Every Country Wants Inflation?

• The Feds are Failing
• Inflation is win-win-win?
• Is a World Currency the solution?

I receive a smattering of emails from readers every day, and although I don't always have time to respond to them, I do read them all.

Every single one.

And while it's always nice to receive compliments, praise and gratitude, I also appreciate it when someone writes in to correct, disagree or just lambaste me or my analysis.

*****Recently, I received an email in response to my article on how the Federal Government is failing, and I thought I'd share it with you, because the reader raises an interesting point.

Paul D. writes:

“Every country wants a weak currency so they can export to a strong currency. A tanked dollar will go a long way to restore some sanity. Except the Europeans and the Chinese don't want to play along. Maybe it is time for a world currency where every country contribute to the value of such currency and promise not to undermine it at the same time. Then the dollar can be just one more currency jockeying for position against the world currency.
-Paul D.”

Paul is echoing a familiar and oft-unchallenged viewpoint. It's something that our leadership is literally betting the house on.

If our currency is weak relative to other currencies, then our goods will be competitive abroad, which, in theory, should increase employment, GDP and solve our pesky trade deficit problems.

*****Moreover, a weakened (aka devalued) currency makes it easier to pay back debt incurred when the currency was stronger. Win-Win.

Oh, and it should also encourage people to spend domestically, because if your money will be worth less tomorrow than it is today, you have a strong incentive to spend it on stuff today.  This increased domestic spending helps bolster growth, keep people employed and also increases tax receipts, so the government can more effectively manage its budget.

Win-Win-Win!

Okay, so devaluing, weakening or otherwise inflating your currency is really, really great in theory.

But we don't have to delve too deep into the history of the world to find out what really happens to countries that destroy their currencies.

As I wrote in the original article,

“Devaluing a currency might be the best way to destroy a state. War rarely wipes out the state. Disease, famine, rebellion - these misfortunes don't hold a candle to currency devaluation.

Were you to engineer the downfall of a State, you could scarcely draw up a more effective blueprint than to put Mr. Ben Bernanke in charge of your central bank and then give him free reign to print as much money as it takes.

I'm not the first person to point it out, but if the devaluation of currency was good for an economy or a state, than the Weimar version of Germany would still be around and kicking. Zimbabwe would be a world leader in GDP. Robert Mugabe would be on the cover of Fortune magazine.”

The other problem with purposely weakening your currency is that all of your economy's inputs (except for labor) almost immediately get more expensive. Yes, you can artificially stimulate demand with inflation for a short while, but on the other end of the equation, everyone holding your currency ends up paying more for things that CAN'T be inflated: commodities.

*****As for a world currency, I see no reason to believe that a world body would be any better at managing interest rates, money supply, trade, income, taxation or production any better than smaller, localized central banks.

The result would be bigger bubbles, bigger busts, more organized theft in the form of inflation, and much more corruption.

Moreover, a world currency would make it more difficult to protect yourself from the whim of a central banker by trading a weak currency for a strong one. Right now I can buy Canadian dollars, Swiss Francs, Japanese Yen, and most recently, Chinese Yuan.

Listen – I really do wish it was possible to simply devalue a currency to create strong, long term growth, employment and prosperity. The problem is that while there's no practical limit on how many pieces of paper a government can produce, the actual “stuff” that we all need to live on CAN'T be summoned at will.

So devaluing a currency will always be disastrous in the short term and eventually suicidal in the long term.

We can't win a devaluation race. No country in history has been able to devalue their way out of debt or recession.

Kevin McElroy, Editor, Resource Prospector