Money_How the Destruction of the Dollar Threatens the Global Economy - and What We Can Do About It

by Steve Forbes

  The government popped the bubble when it tightened and imposed fierce tax increases. The resulting deflation smacked the rest of the economy hard. The government then embarked on what became an unending spending binge to stimulate the economy and fix the mess it created.

  Japanese monetary policy has zigzagged. The bias has traditionally been toward tight money. But ignoring history and the U.S. experience, Japan has recently been toying with its own version of quantitative easing to devalue the yen vis-à-vis the dollar to stimulate growth.

  The move will fail not only because cheap money never does any lasting good but also because the government is continuing the tax increases that have become an obsession over the past 20 years. Prime minister Shinzō Abe has confirmed that the doubling of the national sales tax enacted by his predecessor will continue on schedule. Another drag: Japan’s ferocious social security payroll taxes, which unlike those in the United States have no salary caps. These levies are scheduled to go from about 30% to over 37% by 2018. The top income tax rate is moving to 55%. Japan’s corporate tax rate is the worst in the world, with the single exception of the United States.

  Prime Minister Abe has lately begun attacking Japan’s suffocating regulations, such as limits on the height of buildings and land-use laws that make it difficult to use urban real estate efficiently. These much-needed efforts will be for naught, however, if Japan doesn’t learn the lessons of money: governments can’t conjure up resources out of thin air. Stimulus packages take resources from people and businesses that would employ and invest them better than any public sector bureaucrat. High taxes kill incentives and destroy capital.

  Emerging Markets. These countries have been the victims of their own malfeasance as well as of the Fed’s fluctuating dollar policy. Many emerging nations, including Russia, Nigeria, and Brazil, are rich in natural resources and have the same problems as Spain did in the Middle Ages. They have fallen prey to the resource trap and have grown overly dependent on these assets. A number also have overbearing governments that prevent the emergence of entrepreneurial market economies.

  Each year the World Bank conducts a survey of 189 economies and issues its findings in a publication called Doing Business. It ranks countries in 11 categories ranging from the difficulty of starting a business to dealing with construction permits to “getting electricity.” Brazil routinely ranks in the bottom half. Until recently so did Russia, but it has announced that it is making a concerted effort to improve its standing.

  Brazil, Russia, and other resource-rich nations experienced impressive growth in the earlier part of the last decade because of the commodities boom set off by the weak dollar. The same thing happened to resource-rich countries in the 1970s after the ending of the Bretton Woods gold standard system caused the dollar to decline. But the expansions of the past 10 years were no more durable than they were 40 years ago.

  The travails of these beleaguered countries stand in stark contrast to the growth that has taken place in such nations as South Korea, Hong Kong, Taiwan, Poland, the Czech Republic, and Israel. All have generated wealth through saner monetary policies and more open markets.

  The Baltic states of Estonia, Lithuania, and Latvia are making similar strides. Years ago, all three put in flat tax regimes and conducted very sound monetary policies. Estonia now uses the euro.

  Abundant resources don’t have to be a curse. Chile is rich in copper. Thirty years ago, it made a concerted effort to start diversifying its economy. One initiative that helped create a secure retirement system in addition to creating capital was privatizing social security. The reform has been a spectacular success. How the system will fare under the new socialist president, Michelle Bachelet, remains to be seen.

  Malaysia also has enormous resources. Like Chile, it is working to broaden its economic base by welcoming foreign direct investment in manufacturing, technology, and services.

  All these countries have largely eschewed Keynesian economics. They recognized that printing money does not create wealth—investment and work do.

  The jury is still very much out, meanwhile, with Turkey, Brazil, South Africa, Thailand, and Indonesia. If they learn to keep their monies sound and adopt sensible tax regimes like the flat tax, they will make real breakthroughs.

  The United States. Just as the wave of tax cuts that swept the world in the 1980s and 1990s originated with the Reagan reforms in the early 1980s, the impetus for major monetary reform must now come from the United States.

  This is starting to happen. On the tax front, a consensus is emerging for major tax simplification. More than three years ago President Obama appointed a commission, dubbed Simpson-Bowles, to study the country’s fiscal challenges. Amazingly, both Democrats and Republicans signed on to the idea of simplifying the U.S. tax code and cutting tax rates across the board. The president ignored the commission. But the idea continues to gain momentum. Many congressional Democrats are putting together proposals for simplification. The president won’t give a green light for a serious effort in this area, at least not until after the congressional elections in 2014. If the White House indicated a real interest, an agreement would be rapidly reached on removing certain business preferences and sharply reducing the corporate tax rate, which, as noted, stands as the highest in the developed world. After the presidential election of 2016, there should also be a mandate for radical tax simplification on the personal side. These reforms will provide the legitimacy for other countries to follow suit.

  As for monetary policy, the United States is still far away from the intellectual understanding needed for implementing a new gold standard. Given the manifest failures of Keynesian monetary policies in the United States, Europe, and Japan, however, this is at last beginning to change.

  The loss of patience with the Fed’s failure to generate growth after the Panic of 2008–2009, along with concern about its expanding power, were among the factors that brought about the scaling back of QE. Fears that Janet Yellen, long known as dovish on the dollar, might change course and abandon the taper caused some 26 senators to vote against her nomination.

  These sentiments are likely to grow and provide the impetus for major reform. This reexamination will come not so much from economists but from others who will examine the issues with fresh, unprejudiced eyes.

  One of the things that will strike people is that the United States very successfully operated under a gold standard for 180 years. America’s performance since then has been anything but impressive.

  Events have a way of undermining reigning orthodoxies. The Keynesian experiment has failed, and the question will become: What will replace it? Remember that the disasters of the 1970s were also a repudiation of Keynes, but the continuing hostility among conservative economists to a gold standard prevented the restoration of a Bretton Woods–like system. The recent experience of the United States and the rest of the world since then, particularly in the last decade, makes the failures of Keynesianism and monetarism impossible to ignore.

  Our hope is that this book, and others like it, will help provide the insights and impetus for much-needed change.

  THE NUGGET

  Instability and insufficient growth are not the new normal. A new gold standard will come.

  Notes

  Preface: The Crisis of Modern Economics—and Money

  x government spending, free trade, and sound money “The Wealth of Nations,” Adam Smith Institute, accessed March 6, 2014, http://www.adamsmith.org/wealth-of-nations.

  x tools such as spending, taxes, interest rates, and regulations Peter Drucker, “Schumpeter and Keynes,” Forbes, May 23, 1983.

  x to achieve smooth, perpetual growth “Monetarism,” Investopedia, accessed March 6, 2014, http://www.investopedia.com/terms/m/monetarism.asp.

  xi how are economists so confident that they can predict the future? George Gilder, Knowledge and Power: The Information Theory of Capitalism and How It Is" (Washington, DC: Regnery, 2013), pp. 22, 270.

  xi a ratio that h
eld for more than 200years Nathan Lewis, Gold: The Once and Future Money (Hoboken, NJ: John Wiley & Sons, 2007), pp. 29–30.

  xi Mathematical Principles of Natural Philosophy “Sir Isaac Newton,” Encyclopaedia Britannica, March 1, 2014, http://www.britannica.com/EBchecked/topic/413189/Sir-Isaac-Newton.

  xi complicated clock governed by immutable laws Edward Dolnick, The Clockwork Universe: Isaac Newton, the Royal Society, and the Birth of the Modern World (New York: HarperCollins, 2011), p. xvii.

  xii precious metal itself through the buying and selling of bonds Lewis, op. cit., p. 255.

  xii rise at the expense of lower wages for workers Mark Skousen, The Making of Modern Economics: The Lives and Ideas of the Great Thinkers (Armonk, NY: M.E. Sharpe, 2001), p. 108.

  xii The General Theory of Employment, Interest, and Money Library of Congress Online Catalog, http://catalog.loc.gov/.

  xii an equilibrium in which demand and supply were in balance Drucker, op. cit.

  xii –xiii economy, upon which production was dependent Drucker, op. cit.

  xiv His predictions of mass famine Thomas Robert Malthus, An Essay on the Principle of Population, Library of Economics and Liberty, http://www.econlib.org/library/Malthus/malPop.html.

  xv government is 20%, and investment the rest Mark Skousen, “Beyond GDP: Get Ready for a New Way to Measure the Economy,” Forbes.com, December 16, 2013, http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-get-ready-for-a-new-way-to-measure-the-economy/.

  xv a new statistic called gross output Ibid.

  xv George Gilder’s book Knowledge and Power. Gilder, op. cit.

  xvi Answer: we know more Jerry Bowyer, “George Gilder Is Optimistic That We’re Due for a Surprising Leader,” Forbes.com, August 28, 2013, http://www.forbes.com/sites/jerrybowyer/2013/08/28/george-gilder-is-optimistic-that-were-due-for-a-surprising-leader/#/sites/jerrybowyer/2013/08/21/george-gilder-explains-why-stock-markets-have-devolved-into-a-world-of-noise/?&_suid=139379521661002863893109894706.

  xvi–xvii and its industrial output fiftyfold Gilder, op. cit., p. 477.

  Chapter 1: How We Got Here

  8 more than 318 points, or 2%, in a single day Anora Mahmudova, “U.S. Stocks Tumble; Dow Drops 318 Points,” MarketWatch.com, January 24, 2014, http://www.marketwatch.com/story/us-stocks-sell-off-another-triple-digit-drop-for-dow-2014-01-24.

  8 a “1929 feeling” is back on Wall Street John J. Xenakis, “World View: That ‘1929 Feeling’ May Be Back on Wall Street,” Breitbart.com, January 25, 2014, http://www.breitbart.com/Big-Peace/2014/01/24/25-Jan-14-World-View-That-1929-feeling-may-be-back-on-Wall-Street.

  9 purchasing power has declined by more than 80% Lewis E. Lehrman, “The Nixon Shock Heard ’Round the World” (graph), Wall Street Journal, August 15, 2011, http://online.wsj.com/news/articles/SB10001424053111904007304576494073418802358.

  10 has declined by about 26% Bureau of Labor Statistics, U. S. Department of Labor, Consumer Price Index Inflation Calculator, available at http://www.bls.gov/data/inflation_calculator.htm.

  10 more frequent crises and downturns Michael Bordo et al., “Is the Crisis Problem Growing More Severe?” Economic Policy 16 (32), April 2001, pp. 53–82.

  10 during the period of quantitative easing (QE) William L. Watts, “Treasurys Rally for Third Day as Taper Comfort Increases,” MarketWatch.com, December 10, 2013, http://www.marketwatch.com/story/treasurys-gain-as-investors-factor-in-taper-prospects-2013-12-10.

  10 dramatically weakened on the global markets “‘Fragile Five’ Countries Face Taper Crunch,” Financial Times, December 17, 2013, http://www.ft.com/intl/cms/s/2/407c42ac-6703-11e3-a5f9-00144feabdc0.html#axzz2ukSLUaSi.

  11 money never made it into the economy Robert Auerbach, “Massive Misconceptions About Where the Bernanke Fed’s Money Explosion Went,” Huffington Post, June 25, 2013, http://www.huffingtonpost.com/robert-auerbach/massive-misconceptions-ab_b_3490373.html.

  11 Treasuries and mortgage-backed securities David Malpass, “The Fed ’Twist’ That Won’t Dance,” Wall Street Journal, September 21, 2011, http://online.wsj.com/news/articles/SB10001424053111904060604576570980769992022.

  12 subprime mortgage market with cheap dollars Peter Ferrara, “How the Government Created a Financial Crisis,” Forbes.com, May 5, 2011, http://www.forbes.com/sites/peterferrara/2011/05/19/how-the-government-created-a-financial-crisis/.

  13 too low for too long Peter Wallison, “Don’t Be Fooled About Low Rates and the Housing Bubble,” RealClearMarkets.com, January 23, 2013, http://www.realclearmarkets.com/articles/2013/01/23/dont_be_fooled_about_low_rates_and_the_housing_bubble_100106.html.

  13 around $95 a barrel these days “United States Energy Information Administration, the United States Department of Energy, Petroleum & Other Liquids,” available at http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=f000000_3&f=a.

  14 from Haiti to Bangladesh to Egypt George Melloan, “The Federal Reserve Is Causing Turmoil Abroad,” Wall Street Journal, February 23, 2011, http://online.wsj.com/news/articles/SB10001424052748704657704576150202567815380; and Javier Blas, “Global Food Prices Hit Record High,” Financial Times, January 5, 2011, http://www.ft.com/intl/cms/s/0/51241bc0-18b4-11e0-b7ee-00144feab49a.html?siteedition=intl#axzz2usqHqaXs.

  14 in 1971 costs $5.78 in 2014 Bureau of Labor Statistics, U.S. Department of Labor, Consumer Price Index Inflation Calculator, available at http://www.bls.gov/data/inflation_calculator.htm.

  14 to buy the equivalent goods and services Ibid.

  14 a mere 17 cents Ibid.

  14 a 17% cut in pay Mark Gimein, “For U.S. Men, 40 Years of Falling Income,” Bloomberg.com, December 31, 2013, http://go.bloomberg.com/market-now/2013/12/31/for-us-men-40-years-of-falling-income/.

  14 single-earner family has fallen behind Ibid.

  16 breathtakingly high rates of interest Ianthe Jeanne Dugan and Ruth Simon, “Alternative Lenders Peddle Pricey Commercial Loans,” Wall Street Journal, January 7, 2014, http://online.wsj.com/news/articles/SB10001424052702304477704579256123272658660.

  16 short-term loans can exceed 50% Ibid.

  16 supervisory or enforcement action Gillian Tan, “Pressed by Regulators, U.S. Banks Skip Deals,” Wall Street Journal, January 22, 2014, http://online.wsj.com/news/articles/SB40001424052702304302704579334820201530010.

  17 has too much power “74% Want to Audit the Federal Reserve,” Rasmussen Reports, November 8, 2013, http://www.rasmussenreports.com/public_content/business/general_business/november_2013/74_want _to_audit_the_federal_reserve.

  17 annual rate of nearly 4% Louis Woodhill, “What Is It About a Stable Dollar That Paul Krugman Doesn’t Understand?” Forbes.com, August 29, 2012, http://www.forbes.com/sites/louiswoodhill/2012/08/29/what-is-it-about-a-stable-dollar-that-paul-krugman-doesnt-understand/.

  17 average rate of around 3% Ibid.

  17 56% higher than it actually was Ibid.

  17 $1.3 trillion deficit Ibid.

  17–18 one-quarter of the size of China’s Ibid.

  18 unemployment averaged less than 5% Charles Kadlec, “Nixon’s Colossal Monetary Error: The Verdict 40 Years Later,” Forbes.com, August 15, 2011, http://www.forbes.com/sites/charleskadlec/2011/08/15/nixons-colossal-monetary-error-the-verdict-40-years-later/.

  18 it never rose above 7% Ibid.

  18 around 8% since 2008 Ibid.

  18 inflation, 1.5% higher Charles Kadlec, “An International Gold Standard Beats the Rule of the Governing Elite,” Forbes.com, December 19, 2011, http://www.forbes.com/sites/charleskadlec/2011/12/19/an-international-gold-standard-beats-the-rule-of-the-governing-elite/.

  18 federal debt stood at $436 billion Rich Danker, “To Lower the Debt Ceiling, Fix the Monetary System,” Forbes.com, March 30, 2011, http://www. forbes.com/sites/richdanker/2011/03/30/to-lower-the-debt-ceiling-fix-the-monetary-system/.

  18 more than $17 trillion Stephen Dinan, “U.S. Debt Jumps a Record $328 Billion—Tops $17 Trillion for First Time,” Washington Times, October 18, 2013, http://www.washingtontimes.com/n
ews/2013/oct/18/us-debt-jumps-400-billion-tops-17-trillion-first-t/.

  18 same year that the Fed started implementing QE Peter Ferrara, “Obama’s Budget: The Decline and Fall of the American Economy,” Forbes.com, February 16, 2012, http://www.forbes.com/sites/peterferrara/2012/02/16/obamas-budget-the-decline-and-fall-of-the-american-economy/.

  18 downgrades on their bonds Matthias Sobolewski and Dina Kyriakidou, “S&P Downgrades Nine Euro Zone Countries,” Reuters, January 14, 2012, http://www.reuters.com/article/2012/01/14/us-eurozone-sp-idUSTRE80C1BC20120114.

  19 final days under Ben Bernanke Jonathan Spicer and Jason Lange, “Yellen Stays the Course, Says Fed to Keep Trimming Stimulus,” Reuters, February 11, 2014, http://www.reuters.com/article/2014/02/11/us-usa-fed-idUSBREA1A06O20140211.

  19 “Too many people are unemployed.” Michael Lindenberger, “Janet Yellen Says She’ll Pursue Full Employment,” Dallas Morning News, February 11, 2014, http://bizbeatblog.dallasnews.com/2014/02/janet-yellen-says-shell-pursue-full-employment.html/.

  20 $85 billion in bonds a month Greg Robb, “Fed Tapers Bond-Buying Program by $10 Billion,” MarketWatch.com, December 18, 2013, http://www.marketwatch.com/story/fed-tapers-bond-buying-program-by-10-billion-2013-12-18.

  21 peaking at $1,896.50 in 2011 Data available from the London Bullion Market Association’s daily gold price fixings, http://www.lbma.org.uk/pages/?page_id=53&title=gold_fixings.

  21 rate of growth from 1968 to 1982 Louis Woodhill, “The Mystery of Income Inequality Broken Down to One Simple Chart,” Forbes .com, March 28, 2013, http://www.forbes.com/sites/louiswoodhill/2013/03/28/the-mystery-of-income-inequality-broken-down-to-one-simple-chart/.