What do people like about Ron Paul’s calls for a strong currency?
(posted by jackson)
This graph, which I saw over at Brad Delong’s website, shows the value of the dollar since the early 70s (when the dollar was first allowed to float). Its peak in the 1980s corresponds to a period of massive deindustrialization and high unemployment in the Rustbelt (America lost 2 million industrial jobs during the 1980s). It’s low point in 1995 corresponds to the beginning of the only period of the last 30 years during which real wages rose for most workers (1995-2000). This graph, more than most, suggests that a weak dollar might offer real benefits for most Americans, even if it (a weak dollar) causes quite a bit of pain on Wall Street.
The lowest point on the graph is the last 18 months, which raises the question of whether something good or something awful is about to happen. The risk of a weak dollar is that inflation will get out of control. The benefit of a weak dollar is that American exports become more competitive overseas, and thus a weak dollar should help shrink the nation’s trade deficit. For instance, the CEO of Airbus (Europe’s main manufacturer of airplanes) has already said he has no way to compete with Boeing while the dollar is so weak:
“The dollar’s rapid decline is life-threatening for Airbus,” Mr Enders said in a speech. “The dollar exchange rate has gone beyond the pain barrier.”
The calls from the head of Europe’s biggest manufacturer will increase the pressure on European ministers and the European Central Bank to take action against the continually weakening dollar.
Japanese car makers are slightly better insulated, because they learned a brusing lesson in 1995, the last time the dollar was weak. At that time, Mazda was driven into bankruptcy and was bought by Ford Motor Company. The Japanese car makers that survived moved more of their production to America and Mexico, to be better insulated against the up and down swings of the world’s major currencies.
Oddly enough, I have several friends who are big time Ron Paul supporters (yes, even now), and one of the things they like about him is that he has promised to make the dollar stronger by returning it to the gold standard. I’m puzzled about why they think a strong dollar will help them, or the country. If anything, I would think the goal (of so-called libertarians) should be to have the currency reflect reality. How much do resources (oil, wood, coal, corn, rice) really cost, and how productive are American workers relative to workers in other countries? How many hours should the median American worker have to work to buy a new microwave from China, or a crate of wine from Chile? Why would Ron Paul supporters, who call themselves libertarian, want to see the government have any policy at all regarding the dollar? Why not allow the value to be determined by private-sector traders?
Even more strange, I have several friends who are on the brink of bankruptcy because of their mortgages. Extremely high inflation is one of the few things that will get them out their current predicament (assuming their nominal wage roughly tracks nominal monetary growth). Yet they claim to want a strong dollar. What to make of debt holders who want a strong currency? Normally it’s the banks who want a strong currency.
I’m going to indulge in an extreme hypothetical example. Like a lot of economic examples, it is extreme to make a point. Let’s suppose there is a family that makes $50,000 a year, has $300,000 in mortgage and credit card debt and is paying $300 to $600 a week on food, gas and other repeating consumables. Let’s suppose it is really struggling, for whatever reason. Let’s suppose a burst of high inflation hits the country. A few years later, the family is making $100,000 a year and has to pay $600 to $1200 a week on food and gas. But it’s debts are still only $300,000. It’s ratio of income to consumable expenditures hasn’t improved at all, but it’s ratio of income to debt has improved a great deal. Obviously this hurts the banks quite a bit, but the family benefits. Why would such a family support Ron Paul, and argue that what they need is a stronger currency?
At a stretch, one could argue that it is rational for debt holders to favor a strong currency when they are certain that their nominal income will not keep up with inflation. I should think most times such a scenario leads to a draw - their weekly expenses are worse, but their debts are more manageable. One would have to look at a very rare situation - a person whose nominal income doesn’t change at all, despite an environement of high inflation - before one could find someone who both has a lot of debt and could rationally support Ron Paul’s policies.
I’ve several friends who made some money during the real estate boom by fixing up houses and flipping them. They are not full time professionals in the real estate business. They have their own white-collar jobs, but they made some extra money on houses, while the boom lasted. For the last 18 months they’ve been telling me that America is entering a recession. They were canaries in the coal mine, they were effected by the current crisis long before anyone else. A few of them are supporting Ron Paul and, again, they like the fact that he wants to return the dollar to the gold standard. Assuming they are relatively well informed, they seem to feel that their own nominal incomes are going to remain flat, despite high inflation. If this turns out to be true, it would amount to a historical turning point. White collar professionals are usually able to at least keep up with inflation.
When do nominal incomes grow more slowly than inflation? That is most likely to happen during a recession. Since America is now entering a recession, I can see why some folks might see this as a possibility that faces them. Inflationary recessions combine the worst of all possible economic scenarios. But how will this recession end? Brad Delong seems to think that the thing that has rescued America from a much worse recession is exports, which have increased due to a weak dollar:
I think that there is a policy moral here. Most of the macroeconomic disaster scenarios I have been painting over the past five years had domestic construction spending falling before exports began rising rapidly. We do seem to have dodged that bullet completely.God does indeed look after fools, children, and the United States of America…
Likewise, if Delong is correct, then increasing exports seem likely to be the thing that ends the recession. I realize that folks who are not in export industries may have trouble imagining why the American government should pursue policies that help export industries, but I suspect the benefits of such policies would be widespread.
My own feeling is that America needs a weaker dollar. The country has suffered from an overvalued currency for at least 40 years. The reason why President Nixon had to take the dollar off the gold standard is because international currency traders realized they could make a lot of money by buying dollars and trading them in for gold. That is, the dollar had become overvalued, relative to gold. The reason why President Nixon needed to negotiate a 10% decline in the dollar, relative to the yen, is because American manufacturers were complaining of the trade deficit with Japan (tiny by today’s standards, but Americans have slowly come to accept bad economic news as the norm). Even the 10% cut was clearly insufficient, but Nixon was intent on securing concessions from Japan related to the struggle against Communism. Japan was willing to make any concession that Nixon wanted, so long as he left the American market open, and allowed the yen to remain at a value that Japanese manufacturers found comfortable.
The dollar’s value against other currencies was set right after World War II and reflected the reality of that time. As soon as Japan and Europe had recovered from the war (that is, by the late 1950s) and become productive again, then the dollar was over-valued. Though in the 1970s it was allowed to float, the government has many times intervened to prop it up (always to prop it up, never to help it fall). A strong dollar makes it easier to fund an overseas military, and it makes the American market that much more attractive for foreigners. Most post-war Presidents used the American market as a bargaining chip to gain concessions in the struggle against Communism.
My sense is that deindustrialization in America would not have gone so far if the dollar had not been so frequently proped up. I don’t doubt that some labor intensive industries, such as the clothing/sewing industry, would have left America, no matter how weak the currency was, but many other industries might have stayed. Faced with a flood of small import cars after 1958, American car makers decided that they could not compete in the small car sector. It seems to me that no matter how incompetant the managers are in the American auto sector, there is probably an exchange rate that realistically reflects their incompetance, and thus renders them competitive again (not that the exchange rate should reflect what makes the auto industry happy - I’m simply mentioning the auto industry as an example of an industry that was hurt by the government’s tendency to prefer a strong dollar).
Back in 1980, faced with high inflation and a sluggish economy, the American people flocked to a President who promised a strong dollar. As you can see in the chart above, a strong dollar was then attempted. When the American people got to see how much pain was caused by an overvalued currency, they developed a preference for a weaker currency. The lesson of this incident is worth keeping in mind when people evaluate Ron Paul.
I’ve some friends who can’t stand McCain and who insist that Obama is a war monger who plans to make America a police state. They (my friends) plan to write-in their vote for Ron Paul, as a protest vote. I realize there are other reasons why people might support Ron Paul, other than economics. He talks a lot about governmental decentralization, which has appeal to a lot of people, including me (not that I’m voting for Ron Paul). But I find it surprising that anyone would be attracted to his economic policies.
April 19th, 2008 at 3:33 am
Jackson, both the strong dollar and the weak dollar positions make sense once you realise what the cross-purposes are and how people are talking past each other from only looking at a single part of a larger system.
A weak dollar tends to improve exports and favours local industry, yes. People keen on that are starting with the dollar and exchange rate side of things, and want to use it as a lever to achieve that. However, if local industry is strong, no matter how it got that way, that strengthens the dollar (which makes a negative feedback loop that comes into play if it got that way by favouring industry with a weaker dollar). That happens even if something else strengthened local industry - a strong dollar is a symptom of that. People who want a strong dollar make sense in those terms, unless like many of them they are kidding themselves that they can use the dollar as a lever for that. Their position makes sense if it’s “let’s improve things and check our actions by how strong we’re making the dollar”, but it’s wrong if they think “a strong dollar means we’re doing something right, so let’s just strengthen the dollar” - they didn’t realise that it only works as an indicator if they don’t use it as a lever.
Confusing enough for you? For what it’s worth, the “let’s weaken the dollar” approach is only short term, and less and less effective each time you use it, because the feedback washes the gains out and people’s expectations adjust as they come to expect it. The real-changes-with-a-strong-dollar-as-indicator approach is the best approach, perhaps in a mixed strategy starting with weakening the dollar to buy time for the real changes.
April 19th, 2008 at 4:28 am
“However, if local industry is strong, no matter how it got that way, that strengthens the dollar”
No, you’re talking about reality. I’m talking about government intervention in the currency markets. To say, as I do above, that perhaps the dollar’s value should be allowed to reflect reality is to say that the dollar’s value should reflect the actual productivity of American economic agents (for instance, the productivity of American workers) relative to economic agents in other countries. To vote for a politician who says they are in favor of a strong dollar is to vote for someone who doesn’t like the reality of the underlying strength of the economy and who instead wants to use the government to distort that reality. My question is why folks who call themselves libertarian would want this, or support this?
April 19th, 2008 at 6:59 am
I thought you might miss it, if you were too focussed on just one side of things. Everything you say is true - as far as it goes. However, you are only looking at the part of the feedback loop that goes from what is going on with the money to what is going on with the real activity.
The other part is still there, from what is going on with the real activity to what is going on with the money. It doesn’t matter if you aren’t considering it, it still has an effect because of how negative feedback loops work. If you start with the money, it goes (weaken the money) to (strengthen the activity). If you start with the activity, it goes (strengthen the activity) to (strengthen the money). Close the loop and you see that (weaken the money) goes to (strengthen the money) - putting in a reaction that resists whatever you did to start it off.
Both schools of thought are right, if they don’t let themselves get confused about the feedback loop. They just start at different points within the cycle - which is OK because a circle is like that. What is wrong is forgetting that it is a cycle, because then you get arguments about whether it goes from money to real activity or the other way around, and then arguments about whether a strong dollar or a weak one is associated with strengthening the real activity. They both are - only, a strong dollar is an effect of strong real activity, and a weak dollar is a cause of strong real activity. There is no contradiction because they are different parts of the loop, and people who think they are talking about the same thing are only disagreeing because they are talking at cross-purposes, about two different parts of one larger thing that neither lot has got to grips with.
And that’s where you are at the moment - narrowing in on one part and thinking it’s the whole and can be handled in isolation. It can’t. What’s more, there are a lot of other things that matter too - but we can handle them separately, so long as we remember to pull it all together in the end if we want a complete understanding. Leaving them out and using just what I’ve covered here is good enough for rough work, and only that, because it assumes other things are equal. That approach isn’t good enough for rough work within the feedback loop we’ve just been talking about, because the feedback itself is very material.
And I expect you’re still confused. That’s to be expected, with this subject matter. I could probably make it clearer with the right analogies, but I’d have to choose them according to the reader - analogies from aerodynamics for someone who knew physics, and so on. I don’t know where you’re coming from, so I can’t do that.
Getting back to politicians’ policies though - it depends whether they want to strengthen the dollar as such, or to do those real activity things that flow through to a strong dollar. The latter is the good sort, while the former only makes sense if there are some hidden things that need it to keep working. Think how a debtor shouldn’t suddenly cut his spending, as his creditors will only panic and descend on him. But if that were the case, nobody would tell you the truth anyway.
April 19th, 2008 at 10:29 am
“If you start with the activity, it goes (strengthen the activity) to (strengthen the money).”
No one doubts that rising productivity (relative to other countries) should lead to a stronger currency. That is not a new insight. Nor is there anything in my post that contradicts that.
April 19th, 2008 at 10:36 am
Every country in the world today has a policy of growing its money supply by 10-15% a year. This increase doesn’t always show up in the Consumer Price Index, because the effect is partly offset by rapid gains in productivity due to technology, and because the CPI is heavily manipulated - http://bigpicture.typepad.com/comments/2008/04/disappearing-ec.html).
A strong dollar policy means having the US drop its rate of growth of the money supply relative to the other countries. A weak dollar policy means having the US increase its inflation rate. Libertarians would like to end all government manipulation of the monetary supply, which would effectively mean a 0% rate of growth, and a very, very strong dollar.
The actual mechanism of this inflation is the Fed subsidizing interest rates. This has the effect of subsidizing borrowers and hurting savers. A person who puts their money in currency or bonds will have it depreciate really quickly. The only option is putting your money in assets - like commodities, real estate, or stocks. The only problem with using assets as vehicle of savings rather than a vehicle of investment is that the asset becomes overvalued. This induces overproduction. We saw this first in the over production of dot coms, like Pets.com. That bubble burst and the money moved into housing, which also got overproduced. Now the money is moving to commodities. The net effect of all of this is to massively increase the amount of debt in society ( because you are subsidizing borrowers) and to encourage production of stuff nobody wants. That helps explain why our standard of living hasn’t increased since we ended the Bretton Woods system.
An inflationary policy is a lot like heroin. Feels good in the short term, but very unhealthy long term. And withdrawal from it is very, very painful. We had one bout of withdrawal in the early 80’s, and that’s nothing compared to what would be required today.
Your friends with the mortgage are a perfect case. Had we not been subsidizing borrowing, we would have never had a housing bubble, and they would have been able to buy the house with a much smaller mortgage ( my parents bought a house at 2X income with 50% down!). But now they are completely dependent on the subsidies, and withdrawal would destroy them. The policy has been disastrous - it has turned us into a nation of debtors. But there is no good way out of it.
So what about exports? If we adopted a 0% monetary growth policy it would trigger a global flight to dollars. Why hold a Euro that depreciates at 15% a year when you can hold a dollar that will actually hold your savings? This would force the entire world onto a gold/dollar standard. If everyone was on a gold standard, the net effect on our exports, would be a wash, or even possibly positive, since China would no longer be able to subsidize it’s own export industry by printing money.
But again, the trouble with all of this is getting there. Heroin withdrawal is painful, and perhaps deadly. And the fact that no voter understands any of this means that administering the withdrawal is nigh impossible. So we can only sit back and watch with amazement as this giant rube goldberg machine known as our financial system teeters on the edge of a cliff. Perhaps it will manage to hold itself together with duct tape for decades more. Perhaps it will collapse tomorrow. Either one is possible.
April 19th, 2008 at 10:42 am
“Close the loop and you see that (weaken the money) goes to (strengthen the money)”
If you mean increased economic activity should lead to a stronger relative currency then you’re wrong. If a country has 10% unemployment one year and then the next year it has a boom and so now it only has 1% unemployment, but during this time it has no increase in productivity (which is unlikely and a bit hypothetical, but let’s go with it), then its currency should not strengthen. (If anything, I would assume a boom with no productivity growth would lead to a trade deficit and a weaker currency.) But a nation that sees 10% productivity growth when all of its trading partners are only seeing 5% productivity growth is a nation that should see a relative strengthening of its currency.
Relative productivity is the underlying reality that determines most of the relative strength of a currency (especially in big countries, especially over the long term). Though in the short term some resource (or financial) crisis can cause a bounce or a drop in a currency, over the long term the most important determinant of currency strength is relative productivity. Why is the American currency stronger than the Indonesian currency? Because American workers are more productive than Indonesian workers. Why is the American currency falling against the Euro? Because in recent years the Euro zone has seen more productivity growth than America.
When I wrote “I would think the goal should be to have the currency reflect reality” I mean mostly that the currency should be allowed to reflect that underlying reality of productivity (plus all the effects of booms, busts, resource scarcity, trade flows, etc. - that is, reality).
Again, the question I was asking is why a group of people who call themselves libertarian would want the government to intervene in the situation and distort the reality of the situation.
April 19th, 2008 at 10:46 am
“Both schools of thought are right, if they don’t let themselves get confused about the feedback loop.”
Do you see the chart up above? That is actual history. It really happened. Millions of people were affected. Can you map your theory to that chart? I don’t see how what you’re saying relates to what actually happened.
April 19th, 2008 at 10:49 am
“a strong dollar is an effect of strong real activity, and a weak dollar is a cause of strong real activity”
That much is correct, which is why in the post above, I wrote of the dollar:
“Its peak in the 1980s corresponds to a period of massive deindustrialization and high unemployment in the Rustbelt (America lost 2 million industrial jobs during the 1980s). It’s low point in 1995 corresponds to the beginning of the only period of the last 30 years during which real wages rose for most workers (1995-2000).“
April 19th, 2008 at 10:54 am
“There is no contradiction because they are different parts of the loop, and people … are only disagreeing because they are talking at cross-purposes, about two different parts of one larger thing that neither lot has got to grips with.”
That’s a bit abstract. The history shown above in that chart is a history that shows government intervention in the markets. Are you unaware of the fact that President Reagan campagined on a platform of a strong dollar? Are you unaware that Volcker, at the Fed, jakced up interest rates higher than they’d ever been in all of American history? You’re speaking of currency rate as if it is some kind of natural cycle. The whole point of my post is to ask, “Why would people who call themselves libertarian want to see the government interfere in the currency markets and distort the value of the currency?”
April 19th, 2008 at 11:11 am
Jackson -
You cannot determine cause and effect from a graph like that. There are far, far too many variables affecting the economy to make those correlations meaningful.
Here are three other very plausible explanations for why 1995-2000 showed the only real wage increase:
- In 1996 the Boskin commission radically altered the definition of inflation ( http://www.ssa.gov/history/reports/boskinrpt.html ), lowering it substantially.
- 1995-2000 was a massive stock bubble. Unlike housing, the price of stock isn’t included in CPI, but it can affect income. Thus it is more likely to show up as a measured income increase in the statistics.
- The PC and the Internet were a once in a lifetime productivity shock.
April 19th, 2008 at 11:24 am
“Libertarians would like to end all government manipulation of the monetary supply”
If that were true, politicians would not run for office saying “I’ll make the dollar strong”, they would run for office saying “I’ll let the dollar float. Really float.”
“which would effectively mean a 0% rate of growth, and a very, very strong dollar.”
Is the goal a 0% rate of growth in the money supply or a 0% inflation rate? You can’t have both. Suppose I hire some contractors and get them to build a house, worth $200,000. America now has an extra $200,000 of real wealth that it did not have before. Shouldn’t there be a mechanism that allows $200,000 of new money to come into circulation, to cover that house? You’d need that extra $200,000 of money if you wanted a 0% inflation rate. Without that extra money, you would end up with a negative inflation rate (I mean deflation).
“The actual mechanism of this inflation is the Fed subsidizing interest rates.”
The Fed was created in 1913 and after that time America saw several decades of low-inflation growth. You need another mechanism, something other than the Fed, to explain the asset bubbles of the last 25 years.
“That helps explain why our standard of living hasn’t increased since we ended the Bretton Woods system.”
America was getting economically mauled by Japan and Europe, which is why the American public increasingly wanted to see the end of the Bretton Woods system, and that is why President Nixon obliged. America, at that point, had gone from having the world’s largest trade surplus to having a small trade deficit. Workers in the American Rustbelt were feeling the pain.
When you’re talking about a system of fixed exchange rates, like the Bretton Woods system, you have to ask, “What happens when a weak country becomes strong?” What if, for instance, Germany recovers from the war and becomes a major competitor again? If you don’t have floating currencies, then the changing reality (Germany became strong again) is not reflected in the value of the currency. It was easy for American car companies to compete with German car companies in 1945. It wasn’t so easy in 1973.
Surely you can see that Germany was in better shape in 1973 than it was in 1945? Surely you’ll agree that Germany’s increased economic strength needed to be reflected in the value of its currency?
“Had we not been subsidizing borrowing, we would have never had a housing bubble”
That much is very true.
April 19th, 2008 at 11:33 am
“You cannot determine cause and effect from a graph like that. There are far, far too many variables affecting the economy to make those correlations meaningful.”
I agree. However, the high dollar of the 1980s hurt a lot of people. One doesn’t need the chart to know this. The pain felt in the Rustbelt was a narrative well developed in the media at the time. It’s trivial easy to dig up anecdotal evidence about that story. And then, of course, there are the explicit statements that business executives and union leaders made at the time. They could not compete with Japanese of European firms when the dollar was as strong as it was in 1985. One could argue that the business executives were incompetent or that the union workers were unproductive, but there is surely an exchange rate that exactly and perfectly reflects their incompetence and unproductivity, and thus renders them competitive again.
And, again, the issue here is not about making business executives or unions happy. It is why people would vote for a politician who promises to make the dollar stronger than reality would warrant.
April 19th, 2008 at 1:45 pm
“If that were true, politicians would not run for office saying ‘I’ll make the dollar strong’”
They are politicians. A “making the dollar strong” is a good sound bite.
“Is the goal a 0% rate of growth in the money supply or a 0% inflation rate? You can’t have both.”
The goal is 0% growth in the money supply. This will result in decreasing prices. There is nothing wrong with price deflation - we have seen it in the computer industry and it is a wholly healthy phenomenon.
The dangerous kind of deflation is monetary deflation. This is when a economy has built a massively leveraged credit structure, and the entire thing collapses. This is what happened in 1930. The way to avoid monetary deflation though, is to not subsidize credit expansion in the first place.
“The Fed was created in 1913 and after that time America saw several decades of low-inflation growth.”
Again, you have to distinguish between monetary inflation and price inflation. There was massive monetary inflation in the 1920’s. Consumer credit became common for the first time, and there was massive borrowing to speculate in stocks. This did not show up in price levels, because productivity also increased.
Unfortunately, my economic history of the 60’s needs to be stronger. But my impression was this was a prosperous time. Nixon ended Bretton Woods because it was impossible to inflate the currency to pay for the Vietnam War while nominally staying on a gold standard.
It was easier for American car companies to compete in 1945 because in 1945 the entire German and Japanese industrial base had been destroyed! Of course it’s going to be harder when competitors enter the market, especially if you have had two decades of complacency.
Also, a fair amount of the manufacturing base change was movement from the rust belt to the sun belt, and technology taking jobs. The manufacturing base of my home town actually increased significantly during the 80’s and 90’s.
That all said, I do agree that we have lost a major part of our manufacturing base to abroad, and that this trend has not been healthy. But the reason is not a “strong dollar” policy on our part, but a policy of subsidization on China’s end. (Although not countering their subsidization can be called a “strong dollar policy” - semantics get tricky.
China is in the policy of printing out Yuan and buying dollar denominated treasuries. This makes the dollar strong and Chinese manufactured goods really cheap. We could counter this in a number of ways 1) print dollars and buy back the Chinese owned treasuries 2) not having the government go into debt in the first place 3) threaten to put tarrifs on Chinese goods if they don’t stop subsidizing them.
You are correct though, that in the absence of one of these counteractive measures, reducing the US dollar inflation rate would have the effect of hurting our export industry. I think though, that if the US reduced its inflation rate, other countries would do so also. I think China realizes its subsidizing its own export industry more than is healthy, but it doesn’t have a way to stop without causing a lot of unemployment. It would rather give American cheap HDTVs than have unemployment. Meanwhile, in the US, we would rather spiral deeper and deeper into debt than have unemployment. The entire system is crazy.
April 20th, 2008 at 5:10 am
“No one doubts that rising productivity (relative to other countries) should lead to a stronger currency. That is not a new insight.”
Well, they should doubt it, because it isn’t quite true. The connection is tenuous; what makes far more difference is production. In past times, productivity increases often led to more production, but these days the emphasis is on reducing inputs. Both will improve the level of exports (or import displacement) over imports, but the former makes a bigger difference (can you see why?).
That’s why the reasoning is wrong in “If you mean increased economic activity should lead to a stronger relative currency then you’re wrong. If a country has 10% unemployment one year and then the next year it has a boom and so now it only has 1% unemployment, but during this time it has no increase in productivity…, then its currency should not strengthen.” The country is now producing 99/90 times as much, of which some of the increase is exported. Its imports go up too, to the extent they are inputs for the additional production, and so do consumer imports, but typically the result is an additional gain from foreign trade.
As for the rest - I was trying to describe the mechanisms, so people can make sense of things. With that in your toolkit, you can tell if the politicians you are talking about are being unrealistic or just looking at one of the parts you aren’t looking at.
April 21st, 2008 at 12:07 am
Oddly enough, I have several friends who are big time Ron Paul supporters (yes, even now), and one of the things they like about him is that he has promised to make the dollar stronger by returning it to the gold standard.
Actually, he wants to make the dollar less subject to manipulation by returning it to the gold standard.
I’m puzzled about why they think a strong dollar will help them, or the country. If anything, I would think the goal (of so-called libertarians) should be to have the currency reflect reality.
Does this actually mean anything?
How much do resources (oil, wood, coal, corn, rice) really cost, and how productive are American workers relative to workers in other countries?
How much do the resources cost in what units? How exactly does this translate into some set value for what the dollar is worth?
How many hours should the median American worker have to work to buy a new microwave from China, or a crate of wine from Chile?
What does this have to do with determining where to set the currency value?
Why would Ron Paul supporters, who call themselves libertarian, want to see the government have any policy at all regarding the dollar?
They don’t, per se. They want the end of legal tender laws (laws reuqiring people to accept fiat dollars for payment) and for people to be allowed to demand payment in specie-backed currency. In any case, you are acting as if the fiat dollar somehow exists independent of government. Having the fiat dollar exist and be legal tender (as is currently the case) IS having a policy.
Why not allow the value to be determined by private-sector traders?
Indeed, under a gold standard, the value of the dollar would be determined by private-sector traders, because its value would be tied to gold, and the value of gold is determined by private sector traders.
In any case, it is disingenuous to suggest that in a fiat money system, the private sector determines the value of the dollar. The state, in the form of the Federal Reserve, determines the value of the dollar by determining how many dollars exist in the money supply.
April 21st, 2008 at 1:32 am
“The goal is 0% growth in the money supply.”
Any reason the goal should be 0% growth in the money supply, as opposed to rising real wages? America has seen real wage growth during every decade of its history except for the 1970s and 1980s. Does the inflation matter, so long as wages are rising faster?
“It was easier for American car companies to compete in 1945 because in 1945 the entire German and Japanese industrial base had been destroyed! ”
Do you agree that the American dollar needed to be adjusted to deal with the reality of Germany and Japan having recovered from the war? Do you agree it made sense for President Nixon to let the currency float?
“The manufacturing base of my home town actually increased significantly during the 80’s and 90’s.”
Awesome. I hope this doesn’t sound mean or selfish, but why should we care? I think it is terrific that your town got some manufacturing jobs, assuming that the folks in your town wanted some more manufacturing jobs. But what happened in your town doesn’t reflect a national trend.
“You are correct though, that in the absence of one of these counteractive measures, reducing the US dollar inflation rate would have the effect of hurting our export industry.”
I never said that. You are the one who is saying that.
April 21st, 2008 at 1:51 am
“Both will improve the level of exports (or import displacement) over imports, but the former makes a bigger difference (can you see why?).”
Let’s assume for a moment that you’re right. This is a technical issue and we could, if we wish, consult an economics textbook to get a better sense of this issue. Maybe production has the bigger effect, or maybe productivity. Whatever are the forces shaping the underlying reality that determines the value of a currency, my question is why people would vote for a politician who promises to use the government to distort that reality? And why would such folks call themselves libertarian?
“The country is now producing 99/90 times as much, of which some of the increase is exported”
You are cheating a bit by insisting that some of the increase magically goes to exports.
“Its imports go up too, to the extent they are inputs for the additional production, and so do consumer imports, but typically the result is an additional gain from foreign trade.”
Are you thinking of a particular country during a particular decade? America’s experience during the 1980s and 1990s doesn’t match what you are describing here.
April 21st, 2008 at 1:59 am
“They want the end of legal tender laws (laws reuqiring people to accept fiat dollars for payment) and for people to be allowed to demand payment in specie-backed currency.”
I don’t doubt that some Ron Paul supporters want that, but the one’s I know personally simply want an end to inflation and they think that Ron Paul can deliver that with “a strong dollar”. As I said above, I suspect Ron Paul’s strong dollar would do them (my friends) more harm than might inflation.
“In any case, it is disingenuous to suggest that in a fiat money system, the private sector determines the value of the dollar. The state, in the form of the Federal Reserve, determines the value of the dollar by determining how many dollars exist in the money supply.”
Private sector traders do play a large role in determining the value of a dollar versus a euro, or a dollar versus a yen, or a dollar versus a pound. I can imagine reasons why governments might want to intervene in currency markets to manipuate the value of their own currency, relative to other currencies, but why would a group of people who call themselves libertarian want to encourage this? Why would they vote for a politician who promises more of this?
April 21st, 2008 at 9:12 am
Jackson,
I mentioned this in a previous thread, I think, but I’ll repeat it here because it bears directly on your point: There are two ‘levels’ of effects of monetary base inflation in the economy. Most people tend to obsess over the ‘macro’ view, and much of what you write is certainly a valid argument (though one I’d disagree with) about the ‘macro’ effects of inflationary policy - but it misses an equal, if not more important level of effect: the “micro” effect.
We must never lose sight of the actual mechanism by which the monetary base is inflated. A small, select group of connected insiders control who gets first shot at the newly minted (not even necessarily printed, in this modern age!) money. And if we keep in mind that new money is most valuable to the first person who uses it in the economy (before the rest of the economy can take into account the increased number of currency pieces and reflect it in general prices) this control is tremendously important and distorting to the economy as a whole.
The inflation process does not happen in a neutral environment. There is a reason why stagflation occurs, and it is directly related to the reality of this “micro” process. You can see it at work right now, where income inequality has surged during the recent inflation based boom. The market, and people’s perceptions of reality, are skewed tremendously, and while we can observe fluctuations in the state-capitalist economy that can possibly be tracked to inflation, we can’t observe what process was precluded: a broken window fallacy problem.
In the absence of the centralized, coerced banking system fostered by the Fed, perhaps we would have greater individual savings, and therefore more self-capitalization and community financing instead.
April 21st, 2008 at 11:24 am
Money inflation has another effect, according to the Austrians: what they call “malinvestment.” The idea is that inflation increases the apparent rate of return on investment (and temporarily increases the real rate of return, depending on how favorably situated investors are in the money inflation pyramid scheme). As a result, it artificially shifts upward the level of “roundaboutness” (or capital-intensiveness) that is profitable. The outcome is something very much like what the Marxists call “overaccumulation,” when the money inflation hits the wall and a contraction sets in: much of the economy turns out to be made up of more capital-intensive forms of production than can support itself.
So as strenuously as the Austrians deny it, there is in fact a great deal of parallel between them and assorted neo-Marxists, both on what the government does to promote overaccumulation, and on the chronic crises of overproduction/underconsumption that result.
April 21st, 2008 at 1:33 pm
There is an underlying vulgar libertarian assumption in this post. The currency system we have now is not a market, nor even approximates one. All of the world’s major currencies are centrally planned.
There are really only two rules that would be needed to have a free market in currency. No legal tender laws and the recognition that loaning money for a longer duration than the deposit can be demanded is fraud.
There’s no need for a national bank or a rule restricting what currency can be backed by or even regulating reserve or capital ratios. You just need complete freedom of entry into the lending market and strong policies against fraud.
Yeah, and why should prudent people like me get punished with higher prices because your friends were foolish? Is it “good for the economy” to keep your friends in their over-priced homes?
April 21st, 2008 at 2:25 pm
“There is an underlying vulgar libertarian assumption in this post. The currency system we have now is not a market, nor even approximates one. All of the world’s major currencies are centrally planned.”
Again, my question is why a group of people who call themselves libertarian would vote for a politician who promises to distort the value of the currency, rather than allowing a market to determine the value of the currency.
April 21st, 2008 at 2:27 pm
“Yeah, and why should prudent people like me get punished with higher prices because your friends were foolish? Is it “good for the economy” to keep your friends in their over-priced homes?”
I don’t know if it is good for the economy, but, as I said in the post above, I do find their reasoning odd.
April 21st, 2008 at 2:55 pm
“Money inflation has another effect, according to the Austrians: what they call “malinvestment.” ”
I’ve no reason to doubt that, though I haven’t studied the issue in any detail. Still, it seems like a long term consideration. In the short term, the strength or weakness of the American dollar, in the year 2008, relative to the euro, the pound, or the yen, seems like an issue that is separate from the issue of monetary inflation. When I look at that chart above, it seems to me that the American dollar was overvalued in recent years. When I read articles about other countries attempting to prop up the American dollar, then I’m forced to conclude that the American dollar is still overvalued (relative to where it would be if no government intervened in the international currency markets). Hundreds of billions dollars, large sums by any measure, are being spent to prop up the dollar and give it a value above what it would have if these governments were not propping it up.
One thing Ron Paul probably won’t do is say “I’m going to ask China and the Gulf states to keep doing what they’ve been doing.” And yet, in some short-term sense, China and the Gulf states have fought harder for a strong dollar than the U.S. government has (at least, that is the impression I get from the article which I just linked to).
I assume Ron Paul would never say such a thing, and I assume that because I believe the public would not like to hear such a thing. And yet, for fans of a strong dollar, it seems like such a statement would make perfect sense.
April 21st, 2008 at 6:53 pm
Again, my question is why a group of people who call themselves libertarian would vote for a politician who promises to distort the value of the currency, rather than allowing a market to determine the value of the currency.
How can the market determine the value of the currency when the government gets to determine how much currency there is?
Private sector traders do play a large role in determining the value of a dollar versus a euro, or a dollar versus a yen, or a dollar versus a pound. I can imagine reasons why governments might want to intervene in currency markets to manipuate the value of their own currency, relative to other currencies, but why would a group of people who call themselves libertarian want to encourage this? Why would they vote for a politician who promises more of this?
First, Ron Paul did not promise a centralized gold standard, he wants legal tender laws repealed.
Secondly, unless money is produced privately, it is ludicrous to claim that the market is determining its value.
Under the current system of fiat money, who do you think determines the size of the money supply? The government. So whatever traders do is ultimately in response to government policy. So a fiat money system is NOT letting the market determine the value of the dollar.
Exactly what sort of monetary system do you think that libertarians should favor, jackson? The only system that would truly be free market would be privately minted money, that a person can choose whether or not to accept. As long as the government prints the money, the market is not determining the money’s value.
In any case, what a true gold standard is, is not an artificial price control on gold or a manipulation of the dollar to keep its price tuned to that of gold (Breton Woods was not a true gold standard, not least of which because U.S> citizens were forbidden to own gold bullion). It is simply defining “a dollar” as a certian amount of gold, and only producing paper money that can be redeemd for gold.
This actually lessens the ability of government to manipulate the money supply because it cannot print money to pay its bills unless it can get the gold from somewhere.
Moreover, under a gold standard, the market, not the government, determines the value of money and the amount of money because the market determines the price of gold (that is relative to other commodities) and the market determines how much gold is used as money versus used for industry, jewelry, etc. (if the price of gold goes up, people melt down jewelry and have it turned into coins, if the price goes down, people start turning coins into jewelry, gold foil, etc.).
One thing Ron Paul probably won’t do is say “I’m going to ask China and the Gulf states to keep doing what they’ve been doing.” And yet, in some short-term sense, China and the Gulf states have fought harder for a strong dollar than the U.S. government has (at least, that is the impression I get from the article which I just linked to).
ron Paul’s goal is not a strong dollar, per se. It is a dollar that the government does not have the power to inflate or deflate.