Japan will by the bonds of the
so-called "European Stability Mechanism". (See Bloomberg article, Japan
to Buy European Debt With Currency Reserves to Weaken Yen)
The ESM is an 80 billion euro
pool of capital that can be levered up to 700 billion euros by selling bonds.
Supposedly, 200 billion has to be kept safe but that remains to be seen. The
ESM is a mechanism to lend more money to insolvent governments whose problem
is too much debt. These governments borrowed too much. Therefore someone lent
them too much.
ESM will lend them even more.
ESM is a misnomer, as it is
merely a temporary extension of the unsustainable borrow-to-spend status quo.
Lending a broke government more money so they can lend it to broke banks and
dole it out to the unions and welfare programs will not stabilize anything.
Eventually, the insolvent debtor countries will default on their debts to
ESM. The consequence will be losses for the European governments that
contributed the 80 billion and losses for the buyers of ESM bonds.
What does Japan hope to get by
doing this? According to Japanese Finance Minister Taro Aso, Japan
"seeks to weaken its currency". The Europeans are wary of Japan
acting to weaken the yen, and by this move Japan may be throwing them a bone.
It would be hard for Europe to criticize Japan for buying ESM bonds. In order
to weaken its currency, Japan will be throwing away the money of its
taxpayers by buying bonds to help Europe lend to its insolvent but profligate
socialist governments. It will be inflicting terrible losses on its savers,
whose wealth will be diminished as the yen declines.
The Bloomberg article does not
say what would motivate a government to enact such a hurtful policy, though
it does hint that the insanity is worldwide. "He [Aso] also questioned
whether major Group of 20 nations had stuck to pledges from 2009 to avoid
competitive currency devaluations."
Why would a major country have
to pledge not to hurt its own people, especially savers and productive
businesses? Why would anyone think that, having made such a pledge, it might
really be shooting itself in the foot? Why would anyone think that there
might be 20 .357 revolvers blazing away?
The worldwide regime of
irredeemable paper money provides the means for each country to shoot
themselves in the foot. Each currency has a value in terms of all the others,
but none of them are anchored in reality. No one has the right to redeem
paper in gold or anything else. Therefore the real value of a paper currency
is arbitrary. A dollar might be able to buy a steak dinner for four people,
or it might be able to buy a stick of chewing gum. Its value is arbitrary.
Governments have the power to reduce the value of their paper currencies, and
they have being using this power for a long time.
The old fallacy of
mercantilism provides the motive. Currency debasement is proposed as the cure
for unemployment and falling exports. Pushing down the value of the currency
is purported to solve the problems of rising costs, perverse regulations, high
taxes, and declining competitiveness. Even Milton Friedman believed that a
country could compensate for an ill-considered minimum wage law by currency
debasement. Here is a quote from The Case for Flexible Exchange Rates
by Milton Friedman in 1953:
"The argument for a
flexible exchange rate is, strange to say, very nearly identical with the
argument for daylight savings time. Isn't it absurd to change the clock in
summer when exactly the same result could be achieved by having each
individual change his habits? All that is required is that everyone decide to
come to his office an hour earlier, have lunch an hour earlier, etc. But
obviously it is much simpler to change the clock that guides all than to have
each individual separately change his pattern of reaction to the clock, even
though all want to do so. The situation is exactly the same in the exchange
market. It is far simpler to allow one price to change, namely, the price of
foreign exchange, than to rely upon changes in the multitude of prices that together
constitute the internal price structure."
Another reason for the
pervasive desire for a falling currency is the old ideology of mercantilism,
which favors exports for the explicit policy goal of running a trade surplus.
A falling currency will not
allow a country to get away with shackling its productive enterprise with
onerous regulations, sapping its vitality with confiscatory taxation, and
burdening it with a workforce that is underpaid, inflexible, unmotivated, and
underproductive. Before a country can export a good, it must produce the
good. Before a worker can be paid, there must be capital accumulation that
enables the productivity from which to pay him. A falling currency undermines
productivity by destroying the capital of productive businesses and draining
it from savers before it can be invested in new productive enterprises. There
is also another problem, know as the "terms of trade" (see my paper
for a discussion: http://keithweiner.posterous.com/floating-exc...able-and-dishon
).
There is one other problem
with the idea that a country should debase its currency to fix its problems.
If all countries attempt it at the same time, then all may lose value
(against gold) but the ratios between the currencies may not change much.
Typically, people do not study
the intellectuals who originate and promote the ideas they believe.
Especially when an idea becomes "generally accepted", everyone
takes it for granted. Nearly everyone today, including many who claim to be
of the "Austrian School", accepts the assertion that a falling
currency will help a country and specifically grow exports and employment.
It is time that the world
rediscovers that nothing good can come out of destruction. Would it help
people to understand this if we call it the "broken dollar
fallacy"?
