Update: I learned on 1/5/2017 that the Wilbur Ross tweet referenced below was from a fake account. This is good news if the Trump administration is in fact not advocating a weak dollar, despite contrary suggestion from the Nikkei Asian Review article. It does not change the intent of my article that a stable unit of account based on global cooperation is optimum and essential to lay a foundation for a return to real economic growth. Michael Kendall
Early indications from the Trump economic team is that the Trump administration desires a weak dollar. Wilbur Ross, the Secretary of Commerce, linked a Nikkei Asian Review article and tweeted on Dec 30,2016:
Japan (kuroda), Europe (Draghi) and China will be on the administrations watch list for currency manipulation.
The headline of the Nikkei Asian Review article is: Trump’s tolerance of strong dollar unlikely to last.
While the Department of Commerce generally acts as a trade hammer, it is unlikely that Mr. Ross is representing the views of Commerce against the wishes of Trump. All indications are that Trump desires a weak dollar to rectify perceived trade imbalances. Since the only closed economy is the world economy, all trade ultimately balances. The only way for trade to not balance is if a country gives its goods away for free. If a Presidential administration begins with a faulty premise, it can only lead to negative consequences.
Trump’s initial volley of monetary threats may simply be brinksmanship; his business model of negotiation. The problem is that currency value is not a zero sum game. One currency does not incur advantage over the long-term from its value diminishing relative to the value of another currency. Currency is not wealth, but the measurement of wealth. It is a yardstick for the value of the galaxy of goods and services that create real wealth. Currency can only do three things. It can remain stable in value, appreciate in value, or depreciate in value. Only when a currency’s value remains stable is long-term growth enabled. The only way to observe a currency’s value is against a reliable, unchanging guidepost. That guidepost is gold, whose value has remained stable for centuries. The gold signal indicates changes in the value of a currency relative to gold.
The dollar is the world’s reserve currency. Federal Reserve mismanagement of the dollar’s value over the last 45 years is increasingly causing the world to search for a more stable monetary arrangement. The world is actively in the process of attempting to disassociate itself from the dollar. If the Trump administration uses what power remains from the dollar’s status as the world’s reserve currency to manipulate the dollar’s value against other currencies, this process will only accelerate.
Rather than currency brinksmanship, Trump should engage in global cooperation. What the world needs is a new gold standard. Trump can achieve this through a new international accord that stabilizes currency values against each other and gold. The Trump administration has many favorable, long needed fiscal policy changes on its agenda. Reductions in regulation, smaller government, health care reform, and tax cuts are leading to new optimism for the return of sustained economic growth. Even Trump’s tariff threats are positive if the rates are levied at no more than 15%, and the revenue collected entirely devoted to offset reductions in internal tax rates that lead to capital formation. Trump can only cement these positive fiscal events into long-term growth on a foundation of monetary stability best achieved through international cooperation.
When you manage the world’s reserve currency, brinkmanship is an unnecessary option. Other countries are individually powerless to stabilize their value on their own against the dollar’s global strength. Switzerland attempted to do this in the 70s and it led to negative interest rates and a forced devaluation. The world is looking to the U.S. for leadership, not threats. If Trump provides the former, he can restore Pax Americana, global growth, and the U.S. as a beacon of hope for the world. If he chooses the latter, the world will have no choice but to continue to remove itself from links with the dollar and search for monetary alternatives. The Great Depression began when the U.S. destroyed international economic cooperation with a tariff wall, enacted by the Smoot Hawley legislation. The result was global discord, economic misery, and a world war. The world spent the aftermath building international organizations and cooperation in an attempt to prevent this type of devastation from reoccurring. The beginning of the Trump administration, with so many positives on the horizon, is no time to unlearn this history.
China appears to understand this better than anyone. China advocates monetary stability linked with gold and is actively working to create a yuan gold link. Trump’s threats against China will only accelerate this process while diminishing the dollar’s value and American strength. It is not discord, but international cooperation emanating from U.S. leadership that will make America great again.