Advancing American Freedom, the advocacy group led by former vice president Mike Pence, came out against rumored plans among Trump economic advisers to devalue the U.S. dollar.
Politico reported on April 15 that some advisers to the Republican presumptive nominee, led by former trade representative Robert Lighthizer, want to devalue the dollar to make it easier for foreigners to buy U.S. exports.
AAF notes that the Trump administration designated China as a currency manipulator in 2019. If a second Trump administration devalued the dollar to boost exports, it would be engaged in the same practice for which the first Trump administration condemned China.
It also points out that devaluation and inflation are the same thing, and inflation has already been bad enough under the Biden administration. A devalued dollar would lead to a less efficient American economy with higher prices, AAF says.
Yesterday for Capital Matters, Patrick Horan of the Mercatus Center made similar points about why devaluation is a bad idea. He wrote about the “impossible trinity,” which says “a country cannot have all three of the following at the same time: a fixed exchange rate, free movement of capital or investment, and monetary sovereignty (the ability to conduct monetary policy independently). It can only pick a maximum of two.”
The U.S. has free movement of capital and monetary sovereignty. That choice is the right one, because if it chooses fixed exchange rates instead, it will lose the ability to fight inflation with monetary policy. Using monetary policy to boost exports would mean printing more dollars, which will necessarily lead to inflation.
“While a devaluation would affect the nominal exchange rate — the price of a foreign currency in terms of a domestic currency — what really matters for boosting exports in a sustainable way is the real exchange rate, or the nominal rate adjusted by the price level in each country,” Horan writes. The way to do that is to increase the U.S. savings rate, not devalue the currency.
Two ways to do that: Make it easier to invest in the U.S. and cut the federal budget deficit. Biden wants neither of those things, proposing large budget deficits for the next ten years and new taxes on investment in his budget. Republicans should offer tax reforms to increase incentives to save and invest and credible plans to cut the deficit, not schemes to make inflation worse and imports more expensive.