Currency Wars Aren't Zero-Sum
In a demand-deficient environment, currency wars would help. Perhaps in the far off distant future a sane IMF and WTO would weigh in so nations wouldn't go overboard.
1) the US has a large output gap, high unemployment and low inflation
2) Japan is stuck in a deflationary rut
3) Europe also is treading water
4) China is sucking out demand of 1-3 by keeping its currency low.
1-3 have 4 options of adding demand to their economy.
- Take from creditors/savers and give to debtors via inflation.
- take from rich nationals and give to the government to spend via fiscal policy. Deficit spending would be taking for future generations.
- devalue/bring your currency to down to take from foreign exporters and give to national exporters. This would also hurt savers as their savings is devalued and can purchase less from foreign exporters. It is more politically feasible than merely taxing rich nationals in that the rich are a powerful political constituency
- there's the expectations channel which is more tricky. Investors move their money to riskier investments because of expectations of rising inflation and economic growth. See 1 above.
- Absalom: "The Japanese unemployment rate is apparently 4.1%. There may be little that can be done through monetary easing that would make much difference. My understanding is that one of the things holding the Japanese economy back is that the domestic economy is heavily regulated. De-regulating the domestic economy might be a way to bring some dynamism to the economy (but at the potential cost of increased unemployment)."
- Noah Smith: "Once again, Absalon and I are in complete agreement...Absalon, you hereby win "commenter of the month"..."
- Me: "I'm a complete amateur and find the discussion thought-provoking.
If the unemployment rate is so low, wouldn't talking down the Yen be inflationary as the export sector picks up and looks to hire more workers? Or would they just add more robots?"