Carlos Lam

Spare a Dollar? Why We Need a New Monetary System Now

On Oct 15 10:45 AM chap08 wrote:

> 1. The dollar is over valued. That's why we have a trade deficit.
> The trade deficit and consequent unemployment are at the heart of
> our problems. The current system of high dollar/ trade deficit /capital
> account surplus/ budget deficit is unsustainable. The chain has to
> be broken.

I agree that the chain has to be broken, but the way I would do it is to cut deficits and allow debt to be liquidated. The existing overhanging debt cannot be inflated away without high inflation levels, which would punish savers.

> 2. In a relatively closed economy, you can afford to ignore the international
> dimension. In today's globalized economy we can't do that. We can't
> ignore exchange rates or other central banks and the impact of their
> actions on our economy.

Which is why a weak dollar is dangerous. How many dollars will one need to compete with the Indian or Chinese consumer for oil, coal, iron, or other commodities? The answer is, "a lot more" in an inflationary environment.

> 3. A lower dollar does not mean hyper, or even high inflation. There
> are massive deflationary forces around.

You are correct that there are some falling prices, but others are rising. Taxes, insurance, and energy prices are all rising.

> 4. The "cleansing" that you advocate would be a lot more than creative
> destruction. In the depression that would result, many very good
> businesses would be bust. All of the economic capital built up in
> those businesses would be lost. Decades of sound investment would
> arbitrarily become mal-investment.

Where do you draw the line between creative destruction and "bad" destruction? If supposedly "good" businesses were relying on inflation and cheap money, then I do not consider them "good" or worthy of saving at the expense of responsible savers.

> 5. You are wrong to say that we would have decades of lower living
> standards. Our recent living standards have been artificially high.
> Does it make sense to try and perpetuate these artificially high
> levels? They certainly wouldn't be perpetuated if we went for the
> "massive depression" you advocate. Mass unemployment, poverty and
> homelessness would be likely outcomes. In that scenario, how confident
> are you really, that savers would be rewarded rather than taxed?

I view if from two points of view: economic efficiency and justice. It's efficient to reward savers because they planned successfully for the occurrence of a depression: they saved and didn't take on too much debt. They deferred gratification. Debtors took the opposite tack and didn't plan correctly. Thus, they should bear the consequences of their actions.

Moreover, it is just to reward those who planned and saved. It is manifestly unjust to reward those who took on too much debt and didn't save. Indeed, that is the heart of moral hazard.

You may argue that in THIS instance, if the diligent are rewarded, then EVERYONE will fail. That would be the same meme used by Presidents Bush and Obama when they passed the TARP and allowed the Big 3 bailouts. In the end, a bailout is a bailout: it rewards the profligate at the expense of the diligent.

> On the other side, a lower dollar leads to more exports, more jobs,
> more tax receipts, less unemployment spending and so lower budget
> deficits. These things do not imply a lower standard of living. Even
> if inflation was to be a problem, as it was in the 70s, did that
> imply decades of lower living standards through the 80s and 90s?

A lower dollar does not lead to prosperity. The Zimbabwe dollar is vastly depreciated, yet that nation has become more impoverished. Some exports (especially agriculture) will be cheaper for foreigners, but it also means that the American middle class will have to pay more of their depreciating dollars for things it needs, such as food and energy. All this in an environment where wages will not be rising to compensate.

As for the standard of living in the 80s and 90s, you ignore the opportunity cost. You should ask what our standard of living in the 80s and 90s would've been like had we had sound money. My theory is that we would've had much more capital formation and real wage growth.

I appreciate your arguments and civil tone. I respect your view and admit that you make very good points. I cannot, however, agree with the idea that a depreciating dollar is good.

Spare a Dollar? Why We Need a New Monetary System Now

Great article, Edward, but I have to disagree in part with the following:

The U.S. wants – it needs a lower dollar to avoid deflation. Quantitative easing is not solving the deflation question.

The average, middle-class Americans with dollar-denominated savings do NOT need a "lower dollar" which will decrease their purchasing power. The elite banking and financial interests, who are leveraged to the hilt, WANT a lower dollar because they wish to repay their debt with "cheaper" dollars. In essence, you are advocating a shift of purchasing power from the savers to those who took on more debt. As a matter of public policy, I find such a move abhorrent.

An alternative is to cleanse the system. The dollar should be protected, not debased. The Fed should raise rates, not keep them at zero. This will cause overburdened financial institutions to go bust, which will eliminate a lot of the debt on the books. Moreover, it will reward savers with greater purchasing power. If there is going to be a shift in purchasing power, let it favor those who were prudent and saved rather than those who became overleveraged.

Before others decry the massive depression that this would cause, I will admit that the pain will be significant. If I were a policymaker, however, I would rather take the "bitter pill" now, have debts wiped out, and rebuild. The alternative is a long-term period of consistently lower living standards for the American people.

Yuan Legislation Being Resurrected by Congress

I don't think the bill will go anywhere either, but it shows how US Senators and Congressmen will eagerly engage in showmanship to please the electorate (Sen. Bunning's fundraising and polling numbers are rather poor).

Ironically, allowing the yuan to appreciate is actually the best thing that the Chinese government can do for the average Chinese citizen, who has a lot of savings and little debt. As the value of the yuan rises vis-a-vis the dollar, Chinese citizens can actually purchase the things that they labor to produce (i.e. TVs, clothing) at more reasonable prices. Moreover, a stronger yuan would allow Chinese citizens and companies to more easily purchase productive assets abroad, including in America. Finally, a yuan rise would allow more Chinese students to take advantage of our educational institutions in the US, thereby allowing China to grow its human capital. While it would hurt Chinese exports in the short-run, allowing a yuan rise would produce many tangible benefits for the Chinese.