On Currency Wars

Paul Cézanne, The Card Players (1890-92), Metropolitan Museum of Art, New York, NY

Paul Cézanne, The Card Players (1890-92), Metropolitan Museum of Art, New York, NY

It is usually argued that devaluating a currency increases the value of domestic companies’ foreign profits when they are repatriated. Yet it reduces the attractiveness of repatriating that same capital. Or any other capital for that matter. Higher interest rates are then demanded to make capital investments attractive. But if higher interest rates are paid, then capital might rush in reversing the devaluation. Devaluating a currency subsidizes exports by destroing existing capital. This is replaced by more fragile capital structures.

The benefits of devaluating a currency are so short-termed that, once it starts, there isn’t really much incentive to make it stop.

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