Macro Poll: The Dollar's Up: Is This Good Or Bad?

[EdRooney]

Funny so far the votes in favour of devaluation are outpacing those against 6-1, but the comments are more generally on the negative side.

Let me throw a couple of flies in the ointment:

So the US and EU have been accusing China of keeping its currency artificially weak (whatever that means), saying that doing so is unfair competition. Why would the Chinese want to keep their currency weak and what are the advantages for them? Should Argentina be doing the same thing?

Secondly, in the US in the late 90s we had the opposite of devaluation: a strong dollar led to a huge trade deficit that cost the economy around 9 million jobs, and the economy has yet to recover. There is practically no official inflation, but real wages and median net worth have been stagnant or decreasing for the last 20 years. How can Argentina avoid this trap as it works to solve its inflation problem and stabilise its currency?

Talk amongst yourselves.

 

[Chet]

should governments meddle in the value of currency?
Why?

 

[EdRooney]

It's the governments that issue the currencies. By issuing (currency out) and taxing it (currency in) they play the largest role in its value. This effects the rate of inflation (up or down) and determines the allocation of resources to the policies the gov'ts want to implement (social security, fighting dumb wars, palaces for rulers, education, roads...)

I don't see how govt's with their own currency cannot meddle in its value; the only other choice would be to peg or stop issuing. On the other hand, governments that do not have control over their currencies (like Spain and Greece now, Argentina in the 90s, etc.) cannot use monetary policy to solve problems like trade deficits or unemployment.

 

[Chet]

And why should the government solve trade deficits or unemployment?
What exactly should the role of government be?
I always have trouble with this. Obviously we need some government, law enforcement, courts ..but just how much always puzzles me.
It often seems that government attempts to meddle with the economy produce a lot more bad than good.

 

[EdRooney]

I agree with alot of that. The problem is that governments get co-opted by powerful groups and/or individuals who impose policies that use these tools to their own benefit, to the detriment of others.

So for example, let's take Argentina in the 90s. After a series of hyper inflationary cycles (we're talking in the 2000% range-- utterly dwarfing today's 15-40%), a government was voted in that decided to peg the Peso to the dollar (thus eliminating inflation over night) and to privatise much of the economy under the guise of "getting government out of the way" in order to let the market take over. Well this worked out just dandy for some people: suddenly imports were the same price as domestic goods. This destroyed local industry which could no longer compete with imports subsidised by foreign governments, and the unemployment rose to around 25% (about 4x where it is today). This was great for a small handful of major employers because it meant that they could pay workers even less, since they were so desperate to get work anywhere.

Of course, you can only push things so far, and by 2001, the mass of the population was in the streets, forcing out one government after another until the policies were reversed. The currency peg was removed and industry was allowed to recover. This example is not at all unique to Argentina; other countries such as South Korea, Japan in the 70s, Germany in the 50s, China now... have all shown that the best way to provide an economic environment that benefits most of their citizens is to control their own monetary policy and use it to develop their internal demand.

More directly to your question, the question of what government should and should not be able to do is a question of resource allocation. The economy as a whole and its various aspects are resources that are shared by all in common: infrastructure, an educated workforce, clean air, water, raw materials, etc. The question of how we divide those resources equitably among the population is where the idea of government comes in. It's an answer to the question: what should we do with all these things we have? The problem, as I said, is when small groups are allowed to co-opt the government and use it to further their own interests alone.

 

[Chet]

I agree with alot of that. The problem is that governments get co-opted by powerful groups and/or individuals who impose policies that use these tools to their own benefit, to the detriment of others.

So for example, let's take Argentina in the 90s. After a series of hyper inflationary cycles (we're talking in the 2000% range-- utterly dwarfing today's 15-40%), a government was voted in that decided to peg the Peso to the dollar (thus eliminating inflation over night) and to privatise much of the economy under the guise of "getting government out of the way" in order to let the market take over. Well this worked out just dandy for some people: suddenly imports were the same price as domestic goods. This destroyed local industry which could no longer compete with imports subsidised by foreign governments, and the unemployment rose to around 25% (about 4x where it is today). This was great for a small handful of major employers because it meant that they could pay workers even less, since they were so desperate to get work anywhere.

Of course, you can only push things so far, and by 2001, the mass of the population was in the streets, forcing out one government after another until the policies were reversed. The currency peg was removed and industry was allowed to recover. This example is not at all unique to Argentina; other countries such as South Korea, Japan in the 70s, Germany in the 50s, China now... have all shown that the best way to provide an economic environment that benefits most of their citizens is to control their own monetary policy and use it to develop their internal demand.

More directly to your question, the question of what government should and should not be able to do is a question of resource allocation. The economy as a whole and its various aspects are resources that are shared by all in common: infrastructure, an educated workforce, clean air, water, raw materials, etc. The question of how we divide those resources equitably among the population is where the idea of government comes in. It's an answer to the question: what should we do with all these things we have? The problem, as I said, is when small groups are allowed to co-opt the government and use it to further their own interests alone.

Well said.
Corruption is indeed at the heart of economic problems all over. And in fact it is the governments themselves that are corrupt. Governments, being made up of people, will probably always be so. But we do need them.

 

[Chet]

See: http://baexpats.org/topic/30176-q-rental-negotiation-vs-inflation/
There is a primary driver of inflation, building it into contracts.
Rent goes up, people demand higher wages, food goes up (wages for the growers/producers)
Each in turn demanding more money to keep up with inflation, which in turn creates more inflation.
Sad

 

[Redpossum]

It is interesting that everyone in this thread seems to be accepting of fiat currencies.

It could be argued that fiat currencies are inherently inflationary, and indeed that the reason for universal insistence upon fiat currencies is the fact that they can be manipulated to produce the boom and bust cycles upon which financial speculators make their fortunes.

 

[thorsten]

Do you have a good alternative?

 

[Chet]

Do you have a good alternative?

bitcoin,gold,silver,rice,sea shells