Is Germany a currency manipulator?

Albert Edwards says yes and Paul Krugman says not in a way it is helpful to dwell on.

No surprise, I could not agree more with Krugman’s pragmatic approach to this.  I am not saying he is doing the economics right, although I have no reason to doubt he is. Rather, he gets the question right, which is a big part of making it possible to get the answer right.

The question of whether a country is a currency manipulator is not actually relevant to whether or not a partner would benefit from trading with them.  If Germany were to give us stuff cheaply, then it would not matter to us in the least whether this reflected that she had the advantage to produce it at low cost or that she was somehow discounting it for the US market. Either the US benefits from having access to low-priced imports on the standard logic of the gains from trade or there is some complexity here wrecking that simple argument and we do not.

The range of possible complexities is wider than I am informed on this issue.  But whether the source of the cheap good available from Germany is natural or artificial is entirely beside the point.  Please pause to internalize this point — even if you end up thinking it is stupid.

Maybe we want to protect an infant industry here. Maybe the distributional consequences of unfettered trade with Germany are too extreme.  Maybe we want to threaten to harm ourselves to get Germany to do something to benefit us.  You can have a good debate about such issues and it can get really complicated really fast.  But none of it really boils down to why it is that Germany can give us stuff inexpensively. This very simple point is very often overlooked because people are — here as on many other occasions — distracted by pointless essentialism. What IS Germany? Is she a manipulator or not?

The idea of currency manipulation has not entered the lexicon because it is a compelling consideration from a welfare maximization perspective. Rather, we use the term because politicians do not fully accept the standard gains from trade argument but instead seek an armistice in a mercantilist contest.  They say to one another, you don’t manipulate your currency, and I won’t manipulate mine. They agree to this not because it allows the logic of free trade to work, but because neither side is really willing to act on that logic.  They simply want to corral the other guy away from protecting against them, which is not necessarily wrong, but instead worth understanding for what it is.

This is yet another example of where honest and productive analysis of a situation focuses on what the effects of actual policy initiatives are and why we care and surely not on what the essence of a thing is.  If we are down to tearing up trade agreements, then the question of whether we want to continue trading with Germany is all about the effects on us (and them, if we care for some reason) and nothing to do with whether Germany IS or IS not some abstraction.

Maybe I will be corrected, but I assume this would be obvious to anyone who considered it for just a moment. There is the old joke about the sun giving us all that power for free, dumping it into the terrestrial market. I think that makes the point well. The source of the humour is obvious.  Forgive the metaphor!  But people get distracted by essences. It is a thing.