Enrich thy neighbor

I could write an entire book on economic myths.  One of the most famous is the idea that devaluing your currency steals business away from neighboring countries.  This idea, sometimes dubbed “beggar-thy-neighbor,” had a grain of truth during the 1930s.  When countries left the gold standard, it led to fears that the remaining countries would devalue.  This caused gold hoarding, which was deflationary for the countries with currencies still pegged to gold.

But this theory has no place in the modern world.  Every time the Fed eases significantly, the dollar drops.  And stock prices rise in our trading partners.  Yesterday was a good example:

European stocks advanced, climbing 20 percent from the September low and entering a bull market, after the U.S. Federal Reserve signaled it may keep interest rates low through 2014 and a report said Greece’s creditors will make a new offer for a debt-swap deal.



25 Responses to “Enrich thy neighbor”

  1. Gravatar of Benjamin Cole Benjamin Cole
    26. January 2012 at 18:26

    Besides, USA monetary policy should be for the USA. Is there any country in the world that is saying, “Oh dear, we can’t take this necessary macroeconomic action, it might hurt the USA?”

    On top of that, printing trillions of dollars and flooding the world would pump up the global economy and make our goods more competitive.

    Print money Ben Bernanke, turn the presses on high and send the crews home for the night. Print money until the plates melt, and then start issuing scrip. Become a monetary Chuck Norris—not some feeble, dithering currency gnome.

  2. Gravatar of Max Max
    26. January 2012 at 18:58

    To me devaluation means intervening in the currency market, e.g. buying foreign currency. The Fed doesn’t do that.

    Increasing domestic demand is not the same as trying to import foreign demand by changing the trade balance.

  3. Gravatar of ssumner ssumner
    26. January 2012 at 19:06

    Ben, I agree.

    Max, The Fed controls the supply of currency. That’s one half of the currency market. They don’t just intervene, they completely dominate the market.

  4. Gravatar of Mike Sandifer Mike Sandifer
    26. January 2012 at 19:15

    I wish you would write a book Scott, or perhaps at least a few.

    Here’s my wishlist:

    1. A book on common economic myths, as you mention, though you obviously weren’t serious. The chapter(s) on EMH and bubbles would be worth the price alone, to say nothing of your argument that money’s tight in much of the developed world right now. Oh, and then you can go into how you define income, inflation, etc. It would make for very provocative reading, and given your growing fame, you might even get reviewed in places like The Economist.

    2. A book on the housing run up, financial crisis, and Great Recession, particularly on monetary policy with your evidence carefully laid out in one place.

    3. I’d also like to see a prescriptive policy book.

    I know you’re busy, but I’m just letting you know there’s some demand here.

  5. Gravatar of Max Max
    26. January 2012 at 20:01

    Scott, you are equating inflation with devaluation. All countries (with their own central bank) can inflate, but not all countries can devalue. Devaluation as a stimulus strategy works (if it works) by changing the balance of trade, not necessarily increasing total economic activity.

  6. Gravatar of marcus nunes marcus nunes
    27. January 2012 at 03:58

    John Quiggin has gone “all in” on NGDP level targeting:

  7. Gravatar of ssumner ssumner
    27. January 2012 at 05:40

    Mike, Thanks for the tips. Of course it’s “time permitting.”

    Max, That’s right, but I was referring to an other things equal situation. If the Fed suddenly and unexpectedly eases, and other central banks don’t, then the dollar usually falls that day.

    Marcus, Great News.

  8. Gravatar of Ritwik Ritwik
    27. January 2012 at 06:20

    1)What do European stocks have to do with European GDP?

    2) Are you sure you’re not confusing the ‘currency’ and the Fx market? The Fx is always a dual-currency market. Whatever argument you’re making for the Fed can be made equally easily for its counterparty in the Fx market.

  9. Gravatar of Jaap de Vries Jaap de Vries
    27. January 2012 at 06:29

    Well, if you look at Switzerland, Finland etc. their currency is used as a safe haven. This does hurt the real economy (currency appreciates, without the corresponding growth effects for investment). This is some kind of a beggar-thy-neighbour type, right?

    Furthermore my compliments for this blog, I enjoy reading it daily.


    The Netherlands

  10. Gravatar of Major_Freedom Major_Freedom
    27. January 2012 at 07:18

    Max, inflation is an increase the supply of money. When the supply of any good rises, marginal utility falls. That is devaluation by implication because it lessens the value of each unit.

    I think you’re just separating inflation to change a balance of trade, and inflation to target a price level/rate, calling one devaluation but not the other, when in both cases devaluation occurs.

  11. Gravatar of Max Max
    27. January 2012 at 09:15

    Suppose the Fed buys Euros. This is inflationary for the dollar, but deflationary for the Euro. U.S. exporters are happy; Euro exporters are unhappy.

    If the ECB decides it doesn’t like this, and retaliates by buying dollars, this re-inflates the Euro and deflates the dollar.

    What do you think the result is? I say this attempt at devaluation is not inflationary. The quantity of money has increased, but it’s on central bank balance sheets, not in the economy.

  12. Gravatar of Federico S Federico S
    27. January 2012 at 10:49

    Scott, I’m not disagreeing with you, but how do you separate effects from changes in the discount rate vs effects from changes in expected earnings? A story consistent with your observation that stocks overseas rally when the Fed eases (and the dollar drops) is that risk aversion falls, lowering discount rates, and that expected earnings stay constant (or perhaps even fall) and the net of these two effects is a rise in stock prices.

  13. Gravatar of BW BW
    27. January 2012 at 14:22

    I would like to see further explanation of this post, which is not at all intuitive.

    What I see is a leap from financial markets to goods/services markets that doesn’t make much sense at first glance.

  14. Gravatar of Paul J Paul J
    27. January 2012 at 14:38

    I will +1 the idea of you writing a book on economic myths. I would probably pay $40+ for it.

  15. Gravatar of kokanart kokanart
    27. January 2012 at 23:59

    The ” idea that devaluing your currency steals business away from neighboring countries ” should not be simply dismissed by you as an economic myth.

    It is the basis for the US to perennially call for a revaluation of the Chinese Yuan and this is fully supported by major economists. It’s an intuitive and widely accepted piece of conventional wisdom in economics.

  16. Gravatar of ssumner ssumner
    28. January 2012 at 06:04

    Ritwik, If the action were expected to reduce European GDP, I very much doubt that it would boost European stock prices. But I never mentioned GDP in my post, I mentioned business. Certainly if it stole business from European firms, their stocks would fall. GDP also includes government output, so I agree the the link is less clear for GDP.

    Jaap. When the Swiss government believes their currency is hurting their economy, they adjust the level. That’s what I argue is the appropriate policy. Not trade barriers.

    Max, The ECB targets inflation, so if the US buys euros (they actually buy euro debt, which is very different) then the ECB issues more euros to prevent any deflationary effect.

    Federico, Good question. I think you can find cases where Fed easing raised rates. If so, you’d want to check the impact on European stocks. BTW, did Fed easing also lower rates in Europe? I forgot to check that out.

    BW, See my response to Ritwik.

    Thanks Paul.

    Kokanart, I know that some hold that view, but the major economists that I respect certainly don’t think that way. Krugman is the most famous proponent of that view, but even he says it only applies when US interest rates are at zero, not otherwise. In contrast, the media talks like it’s always true, even when rates aren’t at zero. Those are the uninformed people I’m aiming at here.

  17. Gravatar of honeyoak honeyoak
    29. January 2012 at 10:33

    I think that I can never bang my fist hard enough to counter with his point:
    there is nothing stopping firms from changing their profit margins and the prices that they provide for their inputs. empirically there is little relationship between firm profits and exchange rate fluctuations except for highly comoditized markets (i.e. fabrics, mining, agriculture). the effects of exchange rates are only true in aggregate for the tradable sector of the economy. The idea that exchange rate fluctuations provide well paying jobs is just silly to me.

  18. Gravatar of ssumner ssumner
    29. January 2012 at 12:36

    honeyoak, I agree that exchange rate fluctuations don’t create jobs.

  19. Gravatar of Major_Freedom Major_Freedom
    29. January 2012 at 13:00


    “Suppose the Fed buys Euros. This is inflationary for the dollar, but deflationary for the Euro. U.S. exporters are happy; Euro exporters are unhappy.”

    In terms of prices, yes, but not in terms of money supplies and thus marginal utility of dollars and Euros as such.

    “What do you think the result is? I say this attempt at devaluation is not inflationary. The quantity of money has increased, but it’s on central bank balance sheets, not in the economy.”

    But the supply is more than it otherwise would be, and hence the marginal utility of dollars is greater than it otherwise would be.

  20. Gravatar of Federico S Federico S
    30. January 2012 at 13:04

    Scott, rates in Europe were roughly flat, as measured by the 3M Eonia swap. If you squint you might say they fell 1bp. But note that it’s a little tough to do this given the time gaps between when the statement was released and when Bernanke was giving his press conference (which presumably was more easing). Along that same line of argument it’s a little difficult to read into the equity market movement, as it was closed during part of the time when new information was released. There’s also some time spent digesting the information, naturally.

  21. Gravatar of ssumner ssumner
    31. January 2012 at 13:59

    Federico, Thanks, I admit to relying on the news report here, but I’ve seen similar events on numberous occasions, so I’m pretty confident that a major QE in the US would boost European markets.

  22. Gravatar of orionorbit orionorbit
    9. February 2012 at 09:48

    “Max, The ECB targets inflation, so if the US buys euros (they actually buy euro debt, which is very different) then the ECB issues more euros to prevent any deflationary effect.”


    ok, on a more serious note, nobody considers weakening your currency by lowering the interest rate a “beggar thy neighbour” policy. I think what people like Paul Krugman have in mind when they use the phrase is buying up foreign assets to keep your currency lower than where i otherwise would have been if its value was determined only by market forces. So your argument is poorly phrased as it implies that for instance what china has been doing is not harmful.

  23. Gravatar of orionorbit orionorbit
    10. February 2012 at 13:24

    Sorry for double posting but let me point you again to this guy:


    He re-balances quarterly and publishes holdings (so you know he’s not selling puts on the VIX). OK, let’s forget my entire post above. Let’s assume for a second that this guy’s returns are random, because we only have like 50 observations and in a world with 10 billion people some would achieve this record even by chance. Why him? Why a finance phd and not some grandma managing her pention in north australia?

    Oh, I think i could win this even if I had played a completely different endgame.

  24. Gravatar of ssumner ssumner
    11. February 2012 at 06:47


    1. Why are you posting over here?

    2. 3.8% over ten years is a lousy return, even I’ve done much better than that. What am I supposed to be impressed about?

    3. You don’t hear about grannies earning 3.8% (or me) because we invest way less money.

  25. Gravatar of ssumner ssumner
    11. February 2012 at 06:48

    On your other post: Krugman claims China reduces US AD, but the Fed determines US AD.

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