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How to Restore Trust in the Dollar — and Get Out of a
Recession
An old friend writes about his frustrations in
buying an apartment in France: “Prices are unbelievably high! You get
nothing for under $300,000 - $400,000, unless you are willing to settle
for an apartment without a view.” And view is a very important reason
why you would consider moving to the Riviera.
These are the frustrations of the falling
dollar. The French would not dream of paying such prices for an
apartment on the Riviera; the Euro is the money they use, and in Euros,
those prices would now be the equivalent of $165,000 - $220,000 in U.S.
purchasing power. Why? Because the dollar has fallen forty-five
percent against the Euro since the year 2000 as of this writing, and
record devaluations of the dollar are noted against some of the
strongest currencies of the world.
The other side of the coin is that visiting the
U.S. has become a giant bargain for French tourists, and for Europeans
in general. They can buy restaurant meals, hotel rooms and clothing in
the U.S. at a fraction of what those purchases would cost in their own
countries; and they are arriving in droves to do so, forsaking such
traditional vacation regions as Spain, Southeast Asia and North Africa.
So, what happened to the three functions of
money:
1.
A unit of account;
2.
A medium of exchange;
3.
A storer of value?
When I was a graduate student, I had Hugo
Sonnenschein for a teacher in international economics. He was in favor
of the market — rather than gold — determining exchange rates, and was
unconcerned that this might wreak havoc on international rates of
exchange. “What about speculators?” we asked. “They just accelerate
the market adjustment,” he explained. Sonnenschein eventually became
President of the University of Chicago, the free market bastion of the
United States.
Many years later, the Swedish Central Bank had to
raise interest rates to 500% to discourage a speculative attack on the
Swedish krona. I called my friend Curt Nicolin, a Swedish
industrialist (we had worked together on Swedish market reforms, and I
knew that he was a free market advocate). “Why not let the price of
the krona be set by the market?” I asked. “It would lower people’s
faith in their own currency,” he replied. He continued, “Money is a
storer of value, and we cannot not intercede when that
function is so strongly threatened.”
“Ah! So the Swedish krona is a faith-based
currency,” I thought. But then, that is what all money is! Because
most Americans don’t travel abroad or deal in the currencies of other
countries, they seem largely unaffected by the fact that their own
currency has depreciated so dramatically and caused losses in the buying
power of the dollar in the trillions of dollars. Trillions! That very
inconvenient fact is now beginning to erode our trust, and trust is all
we have to draw upon in order to have a functioning banking system.
Chairman Bernanke of the Federal Reserve is
fighting to maintain trust in the dollar and the U.S. banking system.
He has decided that the main enemy of the moment is not inflation but,
rather, that the deflation we are seeing happening against other
currencies should spread to the domestic economy in a replay of what
happened during the Great Depression of the thirties. That is unlikely
to happen, but there are limits to what the Federal Reserve can do.
Trust and confidence happen in the minds of actual people, and rarely as
a direct response to money flows. If money is made available, but banks
remain unwilling to lend and customers unwilling to borrow, lowering
interest rates is like pushing on a string. Keynes called this “the
liquidity trap” and shifted his policy attention to the use of fiscal
measures instead when a country encountered a crisis of confidence.
My friend would be better off looking for a condo
in Florida, where prices have plummeted mostly because of actions by
local speculators and the sub-prime mortgage crisis. In that
environment, his dollars appear strong as a medium of exchange (condos
for green paper). The loss in stored value for the condo owners
benefits buyers, and the prices of condos are still only quoted in
dollars. But what if the prices keep falling? What if buyers don’t see
a bottom yet in the housing market and hold back on their purchases?
That is when deflation rears its ugly
head. Economists find deflation a very difficult problem to
solve. Inflation encourages spending, but
deflation discourages both spending and saving — spending
because no one would like to buy too soon, and saving
because it makes no sense to save when interest rates fall
to zero or below. What do you do when you feel like neither
saving nor spending? Most people do nothing, and that is not
good for the economy. |
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When this scenario occurs in other
countries, money often flows to safe havens abroad — or to
gold. Those countries depend upon the “kindness of
strangers” for keeping their money safe. Similarly, the U.S.
relies upon massive capital flows from abroad to cover its
trade imbalance. It is that imbalance that the falling
dollar seeks to restore to balance; but that requires an
economy in expansion, not contraction. And recession is the
very definition of a contraction. Keep in mind that other
economies are linked to the US economy through trade and
investments—and if we stop growing, they may too, and then
our exports may not grow fast enough to eliminate our trade
deficit.
The solution lies neither in monetary
policy nor in fiscal policy. It lies in the kind of
deflation economists love to see: Prices falling because we
do what we do cheaper, better, faster. It lies in
refocusing American ingenuity on providing that which no one
else can provide — that which is called “earned monopoly
advantage,” and that which allows sellers to price on
value rather than cost.
This solution is real,
it is lasting, and it restores confidence,
optimism and belief in the future. It is what both Bush and
Bernanke should be focusing on as the long term strategy for
growth and prosperity.
How do we know that can happen? In
every recession, we have seen that at least five percent of
U.S companies thrive, no matter their economic
circumstances. One of our strategic alliance
partners (www.clubwowltd.com)
calls this “The 5% Solution.” These companies improve their
productivity and use the resulting profits to lower prices,
pay higher wages, and raise their profits, thereby
continuing an uninterrupted spiral of innovation, top
performance and positive change through good times and bad.
U.S. companies need not wait for Bush
and Bernanke to act. They can act on their own.
Figure out how to make your customers
better off. Engage them in a common quest. Then involve
your entire work force in that noble undertaking. Be nimble
and smart, and draw upon the vast amount of capital that is
available to you — human capital —joining with
these “capitalists” to pursue a common goal.
Eliminate the obstacles that are in their way.[*]
There is dignity in a common goal.
There is unity in a common goal. There is hope and optimism
in a common goal.
Doing this in your own organization
is hard work. But Americans have never shied away from hard
work. Americans know that to not do this now
means the going will be harder still when it is delayed.
Do this, and you’ll actually have
something you can take to the bank: A plan for raising the
productive contribution of every resource of the company.
That is bankable. And you will probably never get better
rates than right now in your lifetime. This is the way to
create willing borrowers, and willing lenders,
in an economy that has lost upward momentum for now.
Then watch the powerful, innovative
and self-correcting American market economy take off. It
will lift the spirits of everyone. And we shall then reap
the deepest satisfaction economic life can offer: That which
comes from having done the right thing, in the right way,
when it was most needed — and having done it ourselves.
[*] To learn more about this, I
invite you to attend a Congress scheduled for later
this year that is devoted to this very topic. It is
the 15th World Productivity Congress,
scheduled for September 21-24 in Sun City, South
Africa. Some of the leading experts in the field
will gather there to discuss how to lift the
productive contribution of every man, woman and
child in the world. I will be one of the keynote
speakers. For information, arrangements and
registration, please consult:
http://www.wcps.info/Congress2008/inforeg.pdf.
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