Today's turmoil is affecting stock markets around the world but also currencies, to include digital currencies. The Russian Ruble is a mess, the Chinese Yuan is looking for an opportunity, Bitcoin is lobbying for less regulation, and the U.S. Dollar's long reign is in question. To make everything more confusing, U.S. pundits one day tell us a strong dollar is necessary and the next day a weak dollar will better help the economy. Let's clear up a few misperceptions for our JAM Views members.
First, we will pause to remind our members, (1) the pundit is more than likely incorrect, and (2) their views are driven by their own self-interests (not to mention confirmation and recency bias). I have to admit that even while running an investment firm for two decades, when it came to exchange rates, I would have to regularly pull the finance books off the back shelf to study what helps what and why.
Next, know that we are not dealing with absolutes. The dollar is strong or weak only in relevance to the rest of the world currencies (similar to how stocks are overvalued or undervalued mostly in comparison to current interest rates). The main arguments for a strong dollar promote selling our U.S. Government bonds to the world at higher prices, adding more capital without the Federal Reserve having to buy our bonds, and giving the U.S. strong purchasing power and influence around the world. "He who owns the gold makes the rules."
The primary arguments for a weak dollar are for promoting U.S. exports. If the dollar is weaker compared to the Japanese Yen, the Japanese will find the Harley Davidson's to be much less expensive, and U.S. manufacturing jobs will thrive, at least in the short-term.
It seems simple enough, but the real world never works the way the elites claim (seems to be a recurring JAM Views theme). For example, the Swiss and the Dutch are at the top of the list for best-performing currencies (strongest) since 1900, but the major parts of their economies are exports. Also, history is replete with countries devaluing their currency (making it weaker) to boost their export economies, and hurt imports, only to see them quickly ravaged by inflation, devaluing more, and destroying everything.
The answer for the U.S. dollar now, and always has been, is stability. The Federal Reserve and U.S. politicians can only do damage to free markets, and they try their damnedest every day to make it worse. As we have taught in JAM Views, "money goes where it is treated best." Artificial inputs only screw up systems which are constantly searching for equilibrium, balance, homeostasis. The British economist, John Maynard Keynes, has been screwing up economies with artificial steering since 1913 when Britain replaced gold with foreign-exchange reserves.
Our friend, Steve Forbes, explained it best, "Economists and policymakers regard as holy writ the fantasy that the economy can be steered, as if it were a car...The Federal Reserve, or any central bank, can no more control an economy than long-ago Soviet central planners could...with 7 billion people around the world and countless millions of entities of all kinds engaging in more than 100 billion transactions each day...the only sensible question to ponder is how much damage will our central bank do?"
The answer is stability. CEOs complain during anti-business Administrations that they can't make long-term investments because they don't know if tax rates and regulatory costs are going to keep rising? Note how the stock market always falls when there is "uncertainty." Even listen to Coach "K" preach, "I don't care if the refs are calling it loose or tight. I just need them to be consistent!"
If the U.S. dollar was allowed to find its proper value, without misinformed politicians and technocrats attempting to justify their own existence (and government paychecks with your tax dollars), then the system would find the correct interest rates, correct inflation rates (maybe it's 2% as the Fed claims or more likely it's closer to zero), and correct exchange rates. U.S. companies and workers would maximize efficiency and productivity with the requirement to be as competitive as possible, and the U.S. would efficiently import the correct goods from the correct countries which maximize our own self-interests, just as with Adam Smith's butchers and bakers in Wealth of Nations.
Since the Egyptians and the Romans, monetary stability has been maintained over long periods by a gold standard. Forbes, again, explained in one of his never-ending campaigns to return to the gold standard. "Markets work best with fixed weights and measures. Everyone knows how chaotic life would be if the number of minutes in an hour or ounces in a pound fluctuated. The same is true for money, which is supposed to measure value. Until we blew it all up in the early 1970's, the U.S. had a fixed value for the dollar since Alexander Hamilton established it with a gold standard in 1791. It's no coincidence that the U.S.' average pace of economic growth since then has fallen sharply."
Let's hope and pray that the current world turmoil can end quickly and so many innocent lives may be saved. Let's also continue to do whatever we can to keep governments out of free markets and to allow citizens of all currencies to thrive. Now that we understand the basics, pay attention to the mistakes countries make every day in attempting to manipulate their currency. "First do no harm."
"The rating agencies guys wore blue suits from JC Penny, with ties that matched too well, and shirts that were starched just a bit too stiffly. They appeared to know enough to justify their jobs, and nothing more." Michael Lewis, The Big Short