Currency war could help everyone, former FOMC member says
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Kocherlakota said weaker currencies would help global growth but not hurt US
Former Minneapolis Fed President Narayana Kocherlakota is out with a column today arguing that other countries should work to devalue their currencies against the US dollar and that the US should let it happen.
The benefits of weaker currencies are well known but his argument for why the US wouldn't suffer is curious:
"Wouldn't a stronger dollar harm the U.S.? I see two reasons why it wouldn't, as long as the appreciation isn't too large.
For one, the U.S. is in a different monetary policy position, with the Fed on track to raise interest rates. By slowing (or even reversing) planned interest rate increases, it can undo much of the adverse effects of a moderate dollar appreciation on inflation and employment. (In this regard, Canada is in a similar position.)
The second reason, as documented by Gita Gopinath of Harvard University, is that globally traded goods are priced largely in dollars, and those prices don't change much in response to exchange rate fluctuations. Hence, when the dollar appreciates against the yen, Americans pay only slightly lower dollar prices for Japanese imports, while the Japanese pay much higher yen prices for American imports -- and a given dollar appreciation increases the Japanese inflation rate by a lot more than it decreases the U.S. inflation rate."
His first reason makes some sense and you can argue that's taken place already. If not for the strong US dollar, the Fed might have already hiked 2-3 times and that would be as bad as the high currency.
The problem with that thinking is that the US wouldn't have any ammunition when it's time to cut again; and the dollar would stay strong.
The second point doesn't add up for me. Sure items are priced in dollars but over time companies will obviously compete.
The overall thinking is far too flippant and unstudied to overcome the obvious logical downsides of having an overly strong currency.
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