Archive for category economic and political philosophy

Nobel Winner Dares To Go There: “No Reason To Fear Deflation… Greece May Benefit From Gold Standard” | Zero Hedge

Continuing my investigation into inflation and deflation, I notice that the recent winner of the Nobel Prize in Economics, Thomas Sargent, has stated that “there is no reason to fear deflation.” Is that nice Mr. Abe listening, I wonder?

“Historically, there is no reason to fear deflation,” Nobel Laureate Thomas Sargent explains to Germany’s Wiwo.de, “we all benefit from lower prices.” Crucially, he continues, “countries with declining prices, such as Greece, must improve the competitiveness they have lost in recent years,” requiring falling wages and rising productivity and falling unit labor costs which will lead to companies cutting prices, “this is not a dangerous deflation, but part of the necessary correction so that these countries are internationally competitive again.” That central banks pursue an inflation rate of around 2%, Sargent blasts, is because they consider it their job to “make bad debt good debt,” adding that inflation is “a major redistribution machine – reducing the real debt burden for the benefit of creditors and devaluing the assets of the creditors.” A return to a gold standard,he concludes, to prevent governments and central banks from limitless money-printing “would not be foolish.”

via Nobel Winner Dares To Go There: “No Reason To Fear Deflation… Greece May Benefit From Gold Standard” | Zero Hedge.

Best scenario for all economies: mild deflation?

The natural path for all economies is a mild deflation in the amount of productivity improvement, averaging 2-3% annually.

via Here Comes the Spin (Central Banks) in [Market Ticker]

Coninuing my investigation into inflation (the desirability of) and deflation (the evils of), the above is one businessman’s opinion. He writes (emphasis in the original):

I’m going to keep hammering on this until people wake up and start demanding it: The natural path for all economies is a mild deflation in the amount of productivity improvement, averaging 2-3% annually.  That deflation — that is, increased purchasing power for the people of a nation, is yours.  It belongs to you.  It comes into existence because you perform your job, whatever it may be, with more efficiency due to the improvements of technology over time.

You do more with less and since you are the one doing the “more” the fruits of that effort are your property, not someone else’s.

What prompted his outburst is a Bloomberg news article, which states in part:

Central banks are finding it’s easier to push up stock and home prices than it is to prevent inflation from falling short of their targets.

While declining costs for everything from gasoline to coffee can be good news for consumers, disinflation makes it harder for borrowers to pay off debts and businesses to boost profits. The greater danger comes when disinflation turns into deflation, which leads households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up.

The above argument against deflation, namely that it “leads households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up” is an old one, and has been challenged before now. Just how solid is it? Read the rest of this entry »

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JGBs Declared Dead by Mizuho as Kuroda Hides Risks: Japan Credit

“The JGB market is dead with only the BOJ driving bond prices,” said Tetsuya Miura, the chief bond strategist at Tokyo-based Mizuho, one of the 23 primary dealers obliged to bid at government auctions.”

Dead? That doesn’t sound very healthy, does it, boys and girls?

This blog post is part of a series on the subject of inflation and deflation, specifically asking if deflation is really so bad (consumers love lower prices), and if inflation is really so desirable. These lead to other questions, such as, “has inflation worked in the past to boost a flagging economy?” and “who benefits from inflation?” and “is deflation the same as falling prices?” and “who is really frightened of deflation?”

From Bloomberg’s  JGBs Declared Dead by Mizuho as Kuroda Hides Risks: Japan Credit

What caught my eye (my emphasis):

Totan Research Co. and Spiro Sovereign Strategy also said BOJ monetary stimulus is cutting the tie between economic fundamentals and bonds, which yield 0.6 percent for 10 years, the least in the world.

… Prime Minister Shinzo Abe, counting on fiscal and monetary stimulus to end 15 years of deflation, has yet to decide on whether to go ahead with the second planned increase to 10 percent by 2015.

Has Japan really suffered from deflation for 15 years? Let’s see what the Federal Reserve charts say:

7138a

Hmm. A fairly stable line with a brief period of inflation starting at the end of 2004 and ending sharply in 2008.

“These low yields are responsible for the lack of fiscal reform in the face of Japan’s worsening finances. Policy makers think they can keep borrowing without problems.” …

Why on earth would they think that? Could it be because that is what policy makers have been doing in Europe and the U.S., apparently with impunity?

 … “The BOJ’s priority is to lower Japan’s real interest rates and ensure an end to deflation, even if they have to sacrifice liquidity and trading volumes in the bond market,” Takatoshi Kato, a former top currency official at Japan’s Ministry of Finance said in an interview on Oct. 31 in Tokyo.

… “Market functions are sacrificed for the sake of ending deflation,” said Izuru Kato, the Tokyo-based president of Totan, a research unit of money-market broker Tokyo Tanshi Co. A reduction in monetary stimulus could cause a drop in bond prices, which “will make it difficult for the BOJ to normalize policy,” he said.

Why is inflation apparently so desirable? Rising prices means energy becomes more expensive as Japan has to import all its energy or at least the resources to produce its own energy (apart from a small percentage produced by water and geothermals). It also means that citizens will have to tighten their belts because wages are not rising (why should they? The stock market rises are not due primarily to increased production).

So why is inflation so desirable? Who wants it? Consumers don’t.  But the politicians do. Why? Politicians in the EU and a former governor of the ECB is also very worried about deflation, according to a Telegraph report:

Writing in The Telegraph (UK), Ambrose Evans-Pritchard reported that the data stunned the markets. He quotes remarks from a number of financial-market analysts who called this a “debt deflation trap.”

Evans-Pritchard also marshals the authority of an unnamed former governor of the ECB who is quoted criticizing the ECB for not acting to head off the deflation threat through more activist monetary policy.[“Europe moves nearer Japanese style deflation trap,” Daily Telegraph, 31 October 2013.]

A writer on the Mises.org website asks, How does a reduction in consumer price inflation become “deflation”? How does a minor improvement in the purchasing power of consumers become a problem for liquidity in the financial markets?

Good questions! And the answer?

European politicians and central bank policy-makers are concerned not about consumer price reductions but about real reductions in the money supply as such reductions would force governments to abandon permanent budget deficit monetization. That is why they maintain a monopoly over the power to create money and they like to control where money enters the economy. Politicians use these advantages in two ways.

First, they are all, with the sole exception of the Bundesbank, “inflationists” when it comes to monetary policy. Inflation (that is, an increase in the money supply) steadily reduces the purchasing power of a fiat money and, in parallel, eases the burden of debt repayments over time as nominal sums become progressively of less relative value…

for highly indebted Eurozone governments, price inflation is the perceived “get out of jail” card, permitting them to meet their debt obligations with a falling share of government expenditures.

With Japan’s debt-to-GDP predicted by the IMF to grow to 244% this year, “inflating their way out of debt” might well seem attractive to  Japanese lawmakers.

So, inflation (meaning an increase in the money supply) is desirable to the central bank and the government. What about the consumers? They vote, but apparently they don’t care, or else they are happy to vote for politicians who want to take away their purchasing power so that the government can continue deficit spending. It’s not even about saving the asses of Japanese companies that are in difficulties due to falling prices (i.e. failing competitiveness).

Yet growth of PIIGS governments’ debts as a proportion of GDP (Table 1) have now crossed above the critical 90 percent ratio advised by Rogoff and Reinhart as being the threshold above which growth rates irrevocably decline. [K. Rogoff and C. Reinhardt, “Growth in a Time of Debt,” American Economic Review (May 2010). Reported that among 20 developed countries studied, average annual GDP growth was 3–4 percent when debt was relatively moderate or low (i.e., under 60 percent of GDP), but it dipped to just 1.6 percent when debt was high (i.e., above 90 percent of GDP).]

Wha….? So economists know that a debt-to-GDP rate of over 90% is correlated with an irrevocable economic decline. How much is Japan’s debt-to-GDP rate again? 244%!?!?!?

I must be dim. I still don’t get why inflation is such a good thing? Do you?

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Inflation Has Not Cured Iceland’s Economic Woes – David Howden – Mises Daily

Is inflation a good thing? Has it helped bring slumped economies out of the doldrums in the past? A recent article takes a look at the cases of Iceland and Ireland.

Iceland allowed substantial swaths of its financial sector to collapse mostly foreign-domiciled subsidiaries while Ireland enacted blanket guarantees to keep its financial sector afloat.

Iceland quickly inflated its krona in a bid to regain international competitiveness through depreciation. By being locked in the euro, Ireland was unable to pursue a similar path and instead had to become more attractive to foreigners by lowering its domestic prices i.e., disinflation or outright deflation.

Read more at Inflation Has Not Cured Iceland’s Economic Woes – David Howden – Mises Daily.

So how did that work out? Here’s the short version, but click on the link to read the whole story:

Both countries still have problems. Iceland’s monetary controls are notably stifling needed investment, while Ireland is left with a large debt from bailing out its banks, and this is stalling growth. One thing is clear though — the effects of monetary policy are stark and the proclaimed benefits of Iceland’s inflationary policy were counteracted by the price inflation that ensued.

Don’t let a good crisis go to waste; learn something from it. As the tale of these two countries demonstrates, inflating one’s currency may give the appearance of recovery, but the truth is somewhat less rosy.

Is inflation a good thing?

With nice Mr. Abe hell-bent on a 2% inflation target for the Japanese economy, it’s surprising that some people question whether this is a good thing. Yet some do!

Here, Sheldon Richman  points out that price inflation is a consequence of monetary inflation, which has the effect of diluting the value of the paper money in our pockets. Echoing Karl Denninger and the New York Times’s blogger Binyamin Appelbaum, Richman writes, “prices typically rise faster than wages during an inflationary period,” and people on fixed incomes, e.g. retirees, lose purchasing power even faster. Richman summarizes the various arguments made for inflation:

  • rising prices help companies increase profits;
  • rising wages help borrowers repay debts;
  • inflation also encourages people and businesses to borrow money and spend it more quickly.

He then rather rudely knocks these arguments down.

  • It helps people to borrow and pay off debts! Does that make sense?
  • The advocates of inflation say it will raise business profits. Aside from the fact that raising profits is not the government’s job, does that really make sense?
  • While businesses will be able to charge more for their goods during an inflation, they will also have to pay more for the things that they buy, including labor. Where’s the real gain?

Japan has already seen this happen: the halting of all nuclear power plants in Japan forced power companies to import more oil and natural gas from abroad, and even to re-open closed down coal-fired power plants, and of course these imports cost more because of the combination of price inflation and a weak yen (both Abe policies).

  • As for the Times’ claim that inflation encourages people to borrow and to spend money more quickly (because its value is vanishing), what’s so good about that?
  • government has no business trying to prod us to borrow or to go on shopping sprees;
  • this discourages saving, which cuts against the need for more investment, research, and development — the real stuff of economic growth and rising living standards.
  • the Fed can’t be trusted to produce only a “little” inflation.

Wait, there’s more!

  • Because Fed-created money enters the economy at particular points (through banks and bond dealers), a select few people get it sooner than the rest of us. Those who are thus privileged are able to buy at the old, lower prices, while the rest of us don’t see the money until prices have risen.
  • That is an implicit tax and transfer.

Are we done yet? No!

  • Relative prices are what provide entrepreneurs and investors the information required for rational economic calculation and service to consumers.
  • Inflation changes relative prices.
  • Thus, it distorts the price system and, in turn, the multidimensional economic structure.
  • That means any stimulus is unsustainable [my emphasis] because the inflationary policy will eventually end and unemployment must follow as the inflation-induced errors are revealed.
  • Inflation serves the governing class. Honest, hardworking people should abhor it.

In another article, John Cochran questions whether inflation is a good thing – can it really help reduce unemployment, as that nice Mr. Krugman keeps arguing? He takes a look at employment and inflation figures during the 1970s in the U.S. for empirical evidence:

In 1961 inflation was near 1 percent with unemployment slightly high, just under 7 percent. By 1969, inflation had accelerated to nearly 5 percent as unemployment dropped to just above 3 percent (Stone, figure 3, p. 317). So far so good for the higher-inflation-as-a-panacea-for-lower-unemployment crowd. However, by 1973 inflation remained above 5 percent, but unemployment now was 5 percent (Stone, figure 4, p. 317). The situation continued to deteriorate: both inflation and unemployment approached double digit levels, as the economy more quickly adjusted to Federal Reserve go-stop policies.

Cochran continues with a warning: government interference in the economy by means of fiddling with the inflation rate leads to distortions which then require more intervention in a never-ending vicious cycle.

monetary expansion and a low (relative to the natural rate) interest rate may increase employment; the policy may appear to succeed. But, as Hayek and Mises emphasized long before the development of modern macroeconomics, the employment created by stimulus, whether monetary or fiscal, and whether implemented when an economy is near full employment or initiated at a point where significant unemployed resources are available (Hayek 1939 and Ravier 2011) is unstable. Such employment, if it is to be maintained, will require ever-increasing distortions to the spending stream. A policy that uses inflation to generate employment hence contains the seeds of a return to stagflation, and if continually attempted every time unemployment begins to increase, ultimately, to the choice whether to end the inflation or move forward on a wrong path to a eventual crack-up boom.

Cochran concludes:

More inflation now would just repeat the mistake, trading some lower unemployment now for more unemployment and more inflation in the future. To avoid holding a tiger by the tail avoid inflation now. The crisis and slow recovery should not be an excuse to revive failed Keynesian policies but instead to examine critically a denationalization of money.

In case the reader is eager for more punishment, here’s a 25-minute interview in which Mark Thornton explains why a little inflation is not a good idea : Is Inflation a Good Thing?

 

 

Wages have never kept up with artificial inflation

Businessman and investor Karl Denninger blogs on his Market-Ticker site about a recent Bloomberg news article, which says in part (with Denninger’s emphasis):

If there was any consolation in the Sunday New York Times front-page article, “In Fed and Out, Many Now Think Inflation Helps,” it was that the “in Fed” names were few and far between. Yes, Federal Reserve Vice Chairman Janet Yellen, who was nominated to replace Ben Bernanke in January, is mentioned in connection with the idea that “a little inflation is particularly valuable when the economy is weak.” But that was it.

There is no guarantee that wages will keep pace with prices. The Times’s Binyamin Appelbaum says as much in a blog post yesterday, responding to what he says were “skeptical responses” from readers to his Sunday article.

via Market-Ticker – My God, She Makes Sense?!

To which Denninger adds,

How about this: It has NEVER worked before and won’t this time either.

The global finance website Zero Hedge has this to say about “Abenomics One Year Later”:

Abe has managed to devalue his nation’s currency by 25.5% against the USD in that time and the price of Japanese government bonds (despite some early teething trouble with the government’s repressive activity) is practically unchanged up 0.75% on the year. But away from the ‘market’, Job creation remains stifled, inflation is rising (but thanks to import prices) and wages languish down 0.9% as the trade balance is collapsing.

Tonight provided another example of Abenomics failure to spur real growth… Jobs-to-Applicants ratio rose at the slowest pace since Abe started and missed expectations by the most in a year…

Both Denninger and Zero Hedge strongly suggest that Japan’s economic “growth” is illusory, and, as that of the U.S., is a result mainly of central bank spending. Take that away and there really is no growth.

Zero Hedge quotes a Financial Times article by Gavyn Davies:

 the rise in the Nikkei has had positive wealth effects on consumption, so the central bank can claim some of the credit for the recovery.

Unfortunately, the “rise in the Nikkei” has not been due to real economic growth, and therefore has not been matched by wage increases, which phenomenon can also be seen in the U.S.

inflation has broken into positive territory after many years below zero. Unfortunately, much of this change has been due to the rise in import prices,

which rise itself is mainly due to Abe’s policy of weakening, i.e. cheapening, the yen. Under this policy, consumers get it in the shorts, but big export companies make money, so that’s all right, then isn’t it, boys and girls?

The FT points out that Japan’s experiment is unprecedented in modern times:

Japan is not alone among the developed economies in facing fiscal problems, but it has left it much later to begin to address them. (See, for example, Martin Wolf on why the US fiscal problem in the next decade is much less serious than many think.) According to the IMF, Japan is running a structural budget deficit of about 9.2 per cent of GDP in 2013, and that will still be as high as 5.7 per cent even if the sales tax increases are implemented in full, and the temporary fiscal boost is ended, by 2015. In fact, the IMF’s latest Article IV Report on Japan says that the full fiscal adjustment needed in Japan is about 11 per cent of GDP, only half of which has even been earmarked. This would be the biggest such adjustment ever undertaken by a modern democratic country.

The FT article concludes:

The great unknown for Mr Abe and his successors is whether this fiscal tightening can be accomplished without tipping the economy back into recession. If not, the future may eventually hold further monetisation of the debt, with an even bigger devaluation and much higher inflation.

Much higher inflation? How high? Well, India is facing food inflation now of over 18%, mostly a result of similar attempts by the government and the central bank to manage the economy. I’m reminded of a saying about time management: “Time management is an impossibility – you cannot manage time, time manages you.”

India is now finding out that trying to manage the economy is like holding a tiger by the tail. The government is hastily repealing measures it put in place not long ago to prop up its falling currency. Yet another example, perhaps, of unintended consequences (and on this topic, I warmly recommend Herbert Spencer’s little book  of 1884, “Man Against the State”, especially chapter two “The Coming Slavery”, in which Spencer writes about unintended consequences, by which he means consequences that are quite unexpected by the politicians who enact their bills, but perfectly predictable by anyone with both common sense and a knowledge of history:

It is said that when railways were first opened in Spain, peasants standing on the tracks were not unfrequently run over; and that the blame fell on the engine-drivers for not stopping: rural experiences having yielded no conception of the momentum of a large mass moving at a high velocity.

The incident is recalled to me on contemplating the ideas of the so-called “practical” politician, into whose mind there enters no thought of such a thing as political momentum, still less of a political momentum which, instead of diminishing or remaining constant, increases. The theory on which he daily proceeds is that the change caused by his measure will stop where he intends it to stop. He contemplates intently the things his act will achieve, but thinks little of the remoter issues of the movement his act sets up, and still less its collateral issues.

When, in war-time, “food for powder” was to be provided by encouraging population—when Mr. Pitt said, “Let us make relief in cases where there are a number of children a matter of right and honour, instead of a ground for opprobrium and contempt,” it was not expected that the poor-rates would be quadrupled in fifty years, that women with many bastards would be preferred as wives to modest women, because of their incomes from the parish, and that hosts of ratepayers would be pulled down into the ranks of pauperism.

Legislators who in 1833 voted £30,000 a year to aid in building school-houses, never supposed that the step they then took would lead to forced contributions, local and general, now amounting to £6,000,000; they did not intend to establish a principle that A should be made responsible for educating B’s offspring; they did not dream of a compulsion which would deprive poor widows of the help of their elder children; and still less did they dream that their successors, by requiring impoverished parents to apply to Boards of Guardians to pay the fees which School Boards would not remit, would initiate a habit of applying to Boards of Guardians and so cause pauperization.

They never dreamed of these consequences, yet these were indeed the consequences of their acts, and in hindsight were they not obvious, or at least highly likely, given a knowledge of human nature? This chapter remains as fresh and relevant (unfortunately) as when it was written over 120 years ago. (I have been unable to locate a Japanese translation; if any alert reader can do so, perhaps he or she would have the kindness to inform me.)

 

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Yen Surges As Japanese GDP Misses By Most In A Year | Zero Hedge

If you are one of those who never believed in Abenomics, then the following will not come as a surprise. After reading the below, read this piece: Five Years Later, Fed Finds QE Has “At Best, Moderate Effects on Economic Growth”.

There goes the tax hike (and any expectation of fiscal balance). Japanese GDP grew at a miserly 0.6% QoQ, missing expectations of +0.9% (the biggest miss in a year) and slowing from an already revised lower 0.9% growth in Q1. So much for Abenomics breathing life back into a balance-sheet-recessed nation. Typically this kind of miss would be met with cheers as bad is good but in the case of Japan where they are so far down the rabbit hole, there is no moar left. The already collapsing JPY-carry trade is unwinding in a hurry as JPY surges to a 95 handle on the news; the USD is dropping, Nikkei futures are down 200 points, S&P futures are down a few handles, and gold is holding notable gains.

Read more at: Yen Surges As Japanese GDP Misses By Most In A Year | Zero Hedge.

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Japan Tells Firms “Stop Sitting on Cash”, Ignore the Lack of Customers

Abe now tells Japanese firms “Stop Sitting on Cash

via Mish’s Global Economic Trend Analysis: Japan Tells Firms “Stop Sitting on Cash”, Ignore the Lack of Customers.

Click one of the 2 links above to read more. Below are Mish’s frank comments:

What is with these central planning fools anyway?

Not only do they think they know better than the free markets, they want companies to produce what their customers clearly do not want.

The irony in this situation is that Abe is hell bent on producing inflation in Japan.

Here’s a simple question: What happens to prices when more products are produced in the face of falling or static demand?

Abe is a fool in the first place for his inflation targets, but he is even more of a fool to think producing merchandise no one wants is the way to achieve that goal.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Red Flags! | Zero Hedge

History is fascinating, don’t you think? Here’s an interesting tidbit:

the ONLY time any nation on this ball of dirt we call home has managed to repay a truly humongous debt was between 1815 and 1900 when the Brits managed to set the record after their total debt to GDP reached a whopping 260%. Mind you took an industrial revolution to help them along.

A little factoid you might wish to consider: Total debt to GDP over 260% has NEVER EVER been repaid before ANYWHERE ANYTIME.

Next little factoid: Countries presently exceeding this magical line in the now digital sand include Germany, Canada, United States, Switzerland, Italy, France, Japan, South Korea, Spain, United Kingdom. Just saying.

via Red Flags! | Zero Hedge.

“Ze Price Stabeeleetee”: The Market Impact Of The BOJ’s Interventions | Zero Hedge

Quick summary: Zero Hedge quotes the Bank of Japan’s homepage to show that the Bank’s own recent interventions go against the Bank’s stated purpose; Karl Denninger does the same for the Fed, and an Austrian economist reminds us that the inherent fallacies in  expansionary monetary policies were pointed out at least 100 years ago by Mises.

Quoting from the Bank of Japan’s homepage, Zero Hedge reminds us of the purpose of the Bank:

“The Bank of Japan, as the central bank of Japan, decides and implements monetary policy with the aim of maintaining price stability. The Bank of Japan Act states that the Bank’s monetary policy should be aimed at achieving price stability, thereby contributing to the sound development of the national economy.”

via “Ze Price Stabeeleetee”: The Market Impact Of The BOJ’s Interventions | Zero Hedge.

Why this reminder?

Because when your primary stated goal is achieving “price stability” through unprecedented intervention, and instead you break the markets (both bonds and stocks) it may be time to reevaluate.

Meanwhile, another observer, Karl Denninger, reminds his readers of the purpose of the Federal Reserve Board (quoting from the Fed’s homepage):

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

What’s the point of this reminder? Because the Fed, too, like Japan’s BoJ, dreams of a “desirable” 2% inflation rate, yet according to the Fed’s own guidelines, this is, ahem, not actually legal:

It is often said that 2% inflation is “correct”, “necessary” or “desirable.”  Did you pass 5th grade math?  If you did then you know that 2% compounded over 45 years (your working life, basically, from 20 – 65) results there being 244% more “dollars” for a constant volume of goods and services over that time. Put another, and easier-to-understand way, you have 41 cents of every dollar you saved at age 20 when you reach 65.

How is this “desirable”?  It’s not, unless you are lending money in which case it’s necessary to protect your ability to get paid.  When you lend money at interest the interest doesn’t exist in the economy!  Therefore either there is real growth that is matched by the money supply sufficient to cover the interest or you are not going to get your principal and interest back.

All “pre-programmed inflation” boils down to is an attempt to rig the game so lenders get paid first and your purchasing power is reduced to the scraps of whatever remains.  Get out a pencil and paper and run the facts yourself.  While you’re at it contemplate whether you like the fact that your computer or TV this year is double-digit percentages cheaper in price than it was last year.  That happened due to innovation and productivity in the technology space — benefit you should get because you are the ones who get up and go to work every day.

Not only is this a bad policy it’s actually illegal.

Read more at Virtually Everything You Have Been Told is Wrong | Market-Ticker

And if you’re still thirsty for more, I suggest David Howden’s “Japan’s Easy Money Tsunami”. A teaser:

Depreciating your currency does make your export goods cheaper for foreigners to buy. However, it also makes it more expensive for you to buy imported goods. This helps to close a trade deficit and reduces foreign investment in your economy. However, if the goods you sell to foreigners are composed of many inputs that you have to purchase from foreigners the effect will be to drive up your cost of production.

Therefore, Japanese exporters will pay more for the inputs that they will need to import to construct the same goods they intend to sell to foreigners. This effect is especially noticeable in countries with large export markets, but only a small ability to supply the inputs for goods destined for export. No other large economy fits this description better than Japan.

The ineffectiveness of the policy in the long run is apparent when one understands how prices – both domestic and foreign – interact to determine exchange rates. Exports will be promoted in the short run, though the effect will be cancelled in the long run once prices adjust.

If the policy is ineffective in the long run, Mises demonstrated that the short-run gains are illusory. The same monetary policy aimed at depreciating the currency to promote international trade will reap domestic chaos.

That is Ludwig von Mises, whose “key insight” was published first exactly 100 years ago in The Theory of Money and Credit (download a free pdf or epub version, or read it online here and why not try Robert Murphy’s Study Guide to it),  (and followed up shortly afterwards in “Human Action“).