No Country Can be Made Great by Devaluation

John Connally, President Nixon’s Secretary of the Treasury, once remarked to the consternation of Europe’s financial elites over America’s inflationary monetary policy, that the dollar “is our currency, but your problem.”  Times have certainly changed and it now appears that the dollar has become an American problem.

 

Richard Nixon and his treasury secretary John Connally. The latter is today mainly remembered for his remark on the dollar, which presumably gave European finance ministers a few nightmares at the time. Nixon defaulted on the gold exchange standard in 1971, which effectively ended the Bretton Woods agreement and led to the whole world adopting a fiat money standard. Nixon’s announcement of the default stands to this day as a textbook example of government lies and hypocrisy, garnished with a more than generous helping of economic illiteracy. It seems unlikely that he realized that his actions on that day would give birth to the greatest credit bubble in history, but they did.

Photo via twitter.com

 

In a recent interview with the Wall Street Journal, the soon to be 45th President of the United States believes that the greenback’s strength – up some 25% against a broad basket of currencies since 2014 – is now “too strong,” “killing us,” and has hurt companies trying to compete overseas.*

A top Trump economics advisor, Anthony Scaramucci, reinforced his boss’ sentiment adding that “we must be careful of a rising dollar.” Apparently, making America great again does not include the nation’s monetary standard.

Trump’s belief that the dollar is too strong also shows a distinct lack of historical understanding.  Every great nation and empire (which Trump promises to restore America to) had a sound monetary system.

 

Donald Trump probably sees a strong dollar as inimical to his protectionist program. Foreign trade is one area on which Trump is really out to lunch. Mercantilism and protectionism may be as popular as ever, but they are economic nonsense and an infringement of personal liberty to boot. Naturally, we are not confusing today’s managed trade arrangements with truly free trade – but neither currency devaluation, nor tariffs represent an improvement.

 

It is no coincidence that the pound sterling was the world’s “reserve currency” at the time when the British Empire was at its height.  Debasement of it to finance Britain’s insane decision to enter World War I led, in large part, to the eventual loss of its empire.

If Trump truly seeks to restore American greatness at home and its prestige throughout the world, devaluation of the currency is not the way to go.

 

Victims and Beneficiaries

Nor does a weakened dollar benefit the middle class whom the president elect throughout the campaign has pledged to help. In fact, it has been the fall in the purchasing power of the dollar due to the inflationary policies of the Federal Reserve which have decimated the living standard of the middle class.

And, while the proposed Trumpian middle class tax cuts will help, just as important is a sound monetary system if Middle America is to become a creditor class once again.

Pensioners and retirees, another group that Trump has promised to help, would continue to see their financial condition decline under a policy to weaken the dollar. A fall in the purchasing power of money would devastate the income stream of pensions and social security payments.

 

The shrinking dollar: since the establishment of the Federal Reserve, it has lost 96% of its value. Since that figure is based on the government’s own highly dubious price inflation statistics, the loss was probably even greater. Not to put too fine a point to it: this is not the way to get richer – click to enlarge.

 

While a weaker dollar policy would hurt the middle class, retirees, and savers, it would benefit those who are largely responsible for the continued economic doldrums of America – banksters and the government.  A weaker dollar would allow the government to continue to borrow and maintain its profligate spending.

Financial houses and bankers would receive credit at nearly zero cost, which would allow them to continue to blow bubbles in asset markets.  Export firms, too, would benefit  – at least for a while –  but would more than likely face retribution from foreign governments and central banks which would retaliate with their own devaluations, potentially sparking currency wars.

 

Sound Money is the Only Solution

Talk of “currency manipulation,” “weakening the dollar,” “trade deals,” and the like do not address what lies at the heart of not only America, but the Western world’s economic problem – too much debt.

The reason why the West has been able to incur its current gargantuan level of debt is not because of a “weak” or a “strong” dollar, but because the dollar is a fiat currency not backed by any commodity.

 

Total US credit market debt (last update at year-end 2015: $63.5 trn.) – this is indeed the largest credit bubble in history. It was enabled by the adoption of a full-fledged fiat money standard after Nixon’s default on the Bretton Woods gold exchange clause – click to enlarge.

 

A true gold standard, where each currency unit represents either gold or silver, provides monetary discipline which prevents politicians and bankers from incurring ruinous levels of debt.

Since money is the lifeblood of an economy, any hope that one can be turned around without a stable monetary order is, to say the least, delusional.  If president-elect Trump and his policy makers do not realize this, they will be severely disappointed in the years to come.

 

Conclusion

Sound money allows for the accumulation of savings and capital formation, the essential elements of the market economy and the only basis upon which real economic growth can occur.

More savings and capital are needed to boost production and create employment, not supposedly wiser and more competent international trade negotiators. Talk of currency devaluation is what is typically heard from banana republics, it should not be advocated by those who have aspirations of making their country great again.

 

References:

 

*Tyler Durden, “Dollar Tumbles After Trump Calls Currency ‘Too Strong,’ Slams Border-Adjustment Tax.”  Zero Hedge.  17 January 2017.

 

Charts by St. Louis Federal Reserve Research

 

Chart and image captions by PT

 

Antonius Aquinas is an author, lecturer, a contributor to Acting Man, SGT Report, The Burning Platform, Dollar Collapse, The Daily Coin and Zero Hedge. Contact him at antoniusaquinas[at]gmail[dot]com https://antoniusaquinas.com/.

 

 
 

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4 Responses to “Donald and the Dollar”

  • wmbean:

    The problem of a monetary standard is that is cuts both ways. Money is a store of value to a certain extent. But what it represents is that third part to a transaction between buyer and seller that is mismatched. You want to sell apples and buy oranges, I want to sell pears and buy apples. We need a third party that will sell oranges and buy pears. We rely on money as a store of value to accomplish this exchange but it is still a third party to a barter system. This is the reality of money. Currency is simply another barter system only between nations who use different monetary systems. When we accept this concept then we must accept the concept that economic growth comes from either the growth of one’s population of from taking advantage of other nations. That is, if I can produce goods or services at a cost that I am acceptable to bear then I can sell to you at a price that is acceptable.

    I can hire here in the US in any state “Mexican” laborers at far less than the going rate for American union workers. Want to replace the carpet in your house with solid oak flooring? I can find the Mexican worker willing to work for half or a third of the hourly rate than the American union worker. So why should we be surprised that Germany produces goods for less because their labor unions accept less per worker? the principle is the same. Of course the birth rate for the German is less than the rate of reproducing the population. That is, the birth rate is falling and fewer “Germans” are being born, thus resulting in a net reduction of the population minus any immigrants. But then immigrants is another problem in the general accounting of a country’s GDP.

    So if President Trump can put us back on a gold standard what will happen? One can imagine an economic collapse due to the scarcity of money relative to the excessive amount of debt (you name the source). That is not likely to happen any tine soon. So what is left? Perhaps a gradual reduction of governmental debt? A willingness to let bad corporate debt and consumer debt fail? The fact is that as a nation and as a world we will be left trying to keep our individual and collective heads above water until we can’t. We cannot transition to a gold standard or any other ultimate standard gradually. It is an all or nothing affair. Once the few nations and then the many try to go back to an absolute monetary standard then demographics play a large part in GDP. Declining populations mean declining GDP in an absolute monetary standard world.

  • woodsbp:

    “Every great nation and empire (which Trump promises to restore America to) had a sound monetary system.”

    That was then – but not any more. Great states and empires were great at manufacturing and exporting – provided they could obtain the necessary raw materials at home or at significantly discounted prices from abroad. Production has been moved overseas and robots can operate for 24/7/365. You need more and more and more consumers with disposable incomes. If consumer incomes are insufficient – then shift to credit. Problem is debt expands faster than incomes: eventually its BOOM! time – again.

    “Sound money allows for the accumulation of savings and capital formation, the essential elements of the market economy and the only basis upon which real economic growth can occur.”

    “More savings and capital are needed to boost production and create employment.”

    Really? New or additional ‘savings’ can only come from your disposable income. See problem above.

    Creating employment? You have a natural increase in population – say 1% p/a, and possibly some nett immigration also. Now you need to expand your real (as opposed to financial) economic activity at something over 2% p/a – compounding. Then you have to account for the compounding increase in debts. Now you have to expand your domestic economy at something over 3% p/a – compounding. No longer possible. The required quantities of raw energy and materials need to advance the global economy of 7 bill souls by 3% p/a – compounding, are not available on this finite planet.

    We might manage a 1% p/a – simple interest style expansion of economic activity. But that won’t absorb an expanding population, allow for steady income increases, or boost government revenues or provide adequate pensions. Sound money is hardly an appropriate answer to any of those matters.

    Populism (or Political Realism) is alive and well and coming to a neighbourhood near you. “Gird your loins!”

  • If we go away from paper money, the only kind of money is gold and silver coin. Nothing else would last, as we have seen the game of gold exchange and other BS foisted by the credit bankers, who can never pay in a pinch.

    One only need look at Switzerland to see the value of stable money. The same held true of Germany, which still has a sizable manufacturing base, despite being a high wage country, prior to the Euro. The longer the US has trashed its money the worse things have become. One cannot accumulate capital by diminishing the measuring stick.

    The real reason for the dollar rally is international debt and the fact the dollar needs to be earned to keep the trade credit lines open. All these currencies are nothing but bank paper. They have little to do with the actual nations, just their bankers. Once the bankers have acquired what they want on an international basis, from around the world, the dollar will decline. That, or the IMF will come in and hold a fire sale.

  • At the same time the well articulated article explains what should be (for the sake of all) and serves a positive purpose, it appears – to me at least – as investment advice. That is, as I do not trust banksters (on gobmnt payroll or not), nor do I trust The Donald then I am assuming that not the sage advice of this article, but rather populist, quicky solutions will be de rigeur policy of the new administration.

    All the banksters around Trompus (Trump+POTUS>>???) will benefit even more from new QEn+1 and with the ego of TROMPUS, it will be not long before he is convinced that he, and he alone in recent history, can get the fiscal house in order with inflation a la TRUMP Tower magnitude, all under control of course.

    Yes, coming to an arena near you soon, the greatest of great battles. Pre-fight will be Godzilla, Super- & Spiderman Team vs. All the Avengers. Nothing compared to the main event: the great TROMPUS Inflation Printmachine vs. the Globusgobbler Disinflation Force!!! get your tickets now!!!

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