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Of all
the things that can cause economic problems, currency instability is one of
the biggest, and also most obvious. Compared to tax policy, or regulation, or
credit conditions, all of which may take serious work to figure out,
currencies are a cinch. You just look at the exchange rate, compared to gold
and other currencies.
Today,
many people are still debating the causes of the collapse of the Soviet
Union. Whatever one's list may contain, somewhere in the top three or so must
be currency instability. I described this in some length in my book. When
currencies collapse, economies collapse, and often soon after, governments
collapse.
Today,
we are starting to see some currency issues, particularly in Iceland and
Eastern Europe. That this has caused problems should be very obvious.
The
problem seems to stem from the idea that currencies are effects rather than causes. Like the stock
market. We understand that if the stock market declines by a large amount, as
it did in the early 1930s for example, this could be illustrative of
underlying economic problems, and corporate difficulties, and not necessarily
a problem with the stock market. Generally, the decline of a stock market by itself is not so
much of a problem.
However,
currencies are always causes
first and foremost. There is no ultimate reason for a currency to change
value except negligence and incompetence among the managers of the currency.
We could liken it to driving a car. If you don't have your hands on the
steering wheel, then probably something bad is going to happen eventually.
The car could be blown by the wind, or buffeted by a passing vehicle, or the
road could curve. If you ask why
the car ran off the road, the answer, in all cases, is very simple. The
driver didn't have his hands on the wheel, actively adjusting to the
prevailing conditions. A properly managed currency, whether a gold standard
or some sort of currency link like a currency board, has this self-adjusting
component inherent to its design. Even in the case of floating currencies, if
there is some outcome that is undesirable, it must be because the floating
currency manager did not adjust adequately or appropriately to the prevailing
conditions.
The
traditional solution to a currency problem has been to find out who is
responsible (the currency manager), and hang him. Afterwards, the new
currency managers would correct the problem, and return the system to its
proper function, typically a gold standard. A gold/silver standard is
mandated by the U.S. Constitution, and the penalty of deviating from this
ideal was, actually, death.
Today's
currency managers have had their hands off the wheel for so long that people
forget how the process is supposed to work. In the case of Iceland, we could
say "the car ran off the road because of the wind," while another
would say "no, it was because of the bend in the road." Prevailing
conditions are always changing, which is to say, there are always wind and
bends. It seems like the currency change was the effect of the wind or a
bend, one or the other, or maybe something else. It's confusing. The result
is a weird sort of fatalism. But then, I suppose that if a car was being
driven by someone from a foreign culture with no experience with cars, like a
native from the depths of the forests of Papua New Guinea, to them it might
seem like random fate. They sit in the driver's seat, imitating what they
believe to be the correct method, and push this and turn that and -- the
results are unpredictable but often disastrous. Gaaaah!
Then,
when a currency does have some sort of disaster, like the collapse of
Iceland's krona, the results of this disaster are typically assigned to some
other factor. "It was because of the high foreign currency exposure of
Iceland's banks," or something like that. You could make up a hundred
hypotheses. So, everyone stands around bewildered, like a bunch of Papua New
Guinean natives around a car wreck. They understand that something bad has
happened ... but what exactly? Hardly anyone says: "the effects
resulting from the decline in the currency were caused by the decline in the currency."
In other words, the car crash was caused by the fact that the car ran off the road.
And
then you get to hanging those responsible.
Probably
most readers of this site already find this achingly obvious. But, I think
there are some who might have an "aha!" moment. Note that half of
all the banks in the United States went bankrupt in 1929-1932, but the currency
remained pegged to gold. Britain fought World War II with a gold standard
(admittedly a bit sloppy but it worked). Even the losers, such as Germany in
World War I and Japan in World War II, did not suffer dramatic currency
decline (their values fell by about 50% in both instances). Consider that
Iceland, upon which not a single bomb was dropped, has suffered a bigger currency disaster than
Japan in World War II. China's disastrous "Great Leap
Forward" (1957-1959), in which as many of 20-30 million may have died of
starvation, did not result in a currency problem. People had their hands on
the wheel in those days, even during times of extreme turmoil.
* * *
December 21, 2008: Life Without Cars
"I
like his conclusion that no cars = hot asian women"
It's
nice to see that someone got the point. I honestly tried to find more
pictures of European no-car environments with hot European women. The fashion
magazines are full of them. You wouldn't think it would be so hard. But, no
luck.
If you
have some, send them in. (They have to be a good representation of a no-car
environment.)
See
any hot asian women here?
Me neither.
If you
spend your life in a place like this ...
it can
grind you down so far that ...
you actually ....
start to like it.
Could that be
you?
We
could do things a different way. (Siena, Italy)
If we
wanted to.
"We
finally escaped that suburban cesspit -- for a week!
Better
than a boob job!
Thank you
American Express!"
Piazza Del Campo,
Siena, Italy
* * *
Chicks
in advertising: This one about says it all.
New ad campaign
by Chevron
Well,
it's easy anyway. (Thanks Milla.)
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
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