Thursday, January 24, 2013

Two post on developing currency wars.

Now Mr Weidmann would like to see austerity policies in all deficit countries as the preferred tool of adjustment. However, this adjustment has caused mass unemployment in the European deficit countries and falling GDP with no light at the end of the tunnel so far. This, I believe, is the background of the conflict in the ECB. Some, like Mr Weidmann, are calling for internal devaluation policies, while others, like Mr Constâncio, are more open to other ways of economic adjustment.
By the way: there is a clear distributional effect of this choice. Adjustment by austerity leaves capital owners in surplus countries unharmed (at least it seems so to people who do not understand theparadox of thrift) while it hurts workers in the deficit countries. Adjustment by exchange rate changes leaves nominal wages untouched, but some capital owners in the surplus country lose because their investments in the deficit country are now worth less in domestic currency. However, while there is proof that the second avenue works the first – austerity – is without theory. There is no theory of expansionary austerity – it is all wishful thinking.
The crux of it:
When the euro system was introduced, many feared that some people in the ECB would think along national lines only, favoring policies that benefit only their country. It seems that this situation has now arrived.
Austerity for all?
Dirk Ehnts | Berlin School for Economics and Law in Berlin

There is much hype about “currency wars” in the international media this week, reaching the heights of the Davos gathering. The excitement seems to have been started by Bundesbank president Jens Weidmann, who earlier this week aired his concerns about an apparent politicization of exchange rates owing to an erosion of central bank independence and rising political pressures for more aggressive monetary policies.
Multiplier Effect
Are Currency Warriors' Gloves Coming Off?
Jörg Bibow

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