classical economics
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Trade War by Devaluation
TRADE WAR
BY CURRENCY DEVALUATION

By Wayne Jett © March 3, 2008

    In December, 2007, a central banking action came from the European Central Bank that, if done by the Federal Open Market Committee, would have shaken the international monetary system at its foundations. The ECB injected $500 billion in euros as new liquidity in the euro-denominated economy.
    Imagine the effect on the dollar if FOMC injected $500 billion in new liquidity! The dollar’s value would fall off the chart, foreign exchange rates would move to new extremes, and the price of gold would move to four-digit levels long predicted by the promoters of precious metal speculation. Most importantly in political and business terms, businesses based in non-dollar economies including the ECB countries, Britain, Canada, Mexico, Brazil, Japan and India would be made completely uncompetitive against dollar-based competitors such as U. S. firms.
    Yet, no such dire events transpired when the ECB injected $500 billion in euros. The ECB action made headlines at the time, but afterward has gone largely un-remarked. Why did ECB act on such an unprecedented scale? As previously reported in The Supply Side Guide, the ECB monetary union was in danger of coming apart, largely due to difficulties in remaining competitive with dollar-based firms as the Federal Reserve has driven the dollar to new lows. The ECB sought to weaken the euro relative to the U. S. dollar by making the gargantuan injection of new liquidity.
    Did the ECB succeed? By the end of February, 2008, the euro still was rising to historic highs relative to the dollar, near $1.52. Of course, dollar damage to the EMU would have been worse if ECB had not acted as it did. Still, EMU producers are hard pressed to compete with U. S. firms when their currency is more than 50% above par with the dollar.  
    After the Battle of Waterloo in 1815 until mercantilism re-emerged in 1929 America, the world prospered through enlightened public policy permitting free trade. Before Waterloo, trade wars fought with armies, navies, tariffs and embargoes plagued and impoverished nations around the globe. In 2008, producers outside the dominant U. S. market have no real alternative presently other than attempting to follow the Fed’s path to currency devaluation.
    In ancient mercantilism, a central objective was stable, gold-based currency with increasing liquidity gained by additional gold reserves so as to promote domestic prosperity. Orthodox mercantilist intellectuals today do not hesitate to devalue their own currency, impoverishing their domestic population, while giving advantage to those who profit from swings in foreign exchange rates.  Moral and ethical comparisons with the Middle Ages are not entirely favorable to the Fed or to academic Keynesians.  ~