This is not a blame-fire write-up on China or any specific Country's FX devaluation policy because every country has done this at one point or the other in its history. Why blame China for a 3.5% CNY depreciation , for example, if Japan and the EU have both devalued their currencies by a flat 30-40% in the past couple of years.
So this is not about naming and shaming FX de-valuers. This is about the nature of these beggar thy neighbour policies which are essentially Zero sum games. Over the last 5 years which country has truly benefited by playing the devaluation game? Name one country. I can't think of a single one. Because when the US is done in weakening the US$, the EU starts devaluing the EUR, and when both these guys are done, Japan says 'me too' and starts the same game- only to be followed famously by China now. So there's no great shakes in getting to devalue that filthy lucre that you print Mr. Central Banker so-and-so. What you can do, the next guy can overdo it, and destroy whatever little temporary benefit on the current account that you had derived previously.
So we come to the central theme of this Global Devaluation Game- There's Nash equilibria out there- One of which is quite a no brainer - it happened way back in the 1930s and then exploded in 1939 in the form of a World War. Its all in the history books- well, Wiki is actually more accessible than those old books anyway!!
So why is everyone playing this game? Do they not know what is going on? Off course these guys are pretty smart. & Who told you that the great depression and the World War II was a very horrible time? Did you ask all those pumped up Bankers and Armament /Weapon producers who never sent their sons to fight in the War and die in those stupid bombings? The idea is to have a deflationary world- have unemployment - lots of it-so that young people are frustrated enough to believe and do anything preposterous - like frenziedly participating and dieing in another World War. That's the idea- Only a War, in this perverted scheme, can be suitably ignited to maximise the Keynesian pump priming that induces Sovereigns borrowing obscene sums of money to finance Wars run by Armaments /Weaponry Industry producing costly and immediately saleable weapons to kill those very young agitating to do something, anything. Problem solved. Big profits for the big guys and coffin caskets for everyone else. What a great time for these brainy chaps, no? Yes they are indeed very clever. Ask them why they have not used the record low sovereign bond yields in the G7 to borrow and invest in Infrastructure? They will speak some Hayekian non-sense like "Public borrowing crowds out private sector borrowing". Ask them where is the private sector borrowing now that Governments has actually desisted from investment? There's only share buybacks and cash surpluses maintained by private sector? Then they say, "Where is the climate for Investment? Governments need to create that climate first...", when it was these Hayekians who themselves stopped the Governments from actually doing so. You can easily understand why they say such dumb things. They are playing according to a script. They have the media, the smooth talking economists, everyone on their rolls. They are gunning for something big. Your money, your job, your son- & they will send across his body/news about his liquidation- one fine day, when they are done. Ask them why they will not allow Governments to borrow at close to zero costs and invest in supporting the economy through Infrastructure investments while they are ready to bankroll States/Nations in costly and meaningless Wars? Answer is profit margin. The margins are very poor when you do things the right way. But if you do it in the name of Lucifer, Well !! Well !! Stupendous margins in lending money at highest rates to war torn nations , not to mention the easy money that arms suppliers make on the rebound. Just add those coffins to the cost that simple folks will suffer BUT these smart guys will NOT INCUR.
This Nash equilibrium is being forced upon the world to benefit a very small circle of guys who will happily enjoy as millions and billions perish in another World War.
So you get the drift- Ukraine, Afghanistan, Iran, Middle East, Africa- ISIS, Boko Haram etc. etc.
There's one Nash equilibrium which can be a regulated equilibrium where an optimal or a sub-optimal Nash equilibrium can be enforced if the G20 were to come together on issues like FX devaluation and trade. Since it is very clear that the Nash equilibrium discussed earlier is not in the interest of either Global peace or the World community, classical Game theory says that regulated behaviour amongst participants of the game can avoid a bad Nash equilibrium and move to another Nash equilibrium which is either optimal or close to optimal- but definitely atleast better than that bad Nash equilibrium.
There has to be a global leadership away from the present one which takes on the onerous task of regulating the G20 away from the bad Nash Eq. This leadership is non-existent at present but the need is to get together and take the teetering world away from this bad Nash eq. Any effort is better than no effort- anything.
Will leave you with three centrepiece blog extracts over the past 5 months- its worth a read to understand and read between the lines and join the obvious dots.
I. 20th May 2015
http://ageofdeflation.blogspot.in/2015/05/infrastructure-creation-fiscal-deficit.html
"...There is an urgent need to re- engineer strategy now that advanced economies have simultaneously launched an FX war on developing countries using zero lower bound interest rates and unconventional monetary policy. Developing economies cannot afford to join this zero sum game because their per capita incomes are very low compared to the developed economies. Ideally , all Governments in developed economies should use their prevalent low interest rates to borrow and supplement collapse in private demand by spending on infrastructure-both greenfield and maintenance of depreciating works. But these geniuses refuse to even consider such a policy relook and instead continue to debase their currencies in the hope of exporting their way out of deflation. The Nash equilibrium is very simple-Developing economies ape the same strategem and world spirals down a never ending FX war.
But there's a way out -There's another solution with superior payoffs as compared to the suboptimal Nash equilibrium above. Suppose developing countries that have the fiscal and inflationary room to increase government involvement in infrastructure spending, do so, then the resultant demand generation there can reinvigorate demand slowly elsewhere(especially in the developed world). This can serve a very useful purpose-Developed nations trying to export there way out of deflation will eventually export the deflation to developing countries if the latter fall into the Nash trap. Hence it is now in the interest of developing countries to search for demand generation internally. China best fits the bill with very healthy government finances and an Imminent deflation it wants to desperately avoid."
II. 10th June 15
http://ageofdeflation.blogspot.in/2015/06/the-real-malinvestment.html
"I can hear you say - But there's deflation already on in major economies, and higher investments at this stage will create more of the excess capacity and recreate stronger deflationary headwinds. Not if real unemployment is already in double digits and if the investment is likely to draw the pool of the unemployed or underemployed folks back to a decent job- which it will. These extra jobs/work that the investment creates will fuel demand immediately while the capacity creation comes only with a time lag - think 'Golden Gate bridge'. Since capacity creation comes only with a time lag post demand creation , as described above- the two are mutually reinforcing and there is no deflationary impact as is being feared by the Austrian school. ....
....but the underinvestment in most of the Western world is even worse and Chinese over-investment is a kid in size relative to the chimpanzee of the underinvestment pogrom that the 'Austrian' guys are doing to the great detriment of their respective economies. "
http://ageofdeflation.blogspot.in/2015/03/what-negative-sovereign-yields-signal.html
"...it is vey clear that in a deflationary environment private sector spending collapses and with negative yields supporting sovereign borrowing with beneficial fiscal spinoffs , the need of the hour is to sharply expand public investment in infrastructure,research and education. The answer is obvious-in the face of collapsing private sector demand only public sector demand can galvanize a deflating economy back to a modicum of health."
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