reducing regulations allows manufactures to produce goods more cheaply and more productively and the effects will not be cancelled out in the future.

So given the fact that a currency devaluation has no effect in the medium or long-term why do central banks prescribe this medicine?

There is only one answer and that is to simply devalue the currency and for no other reason. One can only guess that the “increase exports” argument is used is to make the devaluation of the currency more palatable to the citizens of a country. Unfortunately anyone earning a wage, receiving benefits, receiving a pension or those with savings in the banks will see their net worth decrease.

The only parties that benefit from a devaluation are those whose debts are greater than their assets. And governments.

The devaluation joker card allows governments to continue running an economy badly and/or to continue financially oppressing the populace at the expense of those who have net worth, those people who claim benefits and those who work.

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