exchange rate wars - continued part 2

Let me get more of my thoughts on this before I get overly influenced by the rightists or leftists views on the QE2. There was an interesting article in Barrons a few weeks back with the title 'Monetary Steroids' by Randall Forsyth. I quote a few sentences from the article. "The trade deficit is a symptom, not the cause of a complex of economic problems. To target a trade deficit is lunatic", Goldman writes on his Inner workings blog at www.atimes.com. "Roberty Mundell shoed in his Nobel Prize-winning work that trade deficits arise from an excess or deficiency of savings in a national economy; if the chinese want to save 50% of GDP, they can only do so by exporting goods, because there aren't sufficient outlets for savings inside China". For the US to increase its savings rate and stop importing goods from Japan and China would mean the US economy would have collapsed, adds Goldman.

I have made this point before in my other blogs - every country in the world can't be net exporters unless we start trading with some outer space aliens. and add to that a corollary, every country can't have a positive savings rate. The desirable equilibrium is to have minor trade deficits/surpluses and average savings rate close to zero. If the chinese or indians have a 40 ro 50% savings rate, it is unsustainable. They can only sustain it by being big net exporters, causing trade frictions and currency exchange rate wars. The govts of the big savings countries need to get their citizens to spend money internally on goods and services. That can be done by providing safety nets like social security, unemployment benefits, universal health care coverage, disability protection etc so that every citizen doesn't see the need to save a big cushion of cash for some unforseen calamity in their life. By saving a big percentage of their income, they are not driving demand for internally produced products and services and so those products & services have to be exported to keep people employed. and these countries initially have a cost advantage to export these goods but then try to sustain the same export advantage using currency manipulation. The country that is losing jobs because of this will retaliate - one tool of easy retaliation is to try to devalue their own currency, which is what the US is trying right now. This is not a solution to the problem but just a response to what the other party is doing. will talk about some solutions in my next blog.