Re: Central Banks and Deflation

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

     Bush has already shown that he is a hard line unilateralist
who does not give a rat's behind regarding what goes on
anywhere in the rest of the world other than to a handful of
countries that kiss his behind very hard.  He (and his closest
political advisers) see getting employment growth up in the
battleground swing states of the industrial upper midwest at
least for the early part of next year as the key to guaranteeing
his reelection.  I think they are probably right, and a quick bout
of beggar-thy-neighbor dollar devaluation before the rest of the
world can do anything about it will probably do the trick for him,
I fear.
Barkley Rosser
----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: <gang8@xxxxxxxxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>;
<a-list@xxxxxxxxxxxxxxxxxxx>; <TheNewForum@xxxxxxxxxxxxxxx>
Sent: Thursday, May 22, 2003 12:28 PM
Subject: Central Banks and Deflation


> The Federal Reserve is very nervous about deflation.  The reason for
> this is more than its awarenes of the grave danger of deflation on the
> economy.  The real reason is is that central banks in general, and the
> Fed in particular, do not have the power or operative measures within
> their discourse to deal with deflation. The exclusive dependence of
> central banks on interest rate policy to fight inflation does not work
> for fighting deflation, as a decade of data in Japan has shown. The Fed
> is now following Japan's lead in trying to manage an exchange rate
> policy (talking is not pushing the dollar down) to export deflation to
> its trading partners.
>
> The Chinese economy has been accused by some Japanese economists as
> exporting deflation by stripping non-Chinese companies of their pricing
> power. That is an obvious fact, but the cause of this does not origninal
> from inside China.  As I pointed out in an earlier post (Dollar's slide
> and PPP), the Chinese currency, the RMB, is actually depreciating
> against the dollar on a PPP adjusted basis, despite a nominal peg.  Thus
> with the US pushing the dollar down, it will only exacerbate China's
> deflation export.
>
> The problem is not the relative value of the dollar, but the dollar's
> role as the dominant reserve currency for trade.  The use of exchange
> rates to manage trade is a destructive move, regardless who does it.
> Exchange rates need to be stable and to change only gradually and
> infrequently.  Trade needs to be structured to increase domestic wages
> rather than to push domestic wages down.  Pushing wages down decreases
> purchaing power domestically which directly contracts international trade.
>
> Central banks must change their theology of protector of the value of
> money and start promoting full employment and rising wages worldwide and
> alter an economic system that rewards corporate policies of layoffs and
> cost cutting, to one that rewards job creation and expansion.
>
>
> Henry C.K. Liu
>
>