Photo Credit: Medill DC/Flickr
By Bill Wilson — Is competitive currency debasement by central banks causing a global economic contraction?
According to data published by the International Monetary Fund, exports worldwide are down in 2012 by an annualized rate of 1.8 percent, led by a 2.6 decrease in emerging and developing economies.
Put another way, worldwide exports in 2011 totaled $18.024 trillion. But in 2012, at their current pace, will only total $17.686 trillion, signaling a significant slowdown. This would mark the first such contraction since 2009.
This was not supposed to happen.
One of the stated justifications for quantitative easing by central banks such as the U.S. Federal Reserve was as a means of devaluing currency and, in theory, making exports relatively cheaper for the country expanding its monetary base.
To be certain, U.S. exports have reported an increase in 11 of the past 12 quarters according to the Bureau of Economic Analysis.
But don’t be fooled by the domestic data, a cursory look at which might leave one with the impression — a false one, it turns out — that global trade is currently increasing. It isn’t. And if it leads to another recession, U.S. exports will ultimately be hurt too.
Small wonder, really, when one considers countries all over the world racing to the bottom to debase their currencies in a misguided attempt to boost trade — with the overall impact so far being a net reduction of trade.
The bottom line is currency debasement is decreasing output. But why?
One reason is because cheap money does not boost spending per se, it boosts debt, leading to increased interest payments that eat up larger and larger shares of income every year.
Also, worldwide quantitative easing increases the costs of producing things, with higher energy and commodities prices, and hits consumers hard, who cannot afford to spend as much. If allowed to escalate their destructive policies, central banks will inflate us right back into a recession.
Viewed through that prism, Federal Reserve Chairman Ben Bernanke’s recent announcement of an annual expansion of its balance sheet by $480 billion to buy mortgage-backed securities is nothing short of a trade war declaration upon the rest of the world.
Ironically, there is little evidence the weak dollar helps the U.S. trade position globally, having had little impact on the trade deficit as imports to the U.S. have increased at an even faster pace on the heels of higher oil prices.
For that reason, the trade deficit has increased every year since 2009, and at its current rate will come in at $741 billion for 2012 based on data compiled by the U.S. Census Bureau, $14 billion more than last year.
So, if the Fed’s various bouts of quantitative easing were designed to improve the nation’s global trade position, or were supposed to turn the global economy around, the policy appears to have failed. Whoops.
Apparently, little has been learned from the history of trade protectionism in the midst of sharp economic downturns.
During the Great Depression, the Smoot-Hawley Tariff Act was similarly enacted in 1930 to make goods imported from overseas more expensive to American consumers than domestic goods. The thought was to incentivize the purchase of U.S.-made goods during a devastating economic downturn, boosting the bottom lines for American businesses.
While Smoot-Hawley did not cause the Great Depression, there is wide consensus that the trade war it provoked made it much worse. U.S. exports took a big hit immediately as the world retaliated, dropping from $3.84 billion in 1930 to $2.08 billion in 1931, and bottoming out in 1932 and 1933 at $1.61 billion and $1.67 billion.
So in the 1930s we tried to “incentivize” the purchase of domestic goods, and today, we are trying to “incentivize” the sale of goods to foreign buyers, but the effect is still the same — a contraction of overall trade.
The lesson learned from Smoot-Hawley was that there are unintended, real consequences to protectionist economic policies. Now, Bernanke’s quantitative easing, i.e. money-printing, is creating another de facto trade war.
Anyone who doesn’t believe it should ask Canada. In the Sept. 24 edition of the Winnipeg Free Press, Toronto-based management consultant Bruce Stewart called quantitative easing by the Fed, the European Central Bank, China’s central bank and others a “declaration of war” because it is killing Canadian exports.
Or ask Brazil Finance Chief Guido Mantega, who recently reacted to easing by major central banks, saying it would touch off a “currency war” — with other central banks joining the fray to “boost” exports.
Bernanke, world-renowned expert of the Great Depression, has apparently learned nothing from the Smoot-Hawley Act. As nations play “can you top this?” one can only hope that the outcome of Bernanke’s trade war will not be worse than what we saw with Smoot-Hawley.
Bill Wilson is the President of Americans for Limited Government. You can follow him on Twitter at @BillWilsonALG.
