Why boost in exports due to currency depreciation cannot grow the economy
When a central bank announces a loosening in its monetary stance, this leads to a quick response by the participants in the foreign exchange market through selling the domestic currency in favor of other currencies, thereby leading to domestic currency depreciation. In response to this, various producers now find it more attractive to boost their exports. In order to fund the increase in production, producers approach commercial banks, which on account of a rise in central bank monetary pumping are happy to expand their credit at lower interest rates.
By means of new credit producers can now secure resources required to expand their production of goods in order to accommodate growing overseas demand. In other words, by means of newly created credit producers divert real resources from other activities. As long as domestic prices remain intact, exporters will record an increase in profits.
However, the so-called improved competitiveness on account of currency depreciation means that the citizens of a country are now getting less real imports for a given amount of real exports. In short, while the country is getting rich in terms of foreign currency, it is getting poor in terms of real wealth, i.e., in terms of the goods and services required for maintaining peoples' life and well-beings. As time goes by however, the effects of loose monetary policy filters through a broad spectrum of prices of goods and services and ultimately undermine exporters profits. In short, a rise in prices puts to an end the illusory attempt to create economic prosperity out of thin air. According to Ludwig von Mises,
The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation's welfare. In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.
Contrast the policy of currency depreciation with a conservative policy where money is not expanding. Under these conditions, when the pool of real wealth is expanding, the purchasing power of money will follow suit. This, all other things being equal, will lead to currency appreciation. With the expansion in the production of goods and services and falling prices and thus production costs, local producers can improve their competitiveness and profitability in overseas markets while the currency is actually appreciating. Within the framework of loose monetary policy exporters' temporary gains are at the expense of other activities in the economy, within the framework of a tight monetary stance gains are not at any one's expense but just the manifestation of real wealth generation.
excerpted from: http://www.mises.org/story/1345
I have long flagged this as a stupid, cut-off-your-nose to spite-your-face kind of approach to solve a real problem of rapidly ratcheting up levels of dependency on enemy states that have not been properly so identified.
Bilateral adjustments are best. Their government intervenes to totally unhinge the playing field for their benefit. Our government needs to counter it.
A general depreciation of the U.S. dollar...the blunderbuss approach... is simply catastrophic for the net savings and investments of the U.S.
This is what our enemies want to happen. They want to weaken us. But this depreciation is something that will happen unavoidably unless something is done...U.S. interest payments owed and outflowing to foreign nations has already passed what the U.S. is receiving. And every time the debt is increased, and the foreign nations increase their position in the debt instruments of the country, national state and corporate...we are looking at a future liquidity crisis. Bananna Republic stuff that has long been well understood...but strangely not by the faux traders.
And your analysis implies that there are those actively seeking to accomplish it here. Enemies within and without. Savage was right!