by Basil Gala, Ph.D.
In Search of Meaning
In 2010 so far we have seen the U.S. dollar rise in value in exchange with the euro and other currencies. Investors holding euros fled to the dollar because they feared the collapse of the European currency, not because they admired the dollar’s purchasing power; gold also rose in tandem with the dollar as a safe haven for cash in the hands of wealthy individuals, companies, and nations. Foreign currency reserves are now over 62% in U.S. dollars, below 28% in euros, 4% in pound sterling, 3% in Japanese yen, and all others 3%. The Japanese economy is the second largest in the world, and the Chinese the fastestest growing, yet people don’t hold large quantities of the yen and yuan (renmimbi) as reserves. Why? What makes people hold a curency in reserve? Why is a currency strong, weak, hard, or desirable and for whom? France and Germany want a strong euro, while Italy, Greece, and Spain would prefer a weaker one. The Chinese have pegged their yuan 25% to 45% below its free market rate versus the U.S. dollar. What are the Chinese up to? Their government denies they manipulate the yuan to keep it weak; the Chinese finance minister claims that a strong yuan would hurt the U.S. Why are people buying gold in 2010 at over $1,200 an ounce when it costs about $300 to get it out of the ground? Do we want a weaker U.S. dollar and a stronger yuan to help export more goods to China and reduce our trade deficit with the Chinese? Shall we seek a still stronger dollar against the euro, say 85 U.S. cents for a euro as it was ten years ago? In Greece this summer of 2010, I find that my dollars buy here about half of what they buy in the States. The strong euro is keeping many American tourists from visiting Greece. The euro is still way over valued. Bring back the good old strong dollar.
Can a currency become too strong for a nation’s economic welfare? Yes, at some point a high exchange rate for the dollar would be bad for exports, although cheap imports would benefit consumers. What good are cheap products for the people when they are out of work? Retired persons, or wealthy consumers are happy with their purchasing power, but workers who produce goods in America cannot find jobs and have no money to spend on the low-priced merchandise. Japan has a super strong yen, which has stymied the Japanese economy, causing deflation and practically no growth for two decades. Yet, a currency which is too weak is worse. The exchange rate for the dollar should be just right—not too high, not too low, like many parameters in life, like sugar or pressure in the blood. For reasons on which I’ll expand, I lean towards a strong dollar.
I have other reasons for wanting a strong dollar besides my desire to increase my purchasing power in Greece where I live summers. A strong dollar is good for America, because a strong dollar demands reducing the national debt, balancing the federal budget, building productive businesses that turn out high-quality products efficiently, and shrinking of the welfare state while checking inflation with a measured supply of money.
I am fascinated by the subject of money, although I’ve never desired to possess more money than I have needed. As a youth I read Thorstein Veblem’s “The Theory of the Leisure Class” on conspicuous consumption, and I heartily shared the author’s contempt for money grabbing and spending. I determined to seek in my adult life the riches of imperishable ideas found in truth, beauty, and justice, their source divine. In a previous essay of mine, “Money: The Source of All Evil?” I examined the concept of currency inside the issuing nation, only briefly broaching money exchanges. In this essay I’ll be examining our currency outside the nation, exchanged with the currencies of other nations to trade, invest, lend, give, and bribe abroad, the dollar benefiting from great strength.
You are entitled to ask, what am I smoking in my pipe? Do I dream of a return to the fifties when the U.S. was the only industrialized country of size with undamaged factories, roads and rails, the world’s largest oil exporter with gushers in Texas, Oklahoma, and California? The U.S. dollar ruled the world, and our products were flooding world markets. When in 1953 I immigrated to America from Greece, a loaf of white bread, a gallon of leaded gas, and a neighborhood movie ticket were all about 25 cents. Television sets, black and white, were in every home, as well as refrigerators, ovens, toasters, and heaters, all American made, and made to last. Big cars with strong, heavy iron bodies, were lining the streets. Back then we had a tiny glass of orange juice with our breakfast of ham and eggs, and at daybreak the milkman, in white uniform and cap, placed glass bottles of creamy milk on the porch, next to the local paper the neighborhood boy had tossed earlier.
In 1953 Eisenhower settled the Korean war with an armistice and a demilitarized zone at the 38th parallel, and the nation was set to coast for eight years in the euphoria of Ike’s presidency, secure and unchallenged except by the Soviet Union in the military sphere only. The U.S. dollar ruled supreme. Do I want that? No, those days are gone, never to return. We live these days in the world with a united and industrialized Europe, with the giant Japanese export machine, with the manufacturing dragon of China, and the services
elephant of India. Russia and Brazil are claiming their rightful share in the world economy with raw materials and manufacturing. The Canadian dollar has become more valuable than the U. S. dollar thanks to natural resources, oil, gold, also grains and industrial products. Australia too has become an export power with its iron, uranium, and other minerals feeding the Chinese industrial maw. The U. S. has lost stature in the world economy, but more importantly, other nations have emerged as big players. America can still lead in the world economy, as it can in the military arena, but America cannot command as in the Eisenhower years. Commanding is not the way to bring back a strong dollar.
Do we want a strong dollar as a nation? Europe, led by Germany and France, supports a strong euro. The strong deutchmark morphed into the euro. Why? Germany and France export technically sophisticated and expensive merchandise. These two countries, as well as the other European nations, import raw materials, especially oil, traded in dollars. Although a strong euro makes exports more difficult, the likes of Mercedes, BMW, Siemens, Channel, Michelin, and Vuitton are not greatly affected by a somewhat higher price for the euro—these companies and many others in medicines, paints, electrical and electronic equipment find markets for their products with those rich buyers in the world who want high-quality and prestigious merchandise. Keep in mind, no nation is totally poor, even Bangladesh or Haiti; they have among them many wealthy families who buy high-quality merchandise at high prices. On the other hand, a strong euro buys more oil and other raw materials outside of Europe. The Japanese too have a strong currency in the yen, because they produce Toyotas, Hondas, Nissans, Nikon cameras, and other sought after products of high technology, while they import much oil and other raw materials for their industry.
A currency with a high exchange rate, a strong currency like the euro inhibits tourists. Europe, however, has such great places to visit, with historical and cultural values, that tourists still come to Europe, although in fewer numbers now.
In 2010 the euro has credibility problems because countries in the southern tier (Portugal, Italy, Greece, and Spain–named PIGS) have different cultures and economies from the northern tier of Germany, France, Belgium, The Netherlands, and Finland (Ireland is a special case). What happened when Greece with a weak drachma joined Germany with the strong deutchmark in a common currency in 1999? The Greek government lied in the statistics for the nation’s deficit and growth. If I lied the same way on a loan application to my bank, I could be prosecuted for fraud. But, luring investors with high interest payments, Greece gained access to loans both for public and private uses. The Greek government, businesses, and private citizens took advantage of the easy financing to borrow to the hilt. Politicians build roads, bridges, airports, and mansions for themselves, and to win the public’s support provided jobs and higher wages. Business people refurbished plants with loans, but also invested abroad, bought yatchts, and kept paid lovers. The booming Athens stock market raised billions in capital, and much of it was misused or stolen. Private citizens got used to credit cards and consumer financing for car and furniture purchases. Whereas in the past Greeks bought and sold homes for cash, now they financed expensive residences, sometimes with no money down. When its state of finances was finally disclosed early in 2010, little Greece with 3% of Europe’s GNP became the epicenter of the sovereign debt crisis.
The other PIGS acted similarly to Greece. Things could have gone differently with the PIGS. The southern tier could have been the sunbelt of Europe, attracting new residents, high-tech industry, and capital invested in productive enterprises. What stood in the way? Corrupt politicians, citizens seduced by advertising and easy credit, short-sighted labor unions, commercial syndicates, and the well-entrenched culture of fiestas, siestas, and maňana.
China and India in the meantime issue the yuan and rupee which are cheap. These countries generally sell cheap merchandise and services. China and India ( Pakistan too) like weak currencies for themselves, because they can find markets for their low-quality exports. Their currencies discourage their citizens from buying foreign products, so their people turn to local producers for their needs, allowing only the wealthy to splurge for the luxuries of German, French, and American producers. Moreover, cheap currencies and wages attract investors in these countries, companies build factories, marketing outlets, and service branches, speculators buy equities and bonds in the local stock markets that finance established and new enterprises. China, and other developing countries are at the same time forcing foreign enterprises to form partnerships with their own business people, and see to it that some of the foreign technology transfers to them. This was the history of development in Taiwan, South Korea, Singapore, Hong Kong, Malaysia, and Indonesia–the little asian tigers–purr, purr, good pussycats. Now we deal with the dragon–argh, argh, and the elephant– stomp, stomp. Will the dragon and elephant be good and obedient to America, Europe and Japan?
With a weak yuan China does pay more for the oil and other raw materials it imports from Russia, the Middle East, Australia, and Africa. The Chinese counter this problem by arranging for advantageous long-term contracts with their suppliers, such as Iran, in exchange for political favors, loans, and technical assistance. China also scours the world to buy companies in commodities and negotiates leases and other deals in Venezuela for oil, Peru for copper, and other South American countries, in Africa, such as the Sudan for oil (ignoring the genocide in Darfur), in Central Asia, such as Afghanistan (one of the world’s largest copper mines being developed by the Chinese while the U.S. pours treasure into the country to fight Taliban), in Russia for coal, iron, and timber, and in Australia, where China gets much iron ore, uranium and other mining products.
Whatever the course of the emerging economic powers of China, India, Brazil, and Russia, we don’t want to go their way, even if we could. Yes, Europe, Japan, and the U.S. are deeply indebted as governments, but they’re still rich and technologically advanced. We want to stay that way and get further ahead with education, training, automation and robotics, investments in high technology and products of culture in entertainment. Our failures are consequences of being too liberal with our riches. Our welfare activities should be largely curtailed; let our people be challenged; let them provide for their own future and retirement, instead of allowing them to depend on government largess, inevitably bloating our nation’s debt.
We have a paradox in the world today: poor countries, like China, hold the debt of rich countries, like America. Japan has the highest debt of any rich nation, but held, however, mostly by Japanese citizens, interest income staying in Japan. The yen is a strong currency, but only 3% of international reserves. The yen keeps strengthening because of Japan’s trade surplus with the United States and other nations, causing deflation in the country, an unusual phenomenon with money. Deflation is a serious problem, making debt repayment more difficult for borrowers. Also, consumers are not eager to spend their yen, expecting further reductions in prices, resulting in economic stagnation and a low growth rate for the gross domestic product. Deflation can be cured quickly by printing more money, so why does deflation persist in Japan? The central bank officials don’t want Japan to pay more for oil and other essential raw materials, including soybeans from America and Canada.
In the United States by comparison, we keep getting inflation. The Federal Reserve Bank has an official target of 2% for consumer inflation. I disagree with Ben Bernanke and his fellows. The target for inflation should be zero (0%) over a lengthy enough period of time. Shocks to supply and demand of products will always occur, shortages, droughts, fiscal crises, disasters, wars, more competition from abroad, or less competition from our trading partners. But the homeostatic target of 0% inflation should be maintained, by applying positive or negative feedback to fiscal policy. And the 0% inflation target should apply to the area under the curve of prices times the GNP over several years, not to monthly, quarterly, or annual values, so that the purchasing power of the dollar would remain constant in the long term. Such an economy would lower interest rates dramatically for long term bonds, making more investment money available to business and government.
To cure inflation, however, it would help for us to reverse the cycle of dependancy in our population which our policy makers have entrenched and which has contributed to our national debt; otherwise, an economic and political collapse will do it for us.
Other factors have contributed to the national debt also. Among these are foreign wars (Korea, Viet Nam, Afghanistan, and Iraq), military bases in over 185 countries around the world, foreign aid (buying friends and influencing people), and investments by corporations, funds, and individuals in Europe, Asia, South America, and Africa. Companies set up plants abroad, employing locals and transfering jobs outside America. They rake in profits, but even more wealth goes to other nations, especially China, factory to the world. Government in the U.S. ends up with fewer tax receipts from workers and a larger caseload of unemployed people on welfare. Over twelve million illegal aliens work in the U.S., many of them paying no taxes, sending billions of dollars of their earnings to relatives in Mexico and other countries. We buy oil and other raw materials from other countries, which we mostly waste. We import cheap merchandise from China and other countries which doesn’t last, ending up in our dumps, or back to China for recycling. The national debt is ballooning. The debt will become impossible to finance when baby boomers reach retirement and the bill for national medical care comes due.
I say, stop all of the above policies and save the dollar before it becomes worthless through inflation or default of the debt–inflation is a form of default. Stop foreign wars with foot soldiers. If we’re attacked, as we were on September 11, 2001, punish the aggressors from the air or space. Close our bases abroad, bringing our troops home; build alliances with nations willing to shoulder their share of the cost of mutual defense. Stop trying to buy friends in foreign governments; that doesn’t work and we’re taken as suckers. Reward companies and wealthy people for investing at home, rather than for pouring their money in other countries. Put tariffs on shoddy imports, or set up other bars against imported products that fall apart quickly. Secure our borders against illegal entries; mining and random machine gunning at the border fence will accomplish this. Require a national I.D. card, as most nations do, gathering up and repatriating illegal residents. Raise the retirement age for able-bodied men and women; they live much longer now than when the social security system was set up in the thirties under FDR. It’s better for the health of older people to work if able, rather than sit on the couch watching television and guzzling bear. Switch the government medical care system to a system of wellness clinics, staffed mainly with trained nurses and specialists in natural therapies. Concentrate on health maintenance and the prevention of disease. Control tobacco, alcobol, junk foods, unnecesary drugs or surgeries and you cut the national health care bill in half.
If the U. S. Government quits spending more money than it collects in taxes we will have a strong dollar again. President LBJ spent too much on the Viet Nam war and the war on poverty printing dollars, which forced the Nixon administration to leave the Bretton Woods system in 1973 when an ounce of gold sold for $44. Had Nixon not taken this step, our entire hoard of gold at Fort Knox soon would have been shipped abroad in exchange for devalued dollars. In 2010 an ounce of gold is worth over $1,200, a measure of inflation since 1973. Inflation means that your dollars are worth less, buy less in products and services. Worse still, inflation forces people to spend their cash quickly, before it loses value, further aggravating inflation; people tend to buy land, buildings, other tangible assets causing price bubbles beyond their utility in such commodities, as in China today; inflation discourages people from saving part of their income (not happening in
China so far), thus decreasing capital formation, the force behind economic growth and advancement.
Another historic point for the dollar was 1933 when gold certificates were abolished and declared illegal. Before 1933 gold certificates (notes redeemable in gold) were freely traded and imposed a limit on the money supply.
There’s nothing wrong with fiat money, government notes for commercial transactions, if the government prints only enough for the nation’s needs. The government, including the Federal Reserve Bank, can’t resist printing money. Of course, in 2010 most transactions are electronic, debits and credits in computers, cash and coin in circulation being a small portion of the money supply. Electronic money is okay too, provided it does not over expand. Matters get complicated when a currency (the dollar, the euro, the yen, or the sterling pound) becomes international, held by other governments, companies, and individuals in reserve accounts. Now the issuing government has less control over the supply and demand of its own currency. Speculators and hedge fund managers turn currency exchanges into casinos, betting one currency against another.
When panic in the exchange markets ensues, because of loss of confidence in the dollar or euro for example, speculators all run for the exit, dumping dollars or euros, driving the value of the currency down precipitously, causing havoc in business and finance. In 2010 the betting is against the euro; in 2011 the tide could turn against the dollar. Certain firms and individuals with enough cunning, skill, or luck can turn huge profits in currency trading during such panics, leveraging purchases of their target currency with bank loans and fund assets. George Soros, today’s philanthropist, managed such a currency trading fund in his younger days, making himself into a billionaire. If you want to make money trading currencies, don’t believe a governement’s official pronouncement they want a strong dollar, euro, or sterling. Look at the government’s balance sheet instead; the government’s income and expense will tell you for how long the currency will be used in reserves.
Is it good for America then to own the world’s premier reserve currency? Yes, at least initially the U.S. can buy products without paying exchange commissions, a small advantage. Yes, the U.S. gets the purchasing value of the dollars pumped out to the world, but that advantage has a limit depending on the demand for dollars. Yes, the U.S. can have easier access to borrowing from foreign sources, governments (such as China these days), banks and individuals, but borrowing cuts both ways, having its big down side in a possible loss of confidence for the American economy. Then everybody runs away from our debt (as it happened to Greece in 2010), causing our borrowing costs to soar. I conclude, it’s best for our country to get out of the reserve currency business, although the business is very tempting for the government.
The dollar is free-floating and adjusts to the demand for our products and the interest we pay for our loans, unless foreigners use it for reserves. That’s the catch. Our people, government and citizens, will exercise better self-discipline in finances, if the dollar is truly free from investors and speculators, and is backed by precious metals, platinum, gold, and silver.
If we get out of issuing the world’s reserve currency, what takes the place of the dollar? SDR’s have been proposed by the United Nations Conference on Trade and Development (UNCTAD), supported by China and Russia. SDR stands for special drawing rights issued like money by the International Monetary Fund (IMF), based on the dollar, euro, yen, and pound. SDR money would facilitate trade, but still rely on the strength of the four major reserve currencies. All four of these currrencies could stumble badly in the future because the issuing governments are heavily indebted, especially Japan with debt about 200% of its annual gross national product.
Gold and silver are far better vehicles for an international currency in the form of gold certificates on paper or computer memory entries at banks. One objection liberals have against a gold standard appears to be reasonable. We don’t have enough gold in storage at Fort Knox to back our currency with it and our miners don’t produce enough of it for commercial transactions in an expanding economy. Perhaps, the American economy and the world economy should not be expanding that fast to avoid booms and busts. But we can import gold from Russia, Mexico, and South Africa for our needs. And we certainly produce plenty of silver in America. When America again produces good stuff the world wants, we’ll have the means to buy precious metals. If the whole world doesn’t have enough gold, then the price will rise to the needed level for domestic and global commerce, at the same time stimulating greater production from less fertile veins. Sure, gold producers will benefit for some time while we accumulate the metal in the same way we are benefiting from printing the world’s reserve currency on paper, but at least they’ll be digging for the gold.
Gold and silver have served well as currency for thousands of years. You can trust gold far more to retain value than fiat money issued by any government, even the Swiss one, which is very trustworthy. (The Swiss franc is hard, stable in value, but not much of a reserve currency because Switzerland is small, and not too strong to inhibit exports. Wise and rich are the Swiss because they are good at saving their money.) So, why did we abandon gold in 1973, 1933, and even further back in 1896?
In 1896 at the Democratic National Convention in Chicago, William Jennings Bryan made his famous speech against a gold standard proposed by Republicans, ending as follows:
“Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”
As a consequence, the dollar was cheapened to make life easier for debtors, causing moral hazard: letting people get away from their
responsibilities encourages irresponsible behavior in the future.
Gold was abandoned for political expediency, to appease the mass of people who lack the ability to reason. Nixon even tried price controls in 1973, a move doomed to failure in all places, all the time. 1933 was the peak year of the great depression. Franklin D. Roosevelt had to deal with 25% unemployment in America, people rioting, and communism on the march. He appeased people with easy money and socialism. In the long run, socialism or communism don’t work for a large society in the modern world.
When the Soviet Union collapsed in 1991, Gorbachev said the world had not been ready for communism. The world will never be ready for communism or socialism because they run contrary to human nature. Most people don’t mind working hard for a living; but when the fruits of their labor are turned over by politicians to those who are lazy or incompetent, they quit trying to produce more and better goods, or to save some of their earnings to invest. Ayn Rand was right on the issue with her “Atlas Shrugged” novelized thesis. Socialism may have worked somewhat in privitive tribes or kibbutz, where like-minded people voluntarily joined in a commune, but it doesn’t work in a modern society and an economy of great size. The 2008 financial crisis was not a failure of capitalism as socialists claim, but of socialism’s theory that every family should own a house, regardless of credit worthiness, and entitled to a good living whether they strive or not. Unfortunately, in 2010 the Obama administration is following on the same course of action with stimulus packages and government subsidies piling on the debt, which will inevitably sink the dollar and the U. S. economy.
Weak governments in weak nations rely on weak currencies. This is the way of the banana republics, Venezuela, Mexico, Argentina (Eva Peron tossing money to the people out of her train) or Greece before the euro. Let a currency lose enough value and public or private debt disappears. So does self discipline and hard work. When I decided to come to America 1953 my dad promised to send me some of my support money. While I was on the boat to the States, the Greek government devalued the drachma from 15 to a dollar to 30 to a dollar. In one day my support money was halved. What will happen to our savings and investments in paper assets (stocks and bonds) when the dollar is halved in value?
Debasing a nation’s currency goes way back. When the Roman emperors waged wars they put less gold or silver in their coins stamped with the imperial mug to have more money to pay soldiers. The most common denarius (like the $20 bill) ranged in silver from the official 4.5 grams (nearly pure) to only 2% silver in the third century with the decline of the empire.
A strong currency which retains its value is the expression of a strong economy and a strong disciplined people, a people unwilling to coast along on government handouts, a people ready to work hard, to be creative, doing work of high quality, not faking what they produce. That’s the kind of people the Germans became after World War II, bringing forth the deutchmark, Europe’s strongest money before the euro. The Germans tried hard to bring that spirit of effort and thrift to the rest of Europe by joining in a common currency. We in the United States should follow the example of the German people, boosting the dollar’s value and reforming our welfare system to a smaller size as the German government has been doing. On the other side lies the abyss.