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Milton
Friedman’s theory of floating exchange rates, on which the
international monetary system has been based since 1971, has given rise to a
coercive regime in the sense that IMF statutes forbid member countries to
stabilize the value of their currencies. A country attempting to do that is
branded “a currency manipulator” and is threatened with trade
sanctions. The prohibition is understandable. It is designed to protect the
scheme whereby the dollar balances of the surplus countries are stealthily
embezzled. It works as follows. The United
States lures the unsuspecting surplus
country into the black hole of currency revaluation against the dollar. As
their currencies are floating upwards, a part of the surplus countries’
dollar balances are appropriated by the U.S.
In effect, the U.S.
is forcing its trading partners running a surplus to grant, unwittingly, a
partial debt abatement. This exhausts the concept of embezzlement. The U.S.,
bankers to the world, conspires to short-change its depositors using the
smoke-screen of floating foreign exchange. This regime, based on plunder,
cannot endure. The only equitable monetary system is the one based on fixed
exchange rates. And the only durable way to fix exchange rates is to make the
currency redeemable in gold.
Friedman’s
theory is a blot on science and on the good faith of the United
States in its dealings with its neighbors.
Floating
versus fixed exchange rates
In
putting pressure on China
to follow Japan’s
example to revalue the yuan the American money doctors fail to point out that
they are in effect asking China
to take a loss, similar to those of Japan
amounting to hundreds of billions of dollars, on her holdings of U.S.
Treasury paper. China
carries her books in yuans, not in U.S. dollars. Therefore every change in
the yuan price of the dollar will have an immediate and predictable effect on
the value of China’s
portfolio of U.S. Treasury paper. In particular, a decrease in the yuan price
of the dollar results in a loss in the yuan value of China’s
dollar balances.
The
question arises: by what right does the U.S., a country with chronic deficits
and a history of reneging on her foreign debt — as on August 15, 1971
— demand that China write off a part of the American debt to
China?
There
is more. If China yielded
to American pressure to let the yuan float upwards, it would mean not just a
one-shot abatement of debt, but a standing commitment to grant further
automatic abatements as new debts are being incurred by the U.S.
This would make mockery out of the idea of independent nations trading with
one another for mutual benefit. It would make China
a vassal of the U.S., a
role China
in all dignity could not accept.
It is
incumbent on the debtor, not on the creditor, to make the necessary
adjustment in case of a persistent imbalance. The contrary position,
advocated by Keynes, is a fallacy. It turns logic upside down. It penalizes
hard work and thrift, while it rewards indolence and prodigality.
Water torturing
Japan
Immediately
after making the dollar an irredeemable currency the U.S.
started running trade deficits on an ever increasing scale. Using Milton
Friedman’s spurious theory according to which floating exchange rates
were supposed to make the currency of a surplus country stronger, the U.S.
started twisting the arms of its trading partners running a surplus, first
and foremost, Japan,
to revalue their currencies upwards. Thus the unsuspecting trading partners
of the U.S.
were lured into the black hole of currency revaluation. In listening to the
sweet siren song from Washington these surplus countries were oblivious to
the fact that they were in effect taking a loss — as they were granting
a debt-abatement to the U.S. proportional to the their dollar balances they
held as a currency reserve.
For
example, when the Japanese yen rose to the level where one dollar was worth
three times less (say, 100 yens as compared to 300 earlier), this actually
meant an abatement of the American debt to Japan in the ratio of 2/3 or 66
percent, without anybody recognizing what was going on. It was trumpeted as
“free market on the go”. It was not. It was embezzlement, pure
and simple. The U.S.,
bankers to the world, embezzled Japanese funds held in dollar accounts to the
tune of 66 percent.
Embezzlement
on that scale has consequences. In fact, it bankrupted Japan,
one of the strongest countries financially. As Japan
fell upon hard times and wanted to draw on her foreign exchange reserves, it
couldn’t, for the simple reason that the funds were not there. At that
point American money doctors rushed in and explained to the Japanese that,
rather than paying their bills by drawing down their dollar balances, they
should start running budget deficits and finance their needs through debt. Up
to that point Japan was practically debt free. By now, Japan’s
debt is so huge that it is stifling the Japanese economy.
The
U.S.
has played the role of the bully-boy of international trade long enough,
bluffing that the irredeemable dollar is „an ultimate extinguisher of debt”.
It is none too soon that someone call the bluff ─ after so many
countries have succumbed to pressure and suffered huge losses on their
foreign exchange reserves as a consequence. Maybe China
will stand up. If China
is the first country opening her Mint to gold, thereby resolving the
gridlock, then the U.S.
will be forced to give up her monetary leadership in the world.
Calendar of Events
August 9-20,
2010, in Budapest, Hungary.
The New Austrian
School of Economics,
the first 20-lecture course offered, entitled: Disorder and Coordination
in Economics — Has the world reached the ultimate economic and monetary
disorder? For more information, see the website www.professorfekete.com or contact
szepesvari17@gmail.com
Preliminary
announcement: a session in Hong Kong in late October is on the drawing board,
followed by more events in New
Zealand in November. Stay tuned.
Antal
E. Fekete
DISCLAIMER AND CONFLICTS
THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY.
THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING
THAT IT REPRESENTS, UNDER ANY CIRCUMSTANCES, A RECOMMENDATION TO BUY OR SELL
ANY SECURITY. THE CONTENT OF THIS LETTER IS DERIVED FROM INFORMATION AND
SOURCES BELIEVED TO BE RELIABLE, BUT THE AUTHOR MAKES NO REPRESENTATION THAT
IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS
TO BE TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A
STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT,
IN ANY SECURITIES MENTIONED, WHICH MAY BE CHANGED AT ANY TIME FOR ANY REASON.
Copyright © 2002-2008 by Antal
E. Fekete - All rights reserved
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