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Author Topic: The inflation-export trade gambit  (Read 1016 times)
jago25_98
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January 17, 2013, 02:10:32 PM
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 I keep hearing the argument that inflation is necessary to encourage a country's exports.

Gut feeling is that this is a load of crap.
Yes, putting artificial pressure on an economy to force trade encourages exports but,

 exports aren't needed if you're rich.

If there's no inflation then the country just gets richer.
If richer, then the country is more powerful and less reliant on exports.

 Is it as simple as this?

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January 17, 2013, 04:11:26 PM
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 I keep hearing the argument that inflation is necessary to encourage a country's exports.

Gut feeling is that this is a load of crap.
Yes, putting artificial pressure on an economy to force trade encourages exports but,

 exports aren't needed if you're rich.

If there's no inflation then the country just gets richer.
If richer, then the country is more powerful and less reliant on exports.

 Is it as simple as this?

When I hear inflation in current times, you need to think, debasing their currency to make it more competitive on the foreign exchange market.  The make your currency cheaper compared to your trading partners so that a trading partner can get more goods from you for their currency.   The problem is that it is a race to the bottom and can end in serious inflation with nothing really to show for it because on the flip side, your raw materials will cost more to import and they will offset any gains other than "goosed" up economic data and temporary employment increases.

Gut feeling has nothing to do with economic theory.  Maybe you get lucky and make a true claim, but that is all.

Your statement says it all, "If there's no inflation then the country just gets richer. ".  The is the crux of it all, when you put this artificial pressure on the country, you do get inflation in some or multiple asset classes and usually leads to bubbles in certain assets classes, or even worse, broad-base inflation.   Take for example, the U.S. takes food and energy out of the CPI but for a majority of people, rent, food and energy (gas & heating or cooling fuel) is their largest monthly expense.   So in that case, what are we really measure? 

No is not as simple as that but I hope the above added to your conversation.

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January 18, 2013, 03:42:23 PM
 #3

The export argument is obviously ridiculous on anything more than a cursory examination. I'm surprised it's managed to survive so long.

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January 20, 2013, 07:23:51 AM
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Wow, I wonder if the people asking you to focus on making things for them have any other possible agenda besides your best interest.

Obv I'm not saying there is anything wrong with exports (which is just an arbitrary subset of something called 'trade') but the freaking point of and incentive to trade isn't what you give it's what you get, otherwise just talk about the important of gift-giving.

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January 20, 2013, 04:17:05 PM
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Exactly. If its a choice between selling 500 widgets for 500,000 f-creds and 1000 widgets for 1,000,000 f-creds, is it really any better to do the second when in the first case, the funds would let you hire ten workers for a year and the second, only 8 workers due to inflation? And you've had to pay more for the materials for the widgets of course.

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January 24, 2013, 03:30:12 PM
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My answer to this has been posted to nogleg.com

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January 25, 2013, 03:02:35 PM
 #7

exports aren't needed if you're rich.

Exports aren't needed if you're big.

The smaller the country, the less stuff it can make on its own, the more it needs to import.

In the long term, imports must balance exports.  A country that imports more than it exports is not sustainable.

Thus, even small rich countries such as Norway are heavily reliant on exports.

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January 25, 2013, 05:19:25 PM
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We have to be careful not to confuse the cause with the effect.
If we have multiple causes and effects we basically have a network.
The human mind is usually very bad at understanding networks.

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January 25, 2013, 05:35:04 PM
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In the long term, imports must balance exports.  A country that imports more than it exports is not sustainable.

Precisely, and under free/uncoerced trade, the value of imports always matches the value of exports. You either import goods and export money, or import money and export goods. Either way, the value is naturally balanced. Trade protectionism and money supply manipulation create an imbalance between imports and exports. In particular, inflating the money supply to encourage exports amounts to marking down the prices of export goods, impoverishing your own citizens (who receive less valuable currency) to enrich foreigners (who receive non-inflated goods)--at least until prices are adjusted to account for inflation.
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January 25, 2013, 06:19:52 PM
 #10

Peter Schiff does an excellent explanation of this argument and the short version of it is is people who argue that inflation is necessary are people who are essentially conning the countries out of their surplus, countries like the U.S have so much debt towards Japan etc. because trade their worthless paper money with Japan for much more valuable goods like for instance electronics. The paper money is debt, so what the Americans are saying is that they'll pay it back later when in reality all that is happening as the time comes to pay off their debts ( This is why the debt ceiling exists and the trade deficit ) they just raise the debt ceiling and print even more to get away with it.

Western countries are basically doing this with every single country out there and amongst themselves, the system just isn't sustainable because a lot of countries are simply trading debt with debt, they don't even have any real goods to offer for the debt, so everything is going to come crashing down no matter how in denial politicians and the central bankers act. China is one of the few economies out there doing well because it makes goods that have value and even Russia is catching on because they don't have a deficit any more which is why it absolutely terrifies me when I've seen these supposed experts telling Russia they should be spending the surplus they got from the oil.

I suppose you could argue that inflation by itself isn't a hugely bad thing but when you use it to postpone your debt payments for as long as possible which is what is happening here, you can see the effects are catastrophic, I see entire continents just filled with nothing, no production and no activity, no one making anything aside from seriously flawed paper work.
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