Currency: the race to the bottom.
- Ivo Vegter
- 12 Oct 2010 07:01 (South Africa)
Wherever you turn, you find central bankers intent on devaluing the currencies under their control to keep pace with the falling US dollar. There's a reason they should never have been in charge of our money.
When the US decided in 2008 and 2009 to print money to blow some demand-side life into a failing economy, it was repeating a century-old conjurer's trick. What had started as a long-term policy of monetary inflation, designed to whittle away at the cash in consumers' pockets to pay for the public works projects and welfare state services of the 20th century, had now become a headlong race to print ever-more money.
Government economists hide what they're doing behind diversions and euphemisms. They talk of "quantitative easing", so it doesn't sound like they're just printing money. You'll hear them warn about deflation, although this is only a short-term expectation because falling asset prices mean consumers are saving money rather than incurring new debt to spend.
What they don't dare to tell you is that over the long term, printing money can have only one effect: inflation. As more money chases the same amount of goods and services, prices rise, and the value of the cash in your pocket decreases. Worse, as governments incur more debt to magically produce all this stimulus money, they end up printing more and more and more.
We have a word for that. It's called hyper-inflation. One only needs to look at history to see the disastrous results once governments acquired the power to control the money supply, and used it to chase their own tails in the attempt to stimulate sagging economies. The classic examples, Weimar Germany and modern-day Zimbabwe, are merely extreme forms of exactly what is happening to the US dollar.
This is not a new thing. The value of the dollar was astonishingly stable for the whole of the 19th century, when all currencies were backed by gold or silver. A dollar minted in 1900 was still worth 96c in terms of the original 1774 dollar.
Today, the dollar is worth less than 4c, in 1774 terms, relative to consumer prices. Other bases for comparison result in even worse results. Put simply, the dollar collapsed in the last 100 years. Other major currencies show the same trend, for the same reasons. For instructive procrastination, you too can play with the relative value over time of money, although it will make you depressed.
The dollar's stability was sacrificed early in the 20th century with the establishment of the Federal Reserve and the Great War. The easy money to pay for the war resulted first in the bubble of the 1920s, and then, predictably, in what we now call the Great Depression.
History has been repeating itself ever since. Governments, instead of learning from it, take refuge in a turgid theoretical defence of the idea that government spending is great. Pumping money you don't have into a sluggish economy is good, this theory goes. Better yet, this can be done simply by printing it.
The excuse for not learning from history came in the form of an insiduous tome written by John Maynard Keynes in 1936, called The General Theory of Employment, Interest and Money. Put simply, the thinking was that governments should issue debt and spend into economic recessions to stimulate demand. This artificial demand, the Keynesians in government believed, would make recessions less deep and preserve employment. This is true, in the same sense that paying off one credit card with another makes the repayments easier for a while. It saves you money that can be used for other expenses you think are equally important, and provides temporary relief, but in the end you know you'll pay for longer and pay more. If you don't, your mother will tell you so.
Sadly, your mother's economics had been abandoned, and Keynesian conjuring became the staple of many an economics school. Of course, ordinary consumers could not be fooled by the eggheads who believed in government control over their lives. They're not stupid. They understood that the only way to pay for the debt incurred by government spending was either to pay for it later, when tax revenue caught up, or, since this never happened, to "deflate" the debt by printing even more money.
They noticed that the currency in their pockets lost its value, and that this meant spending it as fast as possible was a sensible thing to do, compared to saving for the future. Besides, the government would look after them in their old age, wouldn't it? It promised.
What they saw happening was an invisible tax, completely under the control of the government, to pay for whatever spending might take its fancy, good or bad, necessary or unnecessary.
Naturally, people turned to trading with currencies that could not be devalued at will. This ridiculous exercise of personal freedom had to be nipped in the bud, however. Currencies created by the market – which is where currency had always been created – had to be stopped, by force. Legal tender laws were promulgated, which obliged citizens to accept the government's play money in all transactions. Had it been up to us, we'd be trading using commodities we could rely on to keep their value, such as gold, or bank notes from a trusted bank, or cattle, or rare sea shells.
For a time, the dollar remained based partially on gold, although most other currencies became backed by the dollar. By 1971, even this pretence was dropped. To pay for Lyndon Johnson's "Great Society" and the Vietnam War, Richard Nixon made the dollar, too, an imaginary commodity produced by the government printing press. Now, its value was entirely based on the perceived credit-worthiness of the United States, which has never – not yet, at least – defaulted on its sovereign debt. It was propped up by the safe-haven value of the US dollar as a global reserve currency, and the presumption that no US President would go quite as mad as Robert Mugabe.
To see the impact of inflationary monetary policy over the last century, don't bother looking at a money supply chart. Simply look at a chart of price inflation. The two match exactly. They're locked in a death spiral of ever-devaluing money, and ever-increasing prices.
The dollar's fall has implications for other currencies, of course. While major currencies are weakening, those of emerging markets (or alternative safe havens) become stronger. This makes exports more expensive, which places structural pressure on domestic economies that have to adapt to the new reality of poor Americans and Englishmen.
So, many central bankers in the rest of the world have decided they need some magic too. To name just a few, Japan, Switzerland, Brazil, Chile, Russia, the Czech Republic, Poland, South Korea and, indeed, South Africa, are all intervening (or talking about intervening) to keep their currencies from getting too strong compared to the collapsing dollar.
This makes no sense, on a number of grounds.
It is futile. We've been down this road before, and only currency speculators made money from the "one-way bet" that was the rand of a decade ago. Even large economies like the UK and Switzerland, with the billions of hard currency at their disposal, cannot defend their currencies without actually pegging their value. Even then, as Argentina demonstrated, pegs can be broken.
A strong currency reflects investor confidence. A strong rand says that South Africa is a great place to invest. The strong rand does not merely reflect the weak dollar, but it is evidence that investors are putting their money where their mouths are, by pouring money into South Africa. Last time I checked, this was a good thing. Why the complaints? You can't have your cake and eat it too.
You gain on the swings what you lose on the roundabouts. Although exports would become more competitive with a weaker rand, so would the exports of other countries. Imports would become more expensive too. It makes no sense to pay more for something than necessary, so why are expensive imports a good thing? Let us save the money or import more. In both cases, some of the saving (or imports) will be redirected towards productive economic activity – otherwise known as "stimulating the economy". When the rand is weak, we hear complaints that all our natural resources are simply exported. Now that the rand is strong, we hear complaints that our imports are too cheap and our exporters can't compete. You can't satisfy both camps; both are special-interest groups, and their interests conflict.
Some say that all we want is stability. True, we do. However, saying that you want a "stable exchange rate", as president Jacob Zuma has done, is meaningless when you preface it with "more competitive and...". Besides, what do we want the rand to be stable against? Something of value, one would hope. That counts out the dollar.
The US is worth emulating in many ways. Going down the black hole of printing money is not one of them. It will ensure that we remain a marginal country, rather than a productive cog in the 21st century's emerging economy.
By contrast, China is worth emulating in only a few ways. One Chinese proposal that is worth serious consideration is its attempt to institute a currency peg against a basket of currencies, rather than the US dollar alone.
It isn't a simple matter, and it isn't an ideal solution when everyone is printing money as fast as the presses can churn out notes. However, it would appear to be one step back from the precipice. Forcing governments to openly collude with one another if they want to devalue the money in your pocket to satisfy their urge to spend, is one step closer to taking away that power altogether. One day, we may get back to a world in which our currency retains its value, and our governments have to ask the consent of citizens to levy taxes instead of stealing it from them by inflating the money supply.
Threatening intervention in the market to change the value of a currency only declares that the economic decisions of citizens about when to save and where to invest are not theirs to make, but should be given to the most profligate spender of us all: the government.
But all this theory is technical and dreary. Let me put it in simpler terms: The dollar is collapsing. Being jealous is stupid.