Currency Policy Trends and the Widening Wealth Gap

The global currency markets are simple in a completely free markets.  By "simple" I mean self-correcting when there is not government or financial services industry intervention that is not associated with private sector transactions related to a productive economic objective, such as Wal-Mart buying lightbulbs manufactured in Nigeria;  when Wal-Mart buys from a non-domestic U.S.A. manufacturer, two transactions occur:  (1) Wal-Mart authorizes payment for the good produced in Africa and payment is sent to the manufacturer's bank account, and (2) either Wal-Mart's bank or the manufacturer's bank converts Wal-Mart's U.S. dollar payment into local currency such that U.S. dollars are sold, and local currency units are purchased.  Such a pair of transactions results in a marginal weakening of the U.S. dollar currency because that currency has been sold and converted into the relatedly-purchased non-U.S. dollar currency.  When this occurs, all other things equal ("ceteris paribus" in economic speak) all goods and services produced in the United States become slightly less expensive to buyers using foreign currencies and goods and services produced in the home country of the producer of Wal-Mart's good or service become incrementally more expensive.

When the above-explained mechanism occurs with private sector actors (Wal-Mart, the foreign manufacturer, and the banks) all behaving in a self-interested manner aimed toward their goal of generating a profit, the currency markets generally provide a valuable role in societies as a regulator of trade and a measure of the attractiveness of various possible non-domestic sources of goods and services.  As a positive externality, foreign competitive goods force domestic producers to maintain competitiveness in quality, and may in fact force superior product innovation, as I believe has occurred in the case of German automobiles.  For multi-year periods and possibly multi-decade periods, Germany's post-WWI-reparations-driven fear of currency weakness has probably played some role in its high-quality automobiles and high-quality manufactured products track record more broadly.

In contrast to the benefits of free market currency externalities, when nations intervene in currency markets (such as the recent trends globally), protectionism rears its ugly head with regard to quality of goods and services produced in the absence of other nations responding.  Moreover, if other nations do respond with protectionist currency actions, those domestic workers without assets whose nominal values are correlated positively with currency weakening actions may experience a negative impact on their standard of living as their nominal expenses rise more rapidly than their nominal wages.  Thus, currency wars likely benefit politicians and currency bureaucrats who are seen as 'protecting' their employers and citizens jobs, but in reality drive further widening of the wealth gap.

So that is enough on currency at this time.  I believe that we have been in a currency war globally for more than a year since the European Central Bank began quantitative easing.  More recently, the Chinese Central Bank has joined the party.  At the same time, sociologists around the world seemingly write endlessly about the growing wealth gap.  And yet few, if any, relate the growing wealth gap to currency policies.   I think that lake of intellectual connection will dissipate in coming quarters and years.