Competitive Advantage vs. Competitive Devaluation

by: Jeff Nielson

In recent weeks, readers have listened to one talking-head after another proclaiming that we are trapped in the monetary game of competitive devaluation. It’s all drivel. For decades, the United States had the world’s strongest economy – by a wide margin. And during those same decades, the U.S. had a strong dollar.

Was the U.S. some sort of economic miracle-worker, able to thrive in spite of a strong dollar? Absolutely not. It’s economic strength was a direct consequence of a strong dollar. This would be obvious to anyone with a basic understanding of trade and economic fundamentals. And it will be obvious to anyone/everyone without such a background as soon as I explain these concepts – and the difference between them.

First of all, there is never any long-term economic advantage in having a weak currency. This is yet more banker-mythology. Allowing one’s currency to depreciate (or having it forced upon you) is a form of indirect subsidization, whereby the entire population has an involuntary reduction in their standard of living transformed into a (socialist) subsidy for uncompetitive businesses.

When a currency decreases in value, this is obviously the same thing as saying prices go up, which is the same thing as saying that one’s standard of living is going down. Is there any reader out there who receives an automatic boost to their wages every time the currency loses value? Is there anyone who believes that reducing everyone’s standard of living and propping-up uncompetitive businesses is the path to economic prosperity?

Thus, we establish the first proposition: devaluing one’s currency (even if no one else is doing it) is nothing but a form of short-term subsidization of (inefficient) businesses and long-term economic suicide.

It’s funny how despite living in a society full of capitalist ideologues who love to talk to the talk that so few of them want to walk the walk. We want uncompetitive businesses to fail. This is healthy. It drives capital out of inefficient applications and into more efficient applications.

Yes, this creates hardship. Yes, this requires change and innovation. Yes, this will be scary and unpleasant (for that portion of the workforce). However, it is unequivocal fact that such positive economic evolution is mandatory for a healthy economy. Is it better that everyone permanently accepts a lower standard of living just so a relatively small portion of society can evade the need to adapt?

Currency devaluation is nothing more than a tactic by a cowardly, intellectually bankrupt government which is afraid of change, because it lacks the competence to adapt to such change. It is an explicit admission of a failure of leadership.

As for all the pundits who claim that competitive devaluation is a trap, they are equally guilty of being intellectually bankrupt (or simply uneducated). Let’s return to the example of the U.S., with the strong-dollar and ultra-strong economy. First of all, a strong currency means that you (and you alone) get to buy everything cheaper. Call me old-fashioned, but I welcome a little deflation – where for once in my life my dollar buys more rather than less. (But then again, I’m not a banker.)

When I talk about buying everything cheaper, I’m not just talking about raw materials. I’m talking about finished products and even other corporations. Western business leaders love to pound their chests and champion free market capitalism. Then these cowardly hypocrites choose the socialist path of using the subsidy of a lower standard of living (via currency devaluation) to have society prop-up their capitalist enterprises. A real capitalist would want a strong currency, so as to gobble-up foreign competition (and innovation) at a discount (just as U.S. corporations had been doing for decades).

However, the benefits of a strong currency don’t stop there. For decades, I laughed as I listened to U.S. talking-heads claiming that gifted people from all over the world were flocking to the United States – simply out of admiration of their freedom, or democracy, or some other supposed virtue.

They came to the U.S. because they wanted to be paid in U.S. dollars. While many can argue (successfully) that the U.S. is much less free and democratic today, I will strenuously argue that the reason that the flocking to the U.S. has slowed dramatically is because getting paid in Bernanke-bills is no longer an inducement to come to the country.

A currency which is declining against its rivals is the most-obvious indicator that a government is not fit to govern. Change and adaptation are the specialties of our species. It’s what leads to a principle which has obviously been totally forgotten by all the currency-devaluation zealots: competitive advantage.

There is only one path to prospering through trade: you sell the goods and services which you excel at producing, and purchase goods and services which you cannot produce as efficiently. By propping-up uncompetitive businesses, we sabotage the essence of trade: we end up selling goods/services which we are not producing efficiently, and buying goods/services which we could (and should) produce ourselves – by diverting all the economic capital which is currently being wasted.

It is only in an environment where governments and economies freely adapt and remain competitive that free trade can produce any economic net benefit. Without the efficient allocation of capital, we end up with what we have today: brain-dead government and business leaders advocating policies which are literally the exact opposite of what is needed to restore economic health and prosperity.

This is the consequence of living in a world full of ideological simpletons. They have an extremely rudimentary understanding of the capitalist principles which promote economic health – with the result being that almost everything they attempt is nothing but a half-assed imitation of the principle they seek to emulate. Since the gaps in understanding are so large, and the resultant policy is so severely flawed, this is why we so frequently see government action make a bad situation worse, and increasingly see the same incompetence with business – with the result that these ardent “capitalists” whine and plead for (socialist) subsidies and bail-outs.

What makes this reality both intolerable and inexcusable is that I have done nothing more than explain what any student quickly learns (supposedly) in any first-year economics curriculum. Presuming that our business leaders and government leaders are comprised of individuals who boast of academic credentials far superior to that of a 1st-year economics student, we can only assume that there is some force lobbying/brainwashing these individuals – to prevent them from pursuing positive change.

Obviously, the spotlight immediately focuses upon the bankers. These economic parasites are literally the only members of society who derive long-term benefit from currency-destruction. In fact, as we have seen with the Ponzi-schemes, and the market-rigging, and the record profits, and the record bonuses, these parasites thrive in an environment of currency-destruction. How?

Two ways. First of all, the best way to debauch a currency is to print money. And since the bankers were successful in assassinating the gold standard, every new dollar is created with debt. Does anyone want to guess who collects the interest on all this new debt?

The second (and more evil) way in which currency-destruction benefits these parasites is that it forces all members of society to attempt to invest their money, to try to mitigate the rapid erosion of their wealth. Does anyone want to guess who rakes-in the vast majority of profits from investing (where for almost every winner, there is a corresponding loser)?

What we have here is literally straight out of “The Lord of the Rings”. “Grima Wormtongue” whispers into the ear of “King Theoden”, getting the king to do the exact opposite of what he should be doing, for the sole benefit of “Wormtongue” and his (real) master. In our society, “Wormtongue” goes by either the generic name of lobbyist, or the more specific name of Goldman Sachs (NYSE:GS) alumnus.

There is nothing equivocal about this, whatsoever. All of our governments should be pursuing policies of currency appreciation, since that is what leads to competitive advantage, and profitable trade. Instead, we see all our governments (being guided by bankers) pursuing currency depreciation, which inevitably leads to competitive disadvantage – and sabotages all of the benefits of trade.

We can either structure our economies to benefit the 0.0001% who are bankers, or we can structure our economies to benefit the rest of society. Hopefully with these clues, government, business, and media pundits can figure out which way is the right way to go.

Disclosure: I hold no position in Goldman Sachs.