Influential columnist perpetuates dangerous economic fallacy

Re: Southern Europe is on a precipice, by Ambrose Evans-Pritchard

snake oilThe London Telegraph’s influential economics columnist Ambrose Evans-Pritchard (AEP) perpetuates one of the greatest and most dangerous economic fallacies in the world today–that a country can improve its economic performance by debasing its currency.  No country can force another, against its will or against its complicity, to subsidizing its economy.  Yet that is exactly what AEP and almost all mainstream economists believe. Here are selected quotes from AEP’s latest muddle thinking:

“…China is exporting excess manufacturing capacity to   Europe, or, in plain talk, exporting unemployment.” “…the euro has long been too strong for its own good.”

AEP bemoans falling prices:

“It (the euro) is pushing Europe’s crisis states into Thirties-style   deflation, making it almost impossible for Italy, Spain and Portugal to dig   their way out of debt.”

In other words, AEP wants the deficit countries to be able to cheat their bondholders by paying off their bonds in depreciated money.

“They are one shock away from outright deflation.”

Oh, the horrors to the common man of falling prices, which allow him to enjoy a higher standard of living!

“François Heisbourg, French head of the International Institute   for Strategic Studies, is calling for the euro to be “put to sleep” in order   to save the European project.”

Put to sleep?  Must we destroy the euro in order to save it? Rather than export unemployment, cheapening one’s currency imports inflation.  Any increase in exports is fully paid by those already holding the currency.  For example, by holding its yuan cheap against other currencies, China’s non-exporting sectors subsidize its exporting sectors.  This is simply an internal transfer of wealth.  AEP and others see only the increase in the export side and ignore or have difficulty envisioning the cost to the rest of China’s economy. For a more detailed explanation of how cheapening one’s currency works to a country’s detriment, read my article titled Value in Devaluation?.  Patrick Barron

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