*Nix The Dollar!* <http://www.forbes.com/2009/09/13/dollar-currency-gold-standard-opinions-columnists-john-tamny_print.html>John Tamny, 09.14.09, 12:01 AM ET
President Nixon's Treasury Secretary John Connally once famously quipped to a gathering of European central bankers that "the dollar may be our currency, but it's your problem." Connally got it partially correct. Rather than a problem solely suffered by those outside the U.S., the dollar's debasement on Connally's watch brought Americans great harm too. Devaluationist policies never enhance growth, and just as they created problems for the rest of the world, they similarly gave us the lost decade that was the 1970s. Connally made his comment when the dollar seemingly had a definition in terms of gold. The dollar was on the gold standard at one-35th of an ounce, and the rest of the world was on a dollar standard. It's not discussed much today, but the Bretton Woods agreement that pegged allied currencies to a stable dollar from 1944 to 1971 was the biggest factor in the world's post-World War II economic revival. Currency stability leads to the very wealth-enhancing trade that is essential to economic growth. Despite the $35 per ounce definition, by 1970 private markets for gold reflected a price of $47 per ounce. At $47, investors were correctly pricing in the likelihood that President Nixon would take us off the gold standard, and as such, did not wait to devalue the dollar. The dollar's decline quite simply *was* inflation, and since most currencies around the world were at the time defined in terms of the dollar, individuals lacking a U.S. address also suffered our inflationary mistake. Sadly, the low levels of inflation before the 1971 evisceration of the Bretton Woods agreement were a minor, and largely benign, hint of what was ahead. Even though the notion of an explicit dollar standard ceased in 1971, most of the world effectively remained on an implicit dollar standard in the aftermath of Bretton Woods. For countries that devalued alongside us during the unfortunate 1970s, their citizens suffered mightily. By 1980 the dollar price of gold briefly touched $875, and while most today point to nosebleed rates of taxation worldwide as the cause of ill economic health in the 1970s, the inflation wrought by the dollar's post-Bretton Woods collapse was the biggest tax of that decade, and the greatest wealth destroyer of all. When we devalue the dollar, it is frequently a worldwide event, given its outsized role in global economic activity. Happily for the U.S. and the rest of the world in the 1980s and '90s, dollar policy changed, and did so for the better. Ronald Reagan once said that "no great nation ever went off the gold standard." Robert Rubin's elevation to Treasury secretary under Bill Clinton coincided with a cessation of Japan bashing when it came to the value of the yen. History shows the Reagan administration erred with the devaluationist Plaza Accord in 1985 and that the Clinton administration ignored a strong-dollar deflationary episode on its watch. But the '80s and '90s were largely good for worldwide wealth creation--precisely because dollar policy was mostly in favor of a strong greenback. That's been far from the case this decade. Tariffs imposed on steel, lumber and shrimp--combined with the frequent bashing of China over the value of the yuan--were a strong signal that the George W. Bush administration preferred a weaker dollar. The markets complied, judging by the dollar's collapse against gold--from roughly $250 per ounce in 2001 to $1,033 in March of 2008. The Obama administration has picked up where the Bush administration left off when it comes to devaluationist policies. Though gold was trading in the $750 range upon Obama's election, Treasury Secretary Geithner's explicit statement that China is a currency "manipulator" in concert with the administration's unwillingness to defend the dollar has served as a signal that a weak dollar remains the policy in Washington. Markets have once again complied, judging by gold's spike to $1,000 per ounce. Just as it did in the 1970s, the dollar's collapse this decade has burdened the rest of the world. Simply put, the massive worldwide flight to property--a universal symptom of inflationary policies--would not have occurred without the dollar's debasement. It is, no doubt, interesting political theater watching the Republicans and Democrats point fingers about which side's housing policies led to the boom and bust, but the simple truth is that there would be no housing and banking crisis if the dollar had remained stable in terms of gold this decade. Not surprisingly, this decade's dollar mismanagement has led to suggestions from political figures in France, Russia, China and at the U.N. that the world needs a new reserve currency. One can only hope that something like this materializes. Indeed, what's regularly forgotten is that money is insignificant except as a measurement of value that enables investors to more reliably put capital to work, and producers to exchange goods. Far from wealth itself, money is what enables us to exchange and put value on true wealth. And though some equate a nation's power with the ability to issue currency, true economic power within any one country results not from seigniorage, but from the ability of its individuals to produce--free of the friction caused by monetary instability. Assuming a scenario in which another, more reliable currency were to emerge--far from an economic negative for the U.S.--a dollar defined in terms of something stable would lead to massive internal growth alongside a great deal more wealth-enhancing trade. Lest we forget, the U.S. economy thrived when the dollar was pegged to the British pound. To quote Connally once again, money itself "cannot produce, increase efficiency or open markets abroad." U.S. monetary authorities since 1971 have occasionally acted as though money creation and devaluation were the path to wealth--with unfortunate results. That being the case, if our monetary authorities aren't willing to issue a stable dollar of unchanging value, we should eagerly embrace a monetary concept that does, irrespective of country origin. -- Best Regards, Jay Shah, FRM "Expect The Unexpected" Blog: http://fuzylogix.blogspot.com/ --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en -~----------~----~----~----~------~----~------~--~---
