Note: The title should be premised with in the current extreme environment – I am not supporting the idea that we can have permanent income gains beyond potential from printing money, that would simply be inflationary.
I have no idea where these guys are coming from. A currency war causes everyone to lose? Why is that Mr. Reich? Because it leads to high inflation? And what causes the high inflation? Rising AD? And what is the point of the fiscal stimulus you favor? Higher AD?
Seriously, when people talk about “currency wars” do they recognise what the mechanism is that is used to lower the value of currency – well it is printing dollars. If we truly do have “insufficient aggregate demand” this is what we want monetary authorities to be doing. Far from being a “war” it is really co-operation …
Note: The “imbalance view” stems from the relative exchange rates changing and prices being sticky – so that countries can sneakingly change their real exchange rate to favour exports or some such. This structural issue is interesting – but criticising what seems to be a bunch of central banks loosening policy on these grounds misses the point.
Furthermore, lets not forget the impossible trinity here (*,*,*) – if we try to control the exchange rate we either lose control of the inflation rate, or we have to arbitrarily restrict capital flows (which is also costly – as by restricting capital flows the cost of capital will rise). If we want to forget about the crisis and argue for a medium term strategic (arbitrary) fixed exchange rate target this is a separate issue to any near term “currency wars”.
Update: Paul Krugman paints out the structural issue here. Now note that the US and Europe could devalue, and they force China to devalue – so they all print more money and stimulate aggregate demand. Ergo, we have a recovery.
The issue here is that the recovery is “unbalanced” because of the artificial shift in the relative prices faced by exporters/importers. This issue existed before the economic crisis – and this is a trade issue. However, the threats regarding this are as high as they have always been – I can’t remember a time that the US wasn’t trying to get China to shift its currency.
I would also note that if China is willing to lend its export income for a tiny (maybe even negative) rate of return to the countries buying its exports then it isn’t clear that they aren’t just f’ing themselves over to be honest …