Gold News

The Folly of Competitive Devaluation

Trying to boost growth by debasing the currency is a seductive but false promise...

AND SO, the Euro Crisis Train is arriving back into the station after a short trip away from the front pages. We suspect there will shortly be another round of politicians and pundits calling on the likes of Greece to get out and devalue their currencies, writes Damien Phillips for the Cobden Centre.

Given these incoming siren voices, it seems time to head them off by revisiting Gordon Kerr's article for Bloomberg, which takes a look at the supposedly seductive promise of debasing a nation's medium of exchange to secure economic growth.

Much like Henry Hazlitt before him, Gordon takes a look at what boils down to a "deliberate policy of inflation," not just as it affects one group but all groups in society and what happens in the long term. 

Governments like devaluation because it allows them to "reduce the real cost of national debts without the need to declare default or ask for a bailout." But for savers and creditors, they find their wealth progressively destroyed and the value of their assets cut. The average citizen finds that they are now forced to pay higher prices for goods and services, particularly if they are imported, and as their wage buys less and less they can no longer plan with any certainty for their future.

In the short run, debasement gives a temporary boost to export industries, but this is counterbalanced in the longer term by rising costs for importers and consumers through potentially dramatic price inflation. Britain's governing Coalition's policy of export-led recovery via currency destruction is clearly foolish, as history shows – "No nation has achieved lasting prosperity by undermining its currency." Again, successive policy makers seem to be forgetting Hazlitt's 'One Lesson'.

Unfortunately, politicians like to "promise jam and sweeties today" at the expense of a healthy economy in the future, and so refuse to level with the public about the measures necessary to return to a sound footing, instead pursuing recklessly high spending and borrowing plans in the short term, made possible by printing more and more money.

Everyone feels a bit better right now, but no problems are fixed and ultimately this currency suicide leads to economic ruin, as it has done for thousands of years and the pain of recovery will be that much greater. As Gordon sums it up, devaluation can "mask the symptoms of the crisis, but it can't cure them. Such policies are like plastering over a structural crack in a load-bearing wall: They end in a pile of rubble."

Time to Buy Gold?...

Built on anti-Corn Law radical Richard Cobden's vision that "Peace will come to earth when the people have more to do with each other and governments less," the Cobden Centre promotes sound scholarship on honest money and free trade. Chaired by Toby Baxendale, founder of the Hayek Visiting Teaching Fellowship Program at the London School of Economics, the Cobden Centre brings together economists, businesspeople and finance professionals to better help these ideas influence policy.

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