The problem with words

Ah, those pesky words. They do not mean what we think they do. And sometimes we say one thing, but people think we mean another. 

And so it is that David Glasner, in a beautifully crafted takedown of my previous post, has managed to miss my point entirely.

I did, in fact, read carefully all of David's quotation from Ralph Hawtrey, though I did not quote all of it. Hawtrey's point is that what appeared to be destructive competitive devaluation as countries left the gold standard was in fact beneficial loosening of domestic monetary policy. His fishing fleet did indeed all come safely into harbour, eventually.

This was also my point, and the reason why I highlighted Hawtrey's gold standard thinking. Hawtrey understood that in a gold standard system, loosening domestic monetary policy must involve deliberate devaluation versus gold. Indeed in any fixed currency peg system, monetary loosening requires explicit devaluation versus the commodity or foreign currency to which the currency is pegged. As David notes, the problem is distinguishing between devaluation to raise domestic AD (which as a side effect also improves the balance of trade), and devaluation specifically to seize export advantage. It is surprisingly difficult to draw this distinction in practice: the reality is that those earlier into harbour do fare better than the late arrivals, which gives the impression of beggar-my-neighbour policy even if that is not what is intended.

But in a floating rate system, devaluation is a consequence of monetary loosening, not a cause of it. So deliberate devaluation in a floating-rate system would be beggar-my-neighbour policy, even if the stated purpose was domestic AD support. Central banks use weasel words.

However, under either system, there is no sense in which "competitive" can ever be an accurate description of devaluation arising from domestically-focused monetary policy. So Hawtrey was not in fact advocating competitive devaluation at all. His point was that the apparent "competition" was illusory.

My critique of David therefore rested on his apparent advocacy of competitive devaluation, in contradiction of Hawtrey's argument. But David says that was illusory too. Words, again.

The problem with words was brought forcibly home to me in Giles Wilkes' reaction to my post. My final paragraph includes the following sentence:
Of course, if the world were to reintroduce some kind of common currency standard such as gold, we might be able to return to exchange rate targeting as a policy response. 
Giles thought this meant that I was advocating returning to the gold standard. Dear me, no. That is the last thing I would suggest. But reading it back, I can see how my words could be interpreted in that way. What I meant, of course, was this (which you will find in the comments):
I see absolutely no benefit in returning to a gold standard, or to any managed exchange rate system. Some countries do better with a pegged or managed exchange rate, but that is a local decision. But many do better with a free float: for example, the Russian central bank has given a textbook demonstration of the benefits of abandoning a fixed peg for a free float, which others should learn from. I think there might be some value in having an international medium of account (similar to Keynes's bancor), but it should be a floating rate system.
Is it clear now? The sentence Giles took exception to is sarcastic (hence the reference to Mars in the next sentence). As is this phrase that David quotes:
If the US eased monetary policy in order to devalue the dollar support nominal GDP, the relative prices of imports and exports would rebalance - to the detriment of those countries attempting to export to the US.
This is a reference to deliberate devaluation in a supposedly floating-rate system, described as domestic AD support but in fact aimed at creating a trade surplus. Hence the strikethrough. I do not think the US has done this, actually. But I am fairly sure the ECB has.

But beggar-my-neighbour competitive devaluation is not the only form of destructive exchange rate policy, nor even the worst. On Twitter, Iron Economist pointed out that deliberately propping up a currency is every bit as common as deliberately devaluing it. Here, for example, is Winston Churchill, in 1925, justifying a catastrophic decision to return to the gold standard at the pre-WW1 parity on grounds of imperial supremacy:
Thus over the wide area of the British Empire and over a very wide and important area of the world there has been established at once one uniform standard of value to which all international transactions are related and can be referred. That standard may, of course, vary in itself from time to time, but the position of all the countries related to it will vary together, like ships in a harbour whose gangways are joined and who rise and fall together with the tide. I believe that the establishment of this great area of common arrangement will facilitate the revival of international trade and of inter-Imperial trade. Such a revival and such a foundation is important to all countries and to no country is it more important than to this Island, whose population is larger than its agriculture or its industry can sustain, which is the centre of a wide Empire, and which, in spite of all its burdens, has still retained, if not the primacy, at any rate the central position, in the financial systems of the world. 
(quoted in Tony Norfield's book "The City")

Interestingly, Churchill's description of the ships in the harbour all rising together with the tide is the same analogy as Hawtrey used. Yet he was arguing for a strong currency policy, whereas Hawtrey was arguing for devaluation. Metaphors are profligate.

Churchill's decision was roundly criticised by John Maynard Keynes in a pamphlet entitled "The economic consequences of Mr. Churchill", in which Keynes rightly ignored Churchill's imperialist agenda and focused on the domestic effects of a seriously overvalued pound sterling. But this is not the only example of disastrously strong sterling policy. As I showed in this post, the UK is a serial offender, though it has (fortunately) allowed the pound to float freely since its departure from the ERM in 1992. Not that it is alone. Many countries have played the strong currency game, usually with unfortunate consequences. The latest player is China, which has backed away from floating the onshore yuan and is currently holding it at too high a level. I fear this will not end well.

It was, of course, destructive STRONG currency policy of this kind that Hawtrey was really criticising. Many Western countries clung to the gold standard in the teeth of the Depression, to the detriment of their domestic economies and the welfare of their citizens. As countries were, one by one, forced to abandon the gold standard, their currencies devalued, making matters even worse for those still desperately holding on. Consequently, those that left the gold standard early, such as the UK, fared far better than those that remained on it for longer, such as the USA. This has been brilliantly documented by Barry Eichengreen in his book "Golden Fetters".

Anyway, my sincere apologies to David for misunderstanding his point. But perhaps he will acknowledge that he has also misunderstood mine. Deliberate devaluation for competitive purposes is destructive. And words are slippery things.

UPDATE. Andrew Lainton looks at the accounting-identity violation inherent in competitive devaluation. It is not possible for all countries to run a trade surplus: if all try to, then the result is a significant contraction in global trade. And even with trade contraction, someone, somewhere has to run a substantial trade deficit if most of the world is competing for export advantage. That is what I meant when, in my previous post, I said the world is once again trying to cast the USA in the role of consumer-of-last-resort. We do not yet trade with Mars.



  1. Oh god, this just makes me absolutely shrill.

    A free lunch in the sense that David Glasner is trying to define does not actually exist.


    David Glasner is confusing the monetary standard of the gold standard (in particular the systematic behavior of said gold standard as actually existed) with gold as a unit currency. What happened such as what Hawtry was talking about, is about the system, and not an atomized gold coin in the hands of buyers, sellers, and banks. In effect, the "free lunch" is about a transfer of power, either within a country (say workers strong, import-export business strong, heavy industry strong, whatever, vs some other aspect of society weak), or as a matter of geopolitics. US strong, France opportunistic, Britain weak, or whatever. A competitive devaluation is usually an indication of a political order's ability to sustain itself (by transferring assets to the processes that makes it go) has faltered or fallen apart. Even though that's not economic, it dang sure has economic implications.

    1. Yeah, cosign with Andrew Lainton.

      David Glasner was always right--so far as it went. If you devalue with an eye towards competitiveness, and the climate is of monetary expansion, then yes--free lunch. The issue with Glasner's position was always in the narrowness of what he believes was worth talking about. In reality, there is massive political pressure from institutional actors in power to prevent such a policy, and a devaluation + monetary expansion only really happens in extreme crisis (oh, and hegemon too busy with own problems to retaliate). You know, 'cause guys brave as Korekiyo Takahashi usually have Very Bad Things happen to them. Thus, to describe a policy like that as generating a "free lunch" is being very provincially obtuse.

    2. I must add a link to Andrew's post.

  2. Your ability to buy stuff on the world market is not just determined by its strength.
    Of course it is multiplied by the quantity of money produced .
    Thus both Sterling UK and euro France can strip the periphery of resources , using the colony of Germany as their manufacturing zone.
    Not that it does the residents of these core countries any good.
    Typically the peripheral population flood into the core and reduce energy con summed per capita simply because that is where the money is (not local resources)c


    A crisis moment in 2009 ~ but it has resumed its increase
    In contrast Spanish M3 is more or less static

    This strikes me as typical pointless and fruitless (for most) capitalistic centralization.
    The amount of energy lost in "free trade" (see forced trade) is gigantic.

  4. Things become more obvious when looking at consumer credit.

    French consumer credit just keeps growing .
    While Spanish consumer credit just keeps declining .

    Irish numbers are of course more dramatic but to observe the mayhem between the Breche de Roland makes the dynamic very very clear.


    Spanish consumer credit is a order of magnitude or more above French debt but certainly what radicalised my opinions back in the day was the degree of money distortions to preserve private debt agreements.
    Instead of engaging in property distribution with the transfer of deposits out of banks and into post banks they have decided to destroy civilization .

    This is mind blowing .

    1. Not really. The French numbers are stated in millions of euros and the Spanish numbers in thousands of euros.

      The French numbers continue to rise, while the Spanish numbers peaked in 2008 and are now in decline.

      So what else would you expect? Spain went through a very nasty Minsky Moment and is still busy deleveraging. France escaped the worst of the housing bubble and so has much less deleveraging to do.

    2. @Jon
      I work on the Jesus rather then Minsky principle.
      If something is in surplus you give it away.
      Double entry money is a fraud .

      Simply observe Wray or Ives getting their knickers in a twist about free lunches.
      Money is always there to subtract at a moments notice from their centralized throne.
      Its a power kick .

      PS fair kop - I spotted that now.
      I guess I have still this notion of the French peasant who engages in any and all types of frugality to avoid private debt.
      We are all Americans now.
      Coke is now cheaper then table wine etc etc.

    3. Spanish cost of living (n rental payments) could be considerably reduced if empty housing units were simply transferred to young people.
      People could then survive or indeed prosper on reduced cashflow.
      No need to put population pressure on France or England.

      The credit banks books are simply a fraud , they do not reflect the physical reality .

      To base your policy in the real world on upsidedown money books is bloody crazy.

    4. These absurd but true observations of the current capitalistic system proves without a shadow of a doubt that we are not living in a feudal system , its something far worse.

      The feudal overlord (in the absence of usury ) generally made rational resource decisions as he had no freely transferable shares and the like.
      He had skin in the actual long term physical management of the land.
      He did not move peasants from one side of the estate to another so as to add to GDP via construction of more excess homes.
      Sadly this absurdity is the Europe of today.
      This cannot be denied.
      It is observable reality .

  6. Try to get your heads around this.
    The French population continues to explode while the Spanish population continues to contract.
    All to preserve the holiness of private debt contracts.

    They continue to build houses in France while houses remain empty in Spain.
    How can you build or maintain a civilization under such absurd foundations ????


  8. The Spanish 2015 "recovery " of GDP.
    Similar in some respects to the GDP recovery of 1918 & 1939.

    GDP measuring should be scrapped.
    Or at least it should be seen as a sign of societal failure rather then success , a simple measure of waste production.

    Deaths exceeded births by more than 19,000 in the first half of 2015, a turnaround from a year earlier when there were nearly 4,000 more births than deaths, the National Statistics Institute (INE) said.

    Spain has not consistently experienced more deaths than births since its 1936-39 civil war or the 1918 Spanish flu pandemic, according to news reports. Deaths briefly exceeded births in early 1999, but demographers considered that a blip while now they see it as the start of a longer trend.

    The INE predicted last year that a trend of more deaths than births would begin in 2015 and the gap would widen until 2062. It said the country's population, now numbering more than 46 million, would probably fall by more than a million in the next 15 years and by 5.6 million in the next 50 years.

    Spain's population has been shrinking since 2012 due to net migration as recession and high unemployment encouraged people to seek better prospects abroad. Demographers say the crossover of the birth and death rates could accelerate the decline.

  9. Spanish euro corporatists celebrate tourists eating their economic surplus.....(their free lunch)

  10. Iberian electricity consumption growth highest in Europe (Jan - Nov)
    Portugal 6.2 %
    Spain. 5.9 %

    UK: -2.8%

    The cause of this is not really rocket science.....
    The Spanish are certainly not consuming the stuff.

    1. Dork, NO MORE please. Get your own blog and stop grandstanding on mine.

  11. Dork, "NO MORE" means what it says. I have deleted your last comment and will delete any more comments from you on this post.

  12. This comment has been removed by the author.


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