Specifically, devaluing your currency has two consequences:
Now, granted, this problem goes away if you impose profit controls (recall Adam Smith's not-so-famous dictum that profit is more harmful to competitiveness than wages because wages grow only linearly with value added while working capital grows exponentially with value added). But if you have sufficient political clout to impose profit controls, then you also have sufficient political clout to devalue on your own timetable.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
If less competitive domestically against producers that are not reliant on inputs to the same extent ... that's assuming the existence of competing identically those other producers, and may be turbulence but not a long term problem.
If less competitive against overseas producers ... they are dealing in the overseas currency in which the imports are priced and the cost of the imports in terms of that overseas currency has not change. And assuming any domestic content at all, the cost inflation in exporter currency terms is cost deflation in importer currency terms.
There certainly will be J-curve effects.
If the fix-price component of imports are primarily contracted in foreign currency and the fix-price component of exports are primarily contracted in domestic currency, that gives a J-curve effect which requires stability at the new exchange rate to settle out.
And of course, if the volume of flex-price imports is greater than the volume of flex-price exports, there is a J-curve effect as flex-price products shift on a foreign-exchange-rate driven timetable while fix-price products shift on a price-setting (menu or contract) timetable.
I do not know how much of fix-price product imports is denominated in US$ - likely a large share, but I don't know how dominant - but clearly there is an appreciable flex-price component in the US import bill in imports of about 200b US gallons of petroleum products, so certainly the second source of J-curve effects will be important.
If US policymakers had given up on the US policy setting process as a means of pursuing a desirable change in the exchange rate regime, that larger J-curve costs in having the shift take place by pressing another country to push the change through would be one of the costs of having a thoroughly corrupted political system incapable of pursuing high priority national needs. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
But in the long term, we're all dead.
Specifically, if all your industry relies heavily on imports, and you have a current accounts deficit, devaluing means that you'll temporarily increase your current accounts deficit during the transition. If the reason you devalue is that the guy who used to bankroll your current accounts deficit decided to stop doing that... it's not hard to see how that could get a lot worse before it got better.
And God help y'all if you go to the international institutions that were supposedly put in place to help bridge such a transition. While there would be a certain delicious irony to hoisting the US on their own IMF petard, it would be badly blemished by the resulting economic catastrophe.
Going to the international institutions, it turns out that it makes a big difference how many votes you have AT the institution.
devaluing means that you'll temporarily increase your current accounts deficit during the transition
Automatically, in the neoclassical model. Whether or not it works that way in the real world depends on in which currency the purchase contracts for the imports are denominated. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
How many other economists share that insight? The brainless should not be in banking -- Willem Buiter
