Monetary easing no help in long term

It is hard to quantify the effect of currency value on competitiveness. Exchange rates are only one of the many variables in the cost equation. For example, the renminbi has appreciated more than 20 percent against the US dollar in the past few years. But that has not had too great an impact on its overall competitiveness as a manufacturing base for many foreign companies.

Placing too much emphasis on currency value in gauging competitiveness ignores much more important factors, such as political stability, policy consistency, infrastructure facilities and the quality and availability of workers. On the currency front, exporters and investors care more about exchange rate stability than relative value.

Of course, there are extreme situations that make devaluation inevitable. Several Asian countries, notably South Korea and Indonesia, were forced to massively devalue their currencies to resuscitate their economies that were badly battered by the outbreak of the regional financial crisis in 1997.

Indeed, some noted economists contend that those eurozone economies, particularly Greece, that were brought to their knees by the sovereign debt crisis would not be going through such a painful readjustment if they had the option to devalue their own currencies.

But in more normal circumstances, exchange rate fluctuations are a necessary part of an economic adjustment, which is mostly automatic in a free economy. Of course, central banks usually feel necessary to intervene to mitigate the pain caused by unbridled market forces.

Monetary easing and the resulting currency devaluation can bring short-term economic gains. In the longer term, provided we're not all dead, the world's major economies can do themselves a favor by establishing a stable foreign exchange regime.

(China Daily 05/20/2013 page10)