Back in 2000, after buying a house, I started to have a little mad money available again. Surveying the landscape, it looked to me like gold stocks were the only good investment in the stock market.
For once, I was correct. They bottomed in November of 2000, and have been on a choppy but definite uptrend ever since. Their relative performance has trounced the stock market in general in that time.
As a result, I’ve done a lot of thinking, reading and researching about currencies. The thing is this: the U.S. has been running a trade deficit since something like 1979 or 1980, and more recently fell into a current account deficit as well. To define terms, the trade deficit is our deficit with other countries in goods, and means we import more goods than we export. The current account deficit includes services and income received from other countries or paid to other countries, as well as goods. So to say that we have a current account deficit means that when you add up everything, goods, services, and income payments, we’re in deficit with the rest of the world.
These deficits are chronic. In good times or bad, they’re there. At least the budget deficit managed to go away for a year or two at the top of the recently expired Internet bubble, but the current account deficit just kept chugging along right through that time.
My theory, very recently formed over the last couple of days, is that we need to get ourselves back to a gold standard. That’s a charged term, so let me market it as an “International Currency Standard”, or ICS for short, because it really doesn’t matter, abstractly, what the international currency is. It could be gold, silver, copper, seashells, dirt or silicon; just as long as it’s something.
The reasoning goes as follows:
You need local currencies. Let me begin this section by saying that I’m most emphatically NOT advocating something like a euro for the world. A local currency does something that nothing else can do: it provides instant feedback, in real time, as to how well your exports are being recieved on the world market. If they’re doing well, the local currency will rise, thereby making those exports more expensive to the rest of the world, and at the same time making the rest of the world’s imports less expensive to the local economy, providing needed competition to the local successful exporters. If they’re doing poorly, the local currency will fall, thereby making the exports less expensive to the rest of the world and providing a subsidy at the exact point in time when its needed, and at the same time making imports more expensive, thereby giving the local exporters instant protection against imports until such time as they can come back with a more competitive product. This mechanism is forcefully argued for in Jane Jacobs’ “Cities and the Wealth of Nations”. Its short and quick reading for those interested.
That’s the theoretical world. In the real world, currencies are subject to government manipulation and speculation by arbitrageurs, which kind of screws up the theoretical mechanics. But these two forces pale against the one big thing that everyone has to struggle against: the lack of an international currency independent of any local currency.
The dollar today acts as an ICS. The result of this is that it’s chronically overvalued against the rest of the world’s currencies. Anyone looking at our current account deficit would have to argue that the dollar should have been going down for a long time by now, but it hasn’t. The reason, I think, is that it acts as an ICS, and because it does, it’s held by the central banks of the world as a reserve, the way gold used to be, it’s used as internationally accepted legal tender for international debts in markets for commodities, like oil or gold itself, both of which are priced by the world in dollars, and of course it’s used as the default cash by all kinds of characters, shady or not, when dealing internationally. So the demand for dollars is determined not by the demand for the exports of the U.S., but by the needs of the international economy for international transactions and as the kind of reserve currency that gold used to be.
This distorts the demand for the dollar up, chronically, and therefore distorts up the price of the dollar relative to other countries. It’s slowly but surely bankrupting us, and providing all kinds of bad feedback to us and to our trading partners. When confidence in the dollar cracks, as it inevitably must, the crash will be, I think, horrific. If the dollar is replaced as a reserve currency by some other local currency, like the euro, then all that’s going to happen is that the problems now being experienced by the U.S. and the dollar will be experienced by Europe and the euro.
An ICS would, of course, not be subject to this, and would be valued only relative to all of the other currencies of the world. It would free the local currencies of the world to rise and fall against each other based mostly on the import/export market for internationally traded goods and services, so that the economies of the world could finally get true and good feedback, in real time, on their relative success in the international markets.
(Sorry for the length.)
