December 28, 2008

Santayana And Monetary Policy

Just a quick note for today -- has anyone been watching the currency markets? Not very long ago, a dollar bought you .795 Euro. Today, it buys you .705 Euro. This has been more or less replicated across the globe. The dollar has fallen about 12% as compared to other world currencies over the past two weeks -- the British Pound, the Chinese Yuan, the Indian Rupee, even the Mexican Peso.

Why is that? Simple -- we have diluted the value of the U.S. Dollar through our government printing so damn much money (or, rather, issuing so much of it electronically, which is how things get done these days).

This is a measure of how bad economic conditions are relative to us. For instance, Japan has it nearly as bad as us so the U.S. Dollar has fallen only about 8% with respect to the Japanese Yen. Similarly, the Canadian Dollar has risen by only about 4% in that time against our south-of-the-border currency. But the Swiss Franc has risen against the U.S. Dollar fairly significantly, by nearly 20%.

I cannot recall a single time from my study of history in which a devaluation of currency has worked out well in either the short or long term for the nation-state that did it. I can think of lots of times that it worked out poorly -- the Roman and Chinese Empires of the second century, for instance. This lesson is repeated with almost no diverging case models from any phase of history, any stage of industrialization, or any set of socio-economic circumstances. It always leads to inflation. It always leads to diminishing government revenues. It always leads to a transfer of domestic economic power to foreign investors. Historians, economists, anyone with an interest in the issue -- I challenge you to find a single contrary example.

I'd get bitter at the Bush Administration for doing this. But the Obama Administration has given every indication that their people think the Bushies are to be faulted for not doing this enough. So this is going to get worse before it gets better. Good thing The Wife and I are not planning foreign travel for the foreseeable future. Maybe the Italians will finally be able to afford to come visit us.

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