Krugman's Opium War

Antal E. Fekete targets Krugman and those pressing China to revalue its currency.

Friedman asserted, wrongly, that variable foreign exchange rates would eliminate trade imbalances. As the currency of the surplus country appreciates, exports are discouraged while imports are encouraged. Conversely, as the currency of the deficit country depreciates, exports are encouraged while imports are discouraged. This forces adjustments in the volume of imports and exports that will continue until trade balance is restored.

The equilibrating effect of exchange rates on imports and exports is, at best, ephemeral. It may last as long as the inventory of ingredients that go into the exports of the deficit country does. But no sooner had these inventories been exhausted and needed replenishing than euphoria came to an abrupt end. As a direct consequence of the lower value of the currency of the deficit country, its terms of trade deteriorates, while that of the surplus country improves. In particular, the deficit country has the disadvantage of paying higher, while the surplus country has the advantage of paying lower prices for the imported components that go into their respective exports. The competitiveness of the deficit country suffers a further setback. Rather than working towards equilibrium, the floating exchange rate regime works towards perpetuating imbalances, nay, making them progressively worse. It throws the deficit countries into a vicious downward spiral from which it is ever more difficult to escape.

KRUGMAN’S OPIUM WAR ON CHINA (link goes to pdf)

Symbiotic relationship between gov't and speculators

Obviously, you need a theory to explain what is happening other than the QTM. I have offered such a theory. I have called it the Black Hole of Zero Interest. When the Federal Reserve (the Fed) is pushing the rate of interest down to zero (insofar as it needs pushing), wholesale destruction of capital is taking place unobtrusively but none the less effectively. Deflation is the measure of wealth in the process of self-destruction — wealth gone for good. The Fed is pouring oil on the fire as it is trying to push long-term rates down after it has succeeded in pushing short term rates to zero. It merely makes more wealth self-destruct, and it makes the pull of the Black Hole irresistible.

But why is it that the inordinate money creation by the Fed is having no lasting effect on prices? It is because the Fed can create all the money it wants, but it cannot command it to flow uphill. The new money flows downhill where the fun is: to the bond market. Bond speculators are having a field day. Their bets are on the house: if they lose, the losses will be picked up by the public purse. But why does the Fed under-write the losses of the bond speculators? What we see is a gigantic Ponzi scheme. The Treasury issues the bonds by the trillions, and promises huge risk-free profits to the bond speculators in order to induce them to buy. Most speculators believe that the Treasury is not bluffing and they buy. Some may believe that the Fed is falsecarding doubts and they sell. But every time they do they only see foregone profits. What we have here is a rare symbiotic relation between the government and
the speculators.

Hyperinflation or Hyperdeflation?