Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequence

Peterson Institute
1
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Experts have long questioned the effect of currency undervaluation on overall GDP growth. They have viewed the underlying basis for this policy--intervention in currency markets to keep the price of the home currency cheap--as doomed to failure on both theoretical and empirical grounds. Moreover, the view has been that overvalued currencies hurt economic growth but undervalued currencies cannot help in growth acceleration. A parallel belief has been that the real exchange rate--that is, a country's competitive ranking--cannot be affected by merely changing the nominal exchange rate. This view is grounded in the belief, and expectation, that inflation follows any devaluation of currency. Hence, the conclusion that the real exchange rate cannot be affected by policy. However, given China's remarkable performance in recent decades, this traditional view is being reexamined. China devalued its currency by large amounts in the 1980s and early 1990s; instead of inflation, it achieved high growth. Today, there is near-universal demand for China to significantly revalue its currency.

This book examines the veracity of various propositions relating to currency misalignments, and their effect on various items of policy interest. The author subjects more than a century of global exchange rate management and growth outcomes to rigorous empirical analysis and demonstrates convincingly that a country can systematically devalue and yet prosper. The analysis helps in interpreting several phenomena, especially for the last three decades, which have witnessed high economic growth in developing countries, a widening of global imbalances, and a sharp increase in reserve accumulation, particularly among high-growth Asian economies. The book shows that these events are strongly linked via a consistent policy of currency undervaluation in Asian economies.

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About the author

Surjit S. Bhalla is managing director of Oxus Research and Investments, a New Delhi-based economic research, asset management, and emerging-markets advisory firm. He taught at the Delhi School of Economics and worked at the Rand Corporation, the Brookings Institution, and at both the research and treasury departments of the World Bank. He has also worked at Goldman Sachs (1992-94) and Deutsche Bank (1994-96).
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Additional Information

Publisher
Peterson Institute
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Published on
Dec 31, 2012
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Pages
263
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ISBN
9780881326512
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Language
English
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Genres
Business & Economics / Money & Monetary Policy
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Content Protection
This content is DRM protected.
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Surjit S. Bhalla
In Imagine There’s No Country: Poverty, Inequality, and Growth in the Era of Globalization, published by the Petersen Institute in 2002, the author had discussed the effects of globalization on the world’s economies, especially the economies in the developing world. This book also introduced an economic, and empirical, definition of the term ‘middle class’.

Second among Equals advances the concept and definition of the middle class and measures the role the middle class has played in the fortunes of societies since 1500 AD. The first scholar to define, and discuss, the importance of the middle class was Aristotle, circa 350 BC.

There is an intimate relationship between the development of the middle class and economic development. This link is explored in depth in Second among Equals. Further, a division of the world’s population into four classes—the absolute poor, the emerging middle class, the middle class and the rich—can help answer some questions relating to the politics, and political economy, of the developed world today.
In particular, the book will explore the economic reasons behind the political success of globalization in the Western world till the early 2000s, and now its falling from grace in these very same countries (e.g. Brexit, the ascent of right wing nationalism [Trump], etc.).

The book will also explore the political debate surrounding wealth and income inequality (top 1 vs bottom 99 per cent); for example, wealth inequality deals with financial wealth and ignores the enormous magnitude, and contribution, of the most important form of wealth for the bottom 99 per cent—education (human capital).

Second among Equals concludes with a discussion of how one cannot fool ‘mother nature’—the inexorable tide of development and the middle class in large developing economies (especially India and China) will continuously alter the parameters of the world as we know it today. In addition, a sideshow in the book is a discussion as to how the best way to view developments in India and China over the last thirty years (these two economies contain close to 40 per cent of the world population) is from the vantage point that India is China with a five to ten year lag.
James Rickards
In 1971, President Nixon imposed national price controls and took the United States off the gold standard, an extreme measure intended to end an ongoing currency war that had destroyed faith in the U.S. dollar. Today we are engaged in a new currency war, and this time the consequences will be far worse than those that confronted Nixon.

 

Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries' stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008.

Currency wars have happened before-twice in the last century alone-and they always end badly. Time and again, paper currencies have collapsed, assets have been frozen, gold has been confiscated, and capital controls have been imposed. And the next crash is overdue. Recent headlines about the debasement of the dollar, bailouts in Greece and Ireland, and Chinese currency manipulation are all indicators of the growing conflict.

As James Rickards argues in Currency Wars, this is more than just a concern for economists and investors. The United States is facing serious threats to its national security, from clandestine gold purchases by China to the hidden agendas of sovereign wealth funds. Greater than any single threat is the very real danger of the collapse of the dollar itself.

Baffling to many observers is the rank failure of economists to foresee or prevent the economic catastrophes of recent years. Not only have their theories failed to prevent calamity, they are making the currency wars worse. The U. S. Federal Reserve has engaged in the greatest gamble in the history of finance, a sustained effort to stimulate the economy by printing money on a trillion-dollar scale. Its solutions present hidden new dangers while resolving none of the current dilemmas.

While the outcome of the new currency war is not yet certain, some version of the worst-case scenario is almost inevitable if U.S. and world economic leaders fail to learn from the mistakes of their predecessors. Rickards untangles the web of failed paradigms, wishful thinking, and arrogance driving current public policy and points the way toward a more informed and effective course of action.




From the Hardcover edition.
Andreas M. Antonopoulos
James Rickards
The bestselling author of The Death of Money and Currency Wars reveals the global elites' dark effort to hide a coming catastrophe from investors in The Road to Ruin, now a National Bestseller.
 
A drumbeat is sounding among the global elites. The signs of a worldwide financial meltdown are unmistakable. This time, the elites have an audacious plan to protect themselves from the fallout: hoarding cash now and locking down the global financial system when a crisis hits.
 
Since 2014, international monetary agencies have been issuing warnings to a small group of finance ministers, banks, and private equity funds: the U.S. government’s cowardly choices not to prosecute J.P. Morgan and its ilk, and to bloat the economy with a $4 trillion injection of easy credit, are driving us headlong toward a cliff.
 
As Rickards shows in this frightening, meticulously researched book, governments around the world have no compunction about conspiring against their citizens. They will have stockpiled hard assets when stock exchanges are closed, ATMs shut down, money market funds frozen, asset managers instructed not to sell securities, negative interest rates imposed, and cash withdrawals denied.
 
If you want to plan for the risks ahead, you will need Rickards’s cutting-edge synthesis of behavioral economics, history, and complexity theory. It’s a guidebook to thinking smarter, acting faster, and living with the comfort­ing knowledge that your wealth is secure.
 
The global elites don’t want this book to exist. Their plan to herd us like sheep to the slaughter when a global crisis erupts—and, of course, to maintain their wealth—works only if we remain complacent and unaware. Thanks to The Road to Ruin, we don’t need to be.

"If you are curious about what the financial Götterdämmerung might look like you’ve certainly come to the right place... Rickards believes -- and provides tantalizing snippets of private conversations with those who dwell in the very eye-in-the-pyramid -- that the current world monetary and financial system is on the verge of insolvency and that the world financial elites already have a successor system for which they are laying the groundwork."
--Ralph Benko, Forbes
Surjit S. Bhalla
In Imagine There’s No Country: Poverty, Inequality, and Growth in the Era of Globalization, published by the Petersen Institute in 2002, the author had discussed the effects of globalization on the world’s economies, especially the economies in the developing world. This book also introduced an economic, and empirical, definition of the term ‘middle class’.

Second among Equals advances the concept and definition of the middle class and measures the role the middle class has played in the fortunes of societies since 1500 AD. The first scholar to define, and discuss, the importance of the middle class was Aristotle, circa 350 BC.

There is an intimate relationship between the development of the middle class and economic development. This link is explored in depth in Second among Equals. Further, a division of the world’s population into four classes—the absolute poor, the emerging middle class, the middle class and the rich—can help answer some questions relating to the politics, and political economy, of the developed world today.
In particular, the book will explore the economic reasons behind the political success of globalization in the Western world till the early 2000s, and now its falling from grace in these very same countries (e.g. Brexit, the ascent of right wing nationalism [Trump], etc.).

The book will also explore the political debate surrounding wealth and income inequality (top 1 vs bottom 99 per cent); for example, wealth inequality deals with financial wealth and ignores the enormous magnitude, and contribution, of the most important form of wealth for the bottom 99 per cent—education (human capital).

Second among Equals concludes with a discussion of how one cannot fool ‘mother nature’—the inexorable tide of development and the middle class in large developing economies (especially India and China) will continuously alter the parameters of the world as we know it today. In addition, a sideshow in the book is a discussion as to how the best way to view developments in India and China over the last thirty years (these two economies contain close to 40 per cent of the world population) is from the vantage point that India is China with a five to ten year lag.
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