Matthew O’Brien Thinks Currency Wars Are A Good Thing

Matthew O’Brien Thinks Currency Wars Are A Good Thing
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“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

-Murray Rothbard

Pummeling criticism, in most instances, should be reserved for those who espouse such nonsense that it strikes even the most unlearned reader as illogical.  While some economic commentators have an impeccable talent for twisting the facts in a way that makes their argument seem as the only sound alternative (Paul Krugman and Robert Reich come to mind), some thinkers are so utterly confused on the complexity of a market economy that their preferred policies border on infantile.

The latest perpetrator of this crime is associate editor of The Atlantic Matthew O’Brien.  In yesterday’s column titled “Currency Wars Are Good!” O’Brien commits an economic fallacy dating back hundreds of years.

A currency war begins, simply enough, when a country decides to push down the value of its currency. This means either printing money or just threatening to print money. A cheaper currency makes exports cheaper, and more competitive exports means more growth and happier people. Well, everybody except people in other countries who were just undersold and lost exports. That’s why economists call this kind of devaluation a “beggar-thy-neighbor” policy: Countries boost exports at the expense of others.

This sounds bad. Rather than cooperating, countries are fighting over trade. But in this case, some fighting is good, and more fighting is better. Countries that lose exports want to get them back. And the best way to do that is to devalue their own currencies too. This, of course, causes more countries to lose exports. They also want to get their exports back, so they also push down their currencies. It’s devaluation all the way down.

Correct so far.  The global currency race to the bottom has only accelerated after the financial crisis hit and central banks turned their liquidity machines on high.  Countries devaluing their currencies at an accelerated rate to boost exports prior to the crisis, such as China and Brazil, have had to ramp up their printing presses to keep their economies from teetering.  This hasn’t worked so well in China.

But as a mathematical truth, not all countries can export their ways to prosperity if competitors all engage in devaluation at once.  O’Brien recognizes this but then goes on to make this absurd pronouncement:

The downside of devaluation is that no country gains a real trade advantage, and weaker currencies means the prices of commodities like oil shoot. But — and here’s the really important part — devaluing means printing money. There isn’t enough money in the world. That’s the simple and true reason why the global economy fell into crisis and has been so slow to recover. It’s also the simple and true reason why the Great Depression was so devastating. We know from the 1930s that such competitive devaluation can turn things around.

A currency war is good because it leads to more money.

Say what?

There isn’t enough money in the world?  Here is the big question for Mr. O’Brien: what is the correct amount of money in the world?  How does one determine such a number?

First off, the amount of money within a currency system is irrelevant.  Whether it be a hard money market or a fiat-imposed regime, the size of the money supply is a non-issue.  What matters is prices.  You could have a workable gold standard with only one ounce in existence.

Now O’Brien unequivocally declares that more money equals more prosperity.  But if that were the case, then central banks around the globe could simply print off trillion dollar bills for everyone and the great recession would be over.  Using O’Brien’s logic, this man from everyone’s favorite hyperinflation capital, otherwise known as Zimbabwe, would be living in a lap of luxury:

But of course Robert Mugabe destroyed Zimbabwe’s economy with hyperinflation and left its citizens with nothing but worthless pieces of paper to eat.  This writer can only float a guess that O’Brien is completely unfamiliar with this well known history.

The core of O’Brien’s confused thinking stems from his misunderstanding of what money truly is.  Money’s only purpose is that of a medium of exchange to facilitate transactions.  Under uninhibited market conditions, gold and silver have historically emerged as currencies due to the fungibility, durability, divisibility, and ease in recognition.  Fiat systems, with no limit on the amount of money that can be created, ended up replacing hard currency systems by government decree.  This in turn resulted in paper unbacked by anything but the promises of politicians being used to facilitate transactions.  In terms of overall utility, small paper bills have virtually no practical use outside the government forcing their use as money.  Yet O’Brien believes that if everyone had more of what amounts to simply paper, then somehow the whole of the population would be better off because, well, everyone wants more money, right?

Over two hundred years ago, political and economic theorist David Hume exploded the “more money= more wealth” myth.  Rothbard summarizes in An Austrian Perspective on the History of Economic Thought Vol. 1

Hume’s most important contribution is his elucidation of monetary theory, in particular his clear exposition of the price-specie-flow mechanism that equilibrates national balances of payments and international price levels. In monetary theory proper, Hume vivifies the Lockean quantity theory of money with a marvelous illustration, highlighting the fact that it doesn’t matter what the quantity of money may be in any given country: any quantity, smaller or larger, will suffice to do money’s work of facilitating exchange. Hume pointed up this important truth by postulating what would happen if every individual, overnight, should find the stock of money in his possession to have doubled miraculously:

For suppose that, by miracle, every man in Great Britain should have five pounds slipped into his pocket in one night; this would much more than double the whole money that is at present in the kingdom; yet there would not next day, nor for some time, be any more lenders, nor any variation in the interest.

If O’Brien’s dreams were to come true and money was simply printed nonstop in a way where the new funds were instantaneously within the whole of the population’s possession (an impossibility due to scarcity and physics), the end result would no net gain for anyone once prices adjust accordingly.  Anyone who makes the slightest effort to study economics should realize this; which speaks volumes on the amount of thinking O’Brien dedicates to the subject.

Those who believe that all of society’s ills can be cured through inflation confuse money with every other good available.  While the increased quantity of consumer or capital goods lowers the price of each available unit, thus enriching consumers as a whole, an increase in the supply of money only erodes the value of each unit.  There is no never any net benefit on the whole when it comes to inflation.

In the end, it’s quite fascinating that a respected magazine like The Atlantic would allow such drivel on its pages.  There are plenty of arguments for inflation out there (it lowers real wages and helps the labor market clear, it benefits debtors at the expense of creditors, it aids in the process of deleveraging) but O”Brien makes none of these points.  He simply says the world needs more money and leaves it at that.  How this passes for thoughtful commentary is beyond the scope of respect for this author.

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James E. Miller is editor-in-chief of Mises Canada and a regular contributor to the Mitrailleuse . Send him mail

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