Beggaring Thy Equally-Poor Neighbor

The US Treasury and Congressional "shopaholics" are tickled pink with the "flight to safety."

Never mind whether those rampantly popular Treasury bonds are actually preventing recovery by crowding out private sector credit. They're giving the US government's representatives the power to "buy, buy, buy" ...and conveniently solidifying their voters' support in the process.

But not everyone's enjoying the "flight to safety." And Switzerland's response in particular points to a dangerous new trend that's sweeping the globe.

Competitive Devaluation Hits the Majors "The Swiss franc slumped by a record amount against the euro Thursday after the country's central bank confirmed it was intervening to stem the currency's sharp appreciation due to its status as a safe haven," says the Boston Globe's website.

The Swiss National Bank has intervened. They're expanding repo operations and buying up foreign currency in the exchange markets. Why?

To keep exporters from suffering, and to maintain the trade relationships (by maintaining the exchange rate) they've developed with Eurozone countries over the last few years. And by no stretch is Switzerland the first country to intervene on behalf of its exporters.

Dozens of resource-rich countries - like Russia, Brazil and South Africa - have already seen their currencies plummet thanks to the global credit crunch and the "flight to safety." But other countries are stepping in and forcing their currencies down as well. Governments in Armenia, Kazakhstan and South Korea have forced devaluations in the last few months as well.

Devaluation - at the hands of the market or the government - has been a steadily growing trend for the last year or so. And Switzerland's forced devaluation is a significant turning point; the first of the "Majors" (the world's seven most popular currencies) to engage in competitive devaluation.

'Beggar-thy-neighbor' is the phrase often used to describe competitive maneuvering like you see here.

Say for example that you've lost your job. You need new income, but the job market's a pretty scary place. So instead, you walk around the neighborhood offering to cut grass for US$20 per lawn. The problem? Your neighbor runs a landscaping service. And he makes US$50 per lawn (a reasonable and competitive price).

Instead of sticking with your landscaping neighbor, everyone has you cut their lawn. You get a stream of income...but your neighbor loses his job. What about his employees? His family? "They don't matter," says the beggar, "I had to look out for number one."

Perhaps the landscaper calls a spade a spade, and heads out with his lawnmower and an asking price of US$15. In any case, there's no real net positive (either beggar or neighbor will end up unemployed) and we've effectively lowered the per-lawn landscaping price from US$50 to US$20.

And you get deflation...the reason we were here in the first place. Now think of this example on a global scale - with countries instead of individual neighbors. You can see how this sort of thing leads to problems.

Deflation, as strange as it sounds, is almost a good thing in this situation. Since competitive devaluations eat away at purchasing power just as sure as inflation would...leaving a country's citizens with a weaker currency in their pockets, and lower prices at the market (thanks to deflation). And somehow everyone becomes poorer without knowing quite how.

More Cheerie News

Who Benefits from Competitive Devaluation and "Beggar Thy Neighbor"?

I don’t know about beggaring, but certainly we’re all being buggered.

2 posted on 03/18/2009 3:03:35 PM PDT by Recovering Hermit ("A liberal feels a great debt to his fellow man, which debt he proposes to pay off with your money.")

I'm confused. If you devalue the money, isn't that inflation since you're inflating prices? Isn't the lawn cutting example the opposite where you're deflating prices and inflating money. Anyway, all will be reconciled soon since the dollar supply is ballooning and Benny's buying all those T-bills.

The lawnmower man comparison isn't appropriate for “beggar thy neighbour” policies. If someone offers to do a job for a lower price — that's simply competition.

When governments use their powers to tax, coerce, or subsidize to favour domestic producers over foreign competitors; they are attempting to “better thy neighbour”. All sides lose, because there are real, dead-weight economic losses. Things look good at first — then, consumers, taxpayers and otherwise healthy, productive, and competitive businesses are hurt.

It's called competition. The Euroweenies don't like it. They enforce price controls and do everything possible to prevent competition. If the out of work guy is willing to mow lawns for $20 to keep food on his table, then the landscape guy charging $50 needs to adjust his rates or go out of business. He's charging more than the market is willing to pay or the available labor is willing to accept.

BTW, this is the same whine I hear from the union types around Idaho. They hate "right to work". They call Idaho "the slave wage state". It's a cheer leading routine they practice while standing together in the unemployment line while people who work for a reasonable price are performing productive work.

I think we really have stagflation going on. Inflation from the government printing money with wild abandon. Stagnation is being caused by business shutting down in the face of tax increases, outrageous regulations, threats to shove unions down the throats of small business, a screwed up credit market and minimum wage increases. The government is doing every possible to make the problem worse...and they are succeeding in making it worse.

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