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.
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.
*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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