The fallacy of monetary devaluation and external competitiveness

One of the greatest fallacies in the current world – and there are many – is that of believing that devaluing your currency leads to an improvement in exports, and therefore in the national economic conditions.

Although, I am not going to say anything new, you do not need to be very intelligent to notice that that theory is wrong, which we can clearly see when we analyze real and World data, although almost nobody knows about it.

Monetary devaluation work?

As it is logical, a monetary devaluation should favor the export complex because national products would be cheaper in the international markets.

Alternatively, however, logic tells us that the importing complex should worsen its competitiveness since its purchases will be more expensive.

Currency devaluation and capital consumption

Regarding Keynesian ideas of capital destruction, that should lead to a decrease in imports, and an increase in exports. Everything seems quite logical actually.

But, the reality is quite different.

The devaluation processes are, in fact, neutral from a current account perspective. What is more, devaluations often signal a worsening current account for the nations adopting them. That is because devaluations are not really a cause, but a consequence.

A consequence of a more fundamental basis, in which, capital consumption is the main culprit.

The increase in the welfare state and a myriad of interventionist policies are the main cause.

That means that when we see a country devaluing its currency very strongly, the most probable consequence will be a massive capital flight and a complete destruction of the country competitiveness.

Monetary devaluation policy

In a scenario like that, the government embraces the interventionist path. As a consequence, the devaluation is a mask of the real confiscatory policies of the country.

On the contrary, a strong currency, is a symptom of a stable society and economy, with more or less, clear rules and respect for private property.

Therefore, the World capital flows to those countries and buy their currencies, making them to increase in value. That, contrary to destroying exports, makes them stronger in a dramatic way.

That massive entrance of capital, which “makes” exports costly, produces a massive amount of capital in the receiving country. Capital that will eventually be deployed in productive activity.

Therefore, countries with strong currencies have better conditions for a strong capital base and the construction of a strong export industry.

Monetary effect of devaluation

Countries that devaluate their currencies significantly have the opposite effect.

National capital flies away as soon as it recognizes that it is being plundered, and the formation of new capital is impaired. What is more, if new capital is formed in a constant devaluating economy, it will go out immediately. For that reason, societies like Venezuela and Zimbabwe have very weak export industries despite their massive devaluations.

The real crux of the matter is the fact that those countries that devalue the most are those that are adopting harsher confiscatory and interventionist policies.

It may be true that China has invested some capital in Venezuela lately, but not a single genuine company in the World will invest a single penny in the Venezuela economy, no matter how much Venezuela makes its competitiveness better.

The problem of devaluing policies is that they are the signal of a society without companies.

We can learn about this by studying World history, where we could see that the most successful exporting economies in the last 50 years were those with the strongest currencies.

German currency devaluation?

Do you know many stronger currencies than the yen or the old German mark?

If we study the data of the yen for the last fifty years we will realize that it has appreciated dramatically against almost any other currency. Despite this increase in value, Germany was improving its external competitiveness constantly.

We can also see the examples of countries like Venezuela, Zimbabwe, Argentina, Cuba, North Korea, and conclude that the more the country devaluates its currency, the worse its external competitiveness will be.

Do you know any Zimbabwean product?

Do you know any Japanesse  procut?

Monetary devaluation should be synonym of massive capital consumption (strong and growing confiscations), and not with a better competitiveness.

The fact is that, when some countries take their currencies to zero in the next years and decades that will not be a sign of a better export industry, but a sign of a growing misery. a misery, consequence of the embracement of the collectivistic dream:

 

Thanks for reading and sharing.