Tuesday, 19 April 2011

The Benefits of Printing Money

In the blog post Strong Aussie - Time to Buy Foreign ETFs? I talk about the strong Australian dollar and the weak US dollar. One of the commenters made an interesting point that I will reproduce below:

"[W]ho knows maybe the weak dollar will help pay off the US's debt and may even increase inflation and hence spur people to work more out of desperation."

This point about the benefits of a weak US dollar is an interesting point. Some economists claim that the US's welfare system and minimum wage make it uncompetitive against countries like China. If US dollars are printed to cause inflation, this will effectively reduce the size of the welfare state assuming that the food cheques do not rise with inflation. Furthermore, if inflation increases due to money printing then this effectively reduces the minimum wage, allowing Americans to compete against low-wage countries like China.

What American politicians should learn is that wealth is created through work. You cannot legislate wealth. That is, simply increasing minimum wage does not increase wealth as the wealth increase for those who are currently working is offset by the lost wages that result when companies hire fewer workers because they cost more.

China's intentional devaluation of its currency may seem illogical to some because it reduces the wealth of its citizens. But even though the devaluation of currency hurts workers, it tends to benefit businesses, especially those that are export goods. A weak currency allows businesses to keep paying its workers the same nominal wage but effectively reduce its real wage, and do all this with stealth. Even though it is not good for the welfare of workers, reducing real wages can have some beneficial impacts. For one, the reduction in wages can actually result in greater employment as lower cost of labor means businesses can hire more labor.

This seems to be China's strategy, that is, export-led growth via low-wage labor. The Chinese government seems to be in a rush to get as many people working as possible, perhaps believing that a citizen preoccupied with work is less likely to engage in dangerous activities such as political activism. On the downside, this current export-oriented strategy (a strategy used by many Asian countries when they were developing) is that citizens work and do not consume much, leading to a situation whereby the economy is dependent on a vast pool of consumers to whom they can sell their widgets. The consumeristic and hedonistic Americans currently fulfiled this role of the consumer very well, but after the GFC and the product of GFC (inflation) it is uncertain whether this export-oriented strategy is sustainable.

No comments: