One thing Japan did was massively devalue their currency which helped them tremendously during the Great Depression years – they ’stole’ a lot of European and British trade e.g. Toyota … that old textile company … ended up making and exporting a lot of garments!

I have a question – what is your view on the US undertaking a massive devaluation of the greenback (very soon e.g. 1Q09)?

(Forgive me if I come across and ignorant on what might be obvious to you – I’m mere trader not an economist – but here is a scenario on which I would dearly value your comments).

A greenback devaluation scenario:

- China devalues the yuan to help their exporters
- But the US doesn’t want a further deluge of cheaper foreign products right now (?) because they want to stimulate demand for consumption of domestic products – whether from China or anyone else including the Japanese e.g. buy GM not Toyota etc.
- Rather than directing protectionist action at China alone, they devalue the greenback very significantly e.g. 30 to 50%
- it then makes it more expensive for US consumers to buy other than USofA products -> resulting in stimulation of US manufacturing
- it also makes it a lot cheaper to visit and immigrate to the US
- throw in a requirement to invest or buy a residence and make it easier for people to qualify for immigration, and you start to create demand for that enormous inventory of US housing
- granted, commodities double, including the most important – energy/oil to USD 100 bbl (we’ve lived through USD 147!), but this is taken by the administration to be ‘pain that is good’, as it maintains the incentive to move to alternatives and is the medicine required to wean the US consumer off the ‘gas’!
- the devaluation upsets many – not the least of which is China, but with China planning to devalue the yuan, the Americians realise it may well be every man for himself (when it comes to China) in this time of crisis
- various other stimulus measures are undertaken at the same time, but a devaluation is something that can be done faster than any infrastructure project and therefore it comes as Obama’s first action in office

An over simplification? Totally missing something? Totally up the creek?! I probably am and would greatly appreciate your views.

I think the basic issue is that we have some fundamental disagreements as to the nature of the current crisis. I personally don’t think that the US has an overconsumption problem or that China has a overproduction problem.

The problem is that the US had a financial system that turned the productivity increases created by globalization into low interest rates rather than higher wages, and that created a financial system that was dangerously unstable.

If you want to boost savings, you boost wages.

Michael: By the way your “print money and stuff it into people’s bank accounts” solution doesn’t make sense. If it is so easy to boost domestic demand that why, why hasn’t China done it?

Because it’s not easy to print money and stuff it into people’s bank accounts. It takes a few months for any fiscal stimulus to take affect which means step one is to make sure that the financial system is stable enough so that you have a few months.

Twofish your language does you a disservice. Boom…I can’t think of anything solved by doing one thing. Anyway the problems are nearly always the unintended consequences of simple things. Its almost always better to tread lightly were ever possible.

Global overproduction/overcapacity mirror loss of investments (in the US) in producing things while relying on debt (to fuel consumption) as a way to substitute for reduced wages. The expansion of debt itself was a function of speculation, which comes as overproduction exceeds consumption, requiring surplus capital to be channeled into the financial speculative arena.

Hence, the credit/debt crisis is itself a product of overproduction/overcapacity.

“The years 1843-5 were years of industrial and commercial prosperity, a necessary sequel to the almost uninterrupted industrial depression of 1837-42. As is always the case, prosperity very rapidly encouraged speculation. Speculation regularly occurs in periods when overproduction is already in full swing. It provides overproduction with temporary market outlets, while for this very reason precipitating the outbreak of the crisis and increasing its force. The crisis itself first breaks out in the area of speculation; only later does it hit production. What appears to the superficial observer to be the cause of the crisis is not overproduction but excess speculation, but this is itself only a symptom of overproduction. The subsequent disruption of production does not appear as a consequence of its own previous exuberance but merely as a setback caused by the collapse of speculation. However, as we cannot at this moment give a complete history of the post-1845 crisis, we shall enumerate only the most significant of these symptoms of overproduction.”
Marx/Engels

http://www.marxists.org/archive/marx/works/1850/11/01.htm

Of course, neither do we face under consumption, since limits to growth are dictated in the end by ecological restraints: nature bats last.

Forfor and Cris, you are right about Germany before 1932-33, which is why I made the point about recovery after balanced trade (a Nazi program). And it is probably true that at least part of Germany’s recovery was caused by fiscal expansion – and not only for military purposes, remember the autobahn. But remember that the investment multiplier depends on the savings rate, and countries with trade deficits and who are very open to trade have a higher ‘savings” rate in the multiplier because of the savings rates of the current account surplus countries, which by definition is likely to be higher. Of course the point about Germany is not that the US is exactly like Germany and will soon suffer a Nazi takeover. It is simply that countries must adjust and will adjust within the balance of payments constraints.

Cris, the point about Japan is very interesting and I have to admit I don’t know as much about Japan in the 1930s as I should, but my superficial understanding is that Japanese trade was highly managed. Part of the reason for the “Co-Prosperity” scheme was for trade management purposes.

Germany was on the verge of bankruptcy in 1939. War was about the only “solution” to sustain the mirage of success. In fact the financial policy of the Third Reich has failed badly.

Even here in Germany many people think that Hitler was successful during peace time. He wasn’t. Financially it was smoke and mirrors. They invented a massive SIV by issuing MEFO bills to hide the debt from the official balance sheet.
http://en.wikipedia.org/wiki/Mefo_bills

Within six years the national debt level rose from 15% to 43% GDP. Remember that in these days money equalled gold. Since Germany consumed all the money they we running out of reserves.

But I absolutely agree with your conclusion: “This is a reminder that substancial financial and economic crisis have strong political implications.”

The other thing that you have to be sensitive to are differences between 1930 and 2008. Fortunately, most of the differences seem to be favorable to less pain.