Late last week, we joined the Peterson Institute for International Economics for its Twelfth Annual Stavros Niarchos Foundation Lecture titled: “Globalization, Multipolarization, and Currency Wars: The Imperative of Systemic Reform”. The lecture, given by PIIE senior fellow and director emeritus C. Fred Bergsten, argued that currency manipulation is the single biggest challenge facing the world economic system and costs millions of US jobs. He also offered bold proposals for countervailing intervention and ties between the IMF and WTO in evaluating currency misalignments.
From our vantage point, Bergsten’s speech centered on five key points, which have subsequently paraphrased below:
- Currency wars are very sizeable, widespread and could get worse;
- Currency wars have very large economic ill-effects on the US economy and the economies of the EMU periphery;
- These developments stem from a gaping hole of int’l economy architecture;
- Policies could and should be adopted to counter ill-effects; and
- US should multilaterally initiate a major effort and be ready to act unilaterally, if necessary (i.e. “it’s time to declare war on int’l currency war”).
Regarding point #5 as articulated above, Bergsten suggested that the US – even if on its own – should immediately pursue one or more of the following rectifying actions through existing int’l agencies:
- Countervailing intervention in the open market;
- Imposing taxes on the FX reserves of manipulating countries;
- Applying duties to the imports of manipulators; and
- Submission of its case to the WTO to apply for across-the-board import restraints.
In so many words, Bergsten basically argued – as he has developed a reputation for doing – for a de facto 1971-style adjustment of US monetary policy. Essentially, he feels that the US should wage an all-out war on currency manipulators, with the ultimate result a likely USD devaluation akin to when President Nixon abandoned the international gold standard.
Did we miss something?
If we can recall – or better yet, pull up the charts – the 1970s turned out to be the worst decade in modern US history from an economic perspective. Politicized agents such as President Nixon, Treasury Secretary Connally, Fed Chairman Arthur Burns, President Carter, etc. all conspired to weaken the US dollar vis-à-vis its international counterparts – perpetuating a near decade-long stagflation in the process.
It wasn’t until President Reagan and Fed Chairman Paul Volcker came in the early 1980s and completely inflected US monetary policy (and the expectations embedded therein) that the US was finally able to overcome stagflation and recessionary levels of economic growth. A similar inflection occurred in the mid-to-late 1990s when a similar bout of USD hawkishness helped the US escape recession, generate wealth and alleviate poverty on a large scale.
No sir, the data doesn’t lie; the strongest periods of economic growth (i.e. the 1980s and 1990s) the US has seen in the modern era have coincidentally occurred when the USD was strengthening and/or persistently at very high levels (using the US Dollar Index as a time-tested proxy). While some might accuse us of conflating correlation with causation, we market practitioners don’t really care to make the distinction. Charts often tell stories that even the “smartest guys in the room” fail to comprehend.
What we do care to demarcate, however, is the FACT that no period of sustained USD debauchery has produced anything on the order of sustainable economic growth. Certainly not in the 1970s when the Nixon/Carter/Burns trio was breaking the buck; nor in the 2000s when the Bush/Obama/Greenspan/Bernanke foursome were inflating bubble after bubble (particularly in housing and commodities) in a spectacularly-failed attempt to create economic growth.
President Reagan said it best: “I was very pleased to read a prediction that the price of gold will nosedive,” and we echo his sentiments exactly. If the price of gold is signaling anything to us today, it’s that we may be at another historical inflection point in US monetary and fiscal policy that, like the others before it, will only be broadly recognized after the fact.
A deviation from perpetual QE, burgeoning federal debts and deficits, etc. would all be hugely positive for the US economy at large. What is bullish for the US’s consumption-based economy is not further currency debasement, but rather a policy to backstop the US dollar from the politicized elite, many of whom astutely realize that inflation, not real economic growth, is the only thing they can actually produce at the stroke of a keyboard. And as our friends at MIT’s Billon Prices Project and at Shadowstats have shown, inflation exists – even if it is no longer politically palatable to accurately report it.
It’s either that or the price of gold has been lying to everyone for twelve consecutive years… Whatever you do, don’t pull up a chart(s) of $100-$150 crude oil (or $4-5 gas) or $8 corn or $4 copper or $200 cotton – all of which are priced internationally in previously-deflating US dollars.
For thousands of years, politicians have resorted to currency debasement when times have gotten tough economically. By our count, not one economy in world history has come out on the other side of currency debasement better off without a marked deviation from those policies to inflate. If anything, currency debasement has historically been a coincident indicator for sustainably slower economic growth and a leading indicator for the collapse of entire empires.
We’d be utter fools to make such a prediction for the US of A at the current juncture. We will, however, warn of the pending collapse in the credibility of the international economist community. For far too long, academics have been espousing their theories upon economies and the politicians and financial markets that dictate them without any empirical proof of their validity or effectiveness.
The US is not an export economy. Please stop recommending policies to devalue and inflate in the hopes of pursuing your elixir of life that is exporting goods and services to Mars. If you fine folks need something to replace the gaping hole in your respective schedules that will inevitably come with a cessation of such practices, try digging up some historical data that actually supports currency debasement as a fruitful economic policy.
That’ll keep you guys busy…