The Saint Florians Policy

As “A Note on the Currency Wars” Paul Krugman states in his Blog (NYT) that the competitive currency devaluation practically doesn’t have any effect on the national economy, as soon as everyone behaves the same. He says, that a “wave of mutual currency purchases would be harmless but also pointless. “

Raghuram Rajan (ftd, 26/10/2010) is of a similar opinion but out of a different reasoning: He states, that if every economy is devaluating their currency to enhance their exports, then automatically everyone is trying to avoid investments from different countries. But where do those investments go? At some point emerging countries like Brazil can’t stop these capital investments anymore, which already lead to a rise in Brazils’ currency, the Real, by 35% compared to the dollar from beginning of 2009 (ftd, 24/10/2010). Instead of trying to enhance short term economic growth like this, Raghuram Rajan suggests that countries should extend their focus beyond short term and make their economies more efficient and balanced in the long term. Keeping on with this “Currency War” will only burn out the world financially.

Personally, I am not quite sure which side to believe: I don’t think that the overall currency devaluation which is happening in the world right now is harmless. On the other hand, from the Great Depression in the 1930s the world has learned that the “non-spending” policy of the Federal Reserve in the USA aggravated the consequences of the Financial Crisis.

I will be happy to hear your ideas.

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6 Responses to The Saint Florians Policy

  1. bravenewloock says:

    Quite a surprising view by Krugman! One of the major concerns voiced by many (check out http://shockedinvestor.blogspot.com/2010/09/brazil-trade-wars-and-currency-wars-and.html; http://www.businessweek.com/news/2010-10-19/south-africa-s-gordhan-warns-of-global-trade-war-.html; http://www.spiegel.de/international/world/0,1518,721044,00.html for example) that the current “currency war” will spark a “trade war”, which in my opinion is not unrealistic in view of the recent China-US rethorics!

  2. vivipre says:

    It is very interesting to read despite all discussions and fears about the threat of a “currency war” some opposing opinions by some well thought economists. However, I think the issue of exchange rate manipulations under the current economic conditions cannot be neglected. As stated in the ‘economic times’ EU leaders also pushed the G20 to pass a resolution on that topic in their summit this November (http://economictimes.indiatimes.com/news/international-business/EU-urges-G20-to-act-to-avoid-currency-war/articleshow/6835063.cms).
    Let’s see what the outcome and actual impact of that is going to be.

  3. rudi2020 says:

    Here’s what Wiki says about Saint Florian: “depicted as a Roman officer or soldier; pitcher of water; pouring water over fire; invoked against fire, floods and drowning”

    In case the recession is our fire I guess that currency manipulation is not our water..

  4. stuerzele says:

    Thanks for the definition on that rudi2020.
    Sure, you are right that currency manipulation will not put out the fire if you look at it globally. But, the countries see that as a (maybe short term) solution to put out the fire in their own country. Thats exactly what Raghuram Rajan wanted to express in his article: We use currency manipulation to put out the fire in our own country, but the world is being set on fire.

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