Money, It’s a crime, Share it fairly, but don’t take a slice of my pie says one of my favorite songs from one of my favorite bands, Pink Floyd. Today, money seems to be the impetus for protests and strife all around the world. Protesters are camped out on Wall Street demanding a slice of someone else’s pie. Across southern Europe, government employees are protesting against the possibility that they can’t keep taking a larger and larger slice of pie, and in the Middle East, protests sparked by the fact that only one family has all of the money is leading to the downfall of governments – and those that have governed. What is going on?
Welcome to the new old world of Mercantilism. The big news today was that the U.S. dollar slumped to a record low against the yen. In fact, the US dollar has been falling in value against nearly every currency pretty much since the start of the Bush Administration. In fact, the dollar index which measures the performance of the greenback against a basket of currencies is down by 37 percent since President George W. Bush took office. The decline has not stopped under the Obama administration, however, other countries have begun to “retaliate” against what can best be described as the Mercantilist policies of the US government.
Mercantilism was an economic idea promoted in the 1700s by the various European powers, that was later discredited by Adam Smith. Under a Mercantilist system, a country would block imports into its borders while promoting exports in order to maximize the amount of gold in the country. Adam Smith showed how this just led to inflation (since gold served as money in those days) and the impoverishment of the population.
Today, countries are all racing to the bottom to try to lower the value of their currency against their trading partners in an attempt to promote exports. As such, no boom in US exports ever materialized, while at the same time, the inflationary pressure from this Merchantilism has led to ever increasing inflation (particularly for commodities), discouraged both foreign and US investment in new productive capacity, and destroyed the purchasing power of worker’s wages. No wonder everyone is so mad.
Unfortunately for those policy makers in Washington who have been following the misguided ideas of the economic orthodoxy, high unemployment rates do not necessarily imply that inflation is not a risk. Any of us who lived through the 1970s understand that inflation and unemployment are not mutually exclusive, and the fact that the “misery index” or combined inflation and unemployment rate has been rising to 1970s levels does not bode well for the economy or for the protesters who are spreading out across the nation and the world.
Higher commodity and producer prices will begin to be reflected in the top line consumer price numbers as soon as housing prices stabilize, and then the Fed will no longer be able to ignore the inflationary overhang of their print and spend policies. Whether or not the US economy is healthy enough to withstand the removal of the life-support provided by negative interest rates remains to be seen – but there has never been a Mercantilist policy that has succeeded over the long run.
Its time for the economists in Washington to pick up a copy of The Wealth of Nations.