Sunday, October 25, 2009
Daniel Drezner explains rather cogently why the dollar is going to remain the world's reserve currency, fretting from the right notwithstanding. Megan McArdle does not disagree with the main point, but does not believe that the current obsession with the dollar's value has much to do with opposition to Obama:
A large segment of the right ascribes almost magical properties to fixed currency, like the ability to keep the government from borrowing too much money. This is belied by the long history of government's on commodity or currency pegs borrowing a great deal of money, and then defaulting and/or revaluing. It is also belied by the fact that the government cannot actually borrow a ton of money in the expectation of inflating away the debt, because neither the bondholders nor the Fed are particularly likely to go along. But for a lot of the right, still, what is good for the US dollar is what is good for America--and what is good for the US dollar is simply being worth as much as possible relative to other currencies.
But whatever the reason, the dollar obsessives were in plentiful supply under Bush, and I suspect are coming out of their hidey holes now mostly because the dollar is again dropping dramatically.
I agree. I'm not much for a strong dollar per se. But it would be useful if it did not swing in value with so much velocity.
Finally, Paul Kedrosky crunches the numbers and largely puts to rest the paranoid assertion that Matt Drudge's dollar obsession actually influences the currency markets.
CWCID: Linkiest, where there are many interesting things to read.
Shockingly stupid analysis by both Drezner and McArdle, if their posts even qualify as analysis. I note that McArdle provides precisely zero examples of governments on commodity or currency pegs that borrowed a great deal of money, then defaulted or revalued.
McArdle may well be correct, but what she seems not to get is that is exactly the point. Sunshine is the best disinfectant, and a government with a fixed currency must explicitly default or revalue in broad daylight and bear the political consequences. By contrast, a government managing a fiat currency can mask its fiscal irresponsibility by devaluing its currency.
Those persons celebrating the DJIA crossing 10,000 would do well retake basic algebra. On a trade weighted, dollar adjusted basis, DJIA 10,000 in October 2009 is really a DJIA of approximately 7500 when measured in 2008 dollars. The DJIA has NOT recovered its value. Only the unit of measure has changed.
On a nominal basis, investors in the DJIA have a rate of return of zero in the last ten years (adjust for inflation and the return is zero for about 20 years). Stock market investing has been an absolute swindle for the average investor.
By contrast, investors in gold have earned a return of approximately 400% in the past 10 years. Yes, keep believing in a fiat currency and watch your wealth disappear.
Drezner says himself that he "is only a political scientist", so it should be no surprise that he should assume that just because today there is no alternative to the dollar that will remain true for a long time to come. A logical fallacy in and of itself, but also an economic stupidity: If China, Japan and others decide an alternative to the dollar is required, one will be developed. That's the way innovation works.
To form fiscal policy on the presumption our currency can never be replaced as the world's reserve currency is unspeakably dumb.