Saturday, March 25, 2023, saw an astonishingly stupid article appeared in the Washington Post. “The Dollar is Our Superpower, and Russia and China are Threatening It.” by Fareed Zakaria (p. A18), while no doubt well-intentioned, reinforced some very bad, even extraordinarily dangerous ideas about money. These have not only the potential to destroy every economy in the world, including that of the United States, they have gone a long way toward doing it.
Cutting through all the rhetoric about weaponizing the dollar and the brilliance or lack thereof of the politicians doing so (or failing to do so), one thing becomes fatally clear. None of the major players — and it would be safe to conclude that few if any of the minor ones — understand either the nature or the function of money. Zakaria’s article, as well as monetary and fiscal policy throughout the world for the past two centuries, has assumed — incorrectly — that money and credit are a thing valuable in and of itself. (Yes, “money and credit” is, both being different forms of the same thing, as Henry Dunning Macleod pointed out.)
The key thing to keep in mind at all times is the one thing that Zakaria forgot, or never knew: that money is not valuable in and of itself. It is only valuable because it is a symbol of something else that has value . . . and therein lies the problem.
|TO STOP DEBAUCHING THE CURRENCY|
When money itself represents something of actual value, there is no problem, or at least no substantive problem. This is the case when that dollar, ruble, yuan, peso, or whatever represents actual marketable goods and services, whether existing in current inventory or the present value of future goods and services. When, however, that money represents something that only has value because of some other factor, such as government debt or what someone else will give for the currency itself, as is the case today with most crypto currencies.
The U.S. Dollar as a reserve currency today is backed completely with U.S. government debt, and thus only has value because the U.S. government is viewed as secure . . . more or less. Zakaria’s mistake, and one endemic in every world economy today, is to assume that a reserve currency makes things valuable instead of taking its value from what backs it. Russia and China cannot threaten the United States by undermining the dollar as a reserve currency. No, China and Russia threaten the dollar by undermining the United States . . . which could not possibly happen if the dollar were backed by things of actual value. And paradoxically, neither Russia nor China could threaten neither the dollar nor the United States (at least economically) if the dollar was backed by private sector hard assets instead of government debt.
|ANYTHING BUT KEYNES! PLEASE!|
So, why isn’t the dollar backed by private sector hard assets? The short answer is Lord Keynes. The longer answer is that when a reserve currency is backed by government debt, the issuing government can alter the value of the currency at will to achieve political goals . . . for a while. Of course, the bill eventually falls due, and the government cannot control either the value of the currency or anything else.
And that is what Russia and China are really doing. They are not so much attacking the U.S. currency as taking advantage of the suicidal monetary and fiscal policies that have been in place in the United States since the early 1930s. If the United States would implement the Economic Democracy Act at the earliest possible date, Russia and China could establish alternative reserve currencies to their hearts’ content, but it would only be disastrous. Gresham’s Law — bad money drives out good — only operates when the good money is not readily available.
The bottom line here is that the U.S. Dollar as a reserve currency is not America’s superpower, but its kryptonite — and the sooner we get rid of it in its present form, the better for everyone concerned, even Russia and China . . . eventually.