Hey there everybody.
I have a really basic question regarding the Austrian theory and the competitive devaluations we see today.
Often you hear in the news/papers, with the swiss franc fix to the euro being a good recent example, that a country is hurting due to an 'overvalued' currency. Now having an overvalued currency particularly if a country is export based sounds reasonable in terms of why it would want to debase its currency to remain competitive. However I've heard Peter Schiff saying, and this makes very good sense that a highly valued or 'overvalued' currency, if you will, is in fact a good thing as the population's purchasing power is greatly increased. It also makes good common sense since increasing the purchasing power of a currency is much harder than simpyl debasing it to achieved a 'competitive' edge.
My question is therefore what is the right way of looking at the strength of a currency and its overall impact on that country and how does it relate to what we see today?
Does competitive devaluation make sense only within the context of a global fiat currency systems?
Does the export industry have to take losses due to making poor entreupraneurial decisions and malinvesting capital (that is for not foresseing the currenies' strengthening?). I mean do you evaluate it as having negative effect in the short term, on a particular group (export industry), or do you look at the country as a whole?
I apologize if there are many inconsistancies in my question/understanding. I am at the beginning of my Austrian journey and am simply trying to make sense of things.
Thank you so very much for taking the time!
Jason.
from Human Action:
http://mises.org/resources.aspx?Id=4506fc1c-f94e-47bc-a1f1-99be0865979a
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It's easy to refute an argument if you first misrepresent it. William Keizer
The "exporters are hurting from the strong currency" argument is idiotic. Assume a currency strenghtens (rises in value, i.e. is devalued less) against all others (like the Swiss Franc CHF was recently). If CHF's strength becomes "too" large, what's stopping the Swiss (firms, individuals -- exporters and importers alike) to simply BUY their (foreign) competitor's devalued assets at bargain CHF prices and profit by selling to the same foreigners without "exporting" or by importing cheaper goods to Switzerland themselves? Increased buying power (wealth) = good. Diminished buying power = bad.
Here is a list of resources on this topic.
It all goes back to taxation. Why do governments want their countries to be "exporter nations"? Because the government taxes all cash flows within the economy it controls and the more money flowing in (via exports) means the more money there is to be taxed. By subsidizing its exporters on the backs of other sectors of the economy it controls, a government attracts foreign revenues. These incoming cash flows apparently create a "bigger pie" to be taxed. But the costs of the taxation are not borne by the foreigners, either. They are, in fact, borne by the locals under the control of the export-subsidizing government. The foreigners purcahsing the subsidized exports are benefitting from artificially cheap goods (e.g. US buying Chinese goods). The exporters benefit from the subsidy profits. The government benefits from increased tax revenues. It is the locals who bear the costs of the wealth redistribution from themselves to the exporters, foreigners and government. The more goods that can be exported, the larger the cash inflow, the greater the subsidy of exporters and the more tax revenues that can be collected on the exporters' profits.
A related question is why do governments regulate their economies in such a way as to favor the formation of giant corporations? The answer is the same: taxation. It is much easier to require a small number of very large corporations to collect taxes from each paycheck of each employee than it is to attempt to directly tax hundreds of millions of individuals. Essentially, big business, cartelization and monopolization is a byproduct of the division-of-labor in taxation. By "outsourcing" the majority of the work of collecting taxes to the payroll departments of private corporations, the government reduces the costs and complexities which it must solve in-house.
Clayton -