Believe it or not, we're in the midst of a war right now. It's not Iraq or Afghanistan. It's a war waged by the major governments of the world to destroy their own currency. All across the world countries are enacting policies that devalue their own money. It's a race to the bottom. Last week, Brazilian Finance Minister Guido Mantega made headlines when he mentioned that a worldwide currency war was brewing, and the winner would be the nation with the weakest currency.
In a normal war countries try to kill the enemy. In a currency war the countries point their guns at their own citizens and kill them with a currency that loses its purchasing power. The country that can make its money worth the least is the country that wins the war. The bad news is that the winner of this war will experience a Pyrrhic victory. The worse news is that America is poised to win this war.
Why on Earth would a country want to devalue its own currency? That is such an easy question to ask because the premise makes absolutely no sense. But the answer is actually quite complicated. That's because modern economists have figured out a way to make it seem like a weaker currency is advantageous to a nation. Of course, this is complete nonsense. A weak currency is the result of bad policies that politicians love. And if an economist can make it seem as though the terrible results of bad policies are actually desirable, well, that economist will probably get a job in the White House on the President's economic staff. An economist who states otherwise (and speaks in terms of truth and common sense) isn't allowed in that elite club.
There are two reasons why a weaker currency would be desirable. First, it helps the nation export more goods. When your money isn't worth very much, it makes the goods you produce considerably cheaper to purchase. When the price of goods is low, the amount of exports goes up. Second, and this is related to the first point in a way, a weak currency leads to more jobs. When the dollars that you pay workers in is worth less, it's more affordable to hire workers and the economy can create more jobs. Politicians love this. Debase the currency, raise exports, create jobs, get elected again. On paper, everything works out perfectly.
Now, you might be thinking that this is what we need right now. If a weaker dollar will create jobs then a weaker dollar we need. But let me ask you something. What's so great about a job? There are very few people who work because they love labor so much. Everyone in Soviet Russia had a job. Every slave in early America had a job. Seriously, the unemployment rate for black people in America during slavery was basically 0%. There is nothing great about having a job. The reason jobs are desirable is because having a job is a means to an end. You earn money at your job and can use that money to buy stuff you want or need. But by making that money worth less, which is what happens in a currency war, the people with jobs lose the ability to buy stuff with the money they earn. Selling goods and having jobs become a means unto themselves and little attention is given to the fact that there are obvious negative effects of currency devaluation: diminished purchasing power and lower living standards. Individuals see jobs as a means to an end. Governments see jobs as an end in and of itself, and a devalued currency is the means to that end.
Way back in the 19th century, before economic models developed their current levels of sophistication, the goal of a government's economic policy was to bring prosperity to its citizens. In other words, they tried to raise the general level of material comfort, while at the same time reducing the amount of toil and work needed to reach that end. Unfortunately, due to the blather spouted by modern economists, success is no longer measured in those terms. A country's currency used to be viewed much like a company's stock price. The reliability, competitiveness, and growth of a national economy usually translated into a strong currency. This system made sense and it worked.
Countries that offered the most fertile soil for investment capital, or that made products other countries wanted, would attract funds from abroad. Demand for the currency of these “blue chip” countries (which was needed to invest or buy locally) would inevitably push up the value of the currency. And so, much as shareholders of successful companies are rewarded by higher stock prices, citizens of successful countries were rewarded with stronger currencies, with which they could buy more goods and services both domestically and internationally, raising their living standards.
But all that has changed in recent years. With a strategy that seems to be taken from the playbook of Sam Walton, governments now look to gain a competitive edge by lowering the cost of their exports. To do this, they have adopted a beggar thyself (as opposed to beggar thy neighbor) policy of habitual currency debasement. Although such a move may benefit those who buy the products, it is a burden to the country’s own workers who, like Wal-Mart employees, have to get by on lower wages. While the markets like a low-cost provider, this is not a niche that everyone can, or should, fill. Some will compete only on price, but more successful ventures will compete on quality and innovation. For every Kia there is a Mercedes Benz. Nearly every country on Earth is attempting to compete by lowering the price of their goods and no thought is given to producing higher quality goods or developing innovative production techniques.
When a government debases its currency in order to gain sales overseas, the nation earns less for the goods that it exports. As a result, its comparative advantage is ruined, and its citizens consume less as a result. In other words, as a nation’s currency declines, its citizens are forced to work harder for less.
If a department store decided to have a sale in which all of its merchandise were marked down 50%, it will surely sell a lot more stuff. However, it would earn a lot less than if it had been able to sell its goods without marking them down. This is how currency debasement works. Similarly, one way for the unemployed to get work is to accept lower wages. Workers will sell a lot more of their labor if they accept 50% pay cuts. But are they better off as a result? Relative to being unemployed, the answer is yes, but they would be much better off being employed at full pay.
As I pointed out earlier, the fact that America holds the world's reserve currency makes it easier for us to have a 50% off sale. It also makes it easier for politicians to print money and inflate the currency at ridiculous levels. Politicians love easy solutions so I'm convinced that extremely high inflation is on our horizon. America is going to win the race to the bottom. And eventually we're all going to be casualties of war.
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