A World Federalist’s Perspective

Etienne Bowie

Article originally published by Transcend

When the Federal Reserve cut interest rates on July 31^st for the first time in more than a decade, commentators were asking why. According to official data, the economy was rebounding, unemployment was below 4%, and GDP growth was above 3%. If anything, by the Fed’s own reasoning, it should have been raising rates.

The explanation of market pundits was that we’re in a trade war and a currency war. Other central banks were cutting their rates and the Fed had to follow suit, in order to prevent the dollar from becoming overvalued relative to other currencies. The theory is that a cheaper dollar will make American products more attractive on foreign markets, helping our manufacturing and labor bases.

Over the weekend, President Trump followed the rate cuts by threatening to impose a new 10% tariff on $300 billion worth of Chinese products effective September 1^st. China responded by suspending imports of U.S. agricultural products by state-owned companies and letting the value of the yuan drop. On Monday, August 5, the Dow Jones Industrial Average dropped nearly 770 points, its worst day in 2019. The war was on.

The problem with a currency war is that it is a war without winners. This was demonstrated in the beggar-thy-neighbor policies of the 1930s, which just prolonged the Great Depression. As economist Michael Hudson observed in a June 2019 interview with Bonnie Faulkner, making American products cheaper abroad will do little for the American economy, because we no longer have a competitive manufacturing base or products to sell. Today’s workers are largely in the service industries – cab drivers, hospital workers, insurance agents and the like. A cheaper dollar abroad just makes consumer goods at Walmart and imported raw materials for US businesses more expensive. What is mainly devalued when a currency is devalued, says Hudson, is the price of the country’s labor and the working conditions of its laborers. The reason American workers cannot compete with foreign workers is not that the dollar is overvalued. It is due to their higher costs of housing, education, medical services and transportation. In most competitor countries, these costs are subsidized by the government.