Alan Reynolds in 1997 on Exchange Rates and Trade

I stumbled on this 1997 talk abut NAFTA by my old friendRoberto Salinas-Leon, making a case for Hillary ’s Wikileak dream of Hemispheric free trade (but not for her other dream of “open borders” if that really meant unhindered migration).  I may be biased, but the following heretofore lost quote from me still seems relevant, but for the U.S. too, not just Mexico. Trump adviserPeter Navarro thinksthe dollar is 45% too strongagainst the Chinese yuan, which supposedly excuses Trump ’s threat of a 45% tariff.  (I’m more in the “strong dollar is good for America” camp, though strong doesn’t mean continually rising.) As Alan Reynolds has recently explained, “the explicit goal of devaluation is to worsen the terms of trade”-for instance, to make Mexico trade more exports for fewer imports. Reynolds continues: “…even if Mexico wanted to impoverish itself in this way, it does not work. When the peso was devalued at the end of 1994 that did not result in Mexican oil or beer being one cent cheap er in terms of U.S. dollars. After a devaluation, interest rates soar, real tax receipts collapse, and the foreign debt burden increases. This causes a squeeze on the government’s budget, and on the budgets of families, farms and firms. This is no way to make a country “competitive.” Economic growth depends on more and better labor and capital, neither of which are encouraged by a currency of unpredictable value. A weak currency has never produced a strong econ...

Source: Cato-at-liberty - October 13, 2016 Category: American Health Authors: Alan Reynolds Source Type: blogs