“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” – John Maynard Keynes[i]
Debt based currency, a weak currency and war do not lead to economic prosperity. The mainstream narrative is wrong and here’s why:
Contrary to what economists have been teaching for close to 100 years, debt does matter. Debt is not inherently bad per se, but the problem arises when a privately held central bank has a monopoly on a nation’s currency, allowing them to create money out of thin air and charge a nation for the use of the currency. The money that was created is backed by nothing but it carries an interest charge which means that the debt can never be repaid. You can see this absurdity when you look at the numbers:
The M2 money supply of the US dollar is $15.5 Trillion[ii] versus the USA national debt of $23.4 Trillion,[iii] this means that the USA owes more money than total money in existence. We can call this “the Fed Spread,” and I will talk further about this at a later date. If you think about this a little more you’ll realize that even if you took all the money in existence and paid down the debt, America would still owe $8 Trillion; yet the entire field of mainstream economics appears to have no problem with this.
If you have read Mises, Rothbard or other Austrian economists then you probably would have read Keynes as well. If you haven’t read Keynes then the problem can be illustrated through a quote he made in 1934 when he said: “The very behaviour that would make a man poor could make a nation wealthy.”[iv] A question to ask a Keynesians would be if this can work in countries like Greece, Argentina, Venezuela or Zimbabwe? If this is true then they should take on more debt and spend their way to prosperity.
It is also important to note that Keynes is regarded as the father of mainstream economics and the entire world financial system is based off of his ideas. The overwhelming majority of his theories have been proven to be false and entirely made up; but still, his ideas are considered to be “orthodox” economics and any credible economist or prospective Nobel prize winner would not want to prove these to be false in public.
Of course, “the USA has the world’s reserve currency,” is something that the uniformed often say. The problem is that we would have to develop a criteria and a rule that allows us to know how reserve status is achieved and what a country must to do preserve this status. The argument is equivalent to saying that everything will work until some indeterminate time when it no longer work and it does not help us to make any informed decision in the present. Also to consider is what happens after the status goes away? The problem cannot be easily resolved because you cannot argue with someone who is devoid of reason, as Ben Bernanke illustrates:
But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services…
He is right about his ability to reduce the value of the dollar but he is wrong in that he sees this as a good thing; the problem remains, how can we argue with one of the most powerful men who has ever lived?
For most fields of study, when a theory has been proven wrong even in one instance, then the theory is considered to be void. It would be a mathematics or scientific joke if an accepted theory was right only some of the times and only in special circumstances. This is not the same in mainstream economies where proving something wrong has no effect on the credibility of the theory. The weak exchange rate fallacy will illustrate this.
On the business news networks they will often say that “a weak currency is good for exports,” however we run into the same borderline “magical” thinking that is not within reality. If a weak currency is good for exports then shouldn’t Venezuela and Zimbabwe be leading the world in exports? At the time of writing $1 CAD = $0.75 USD, so should Canada take on more debt and weaken its currency in order to get the exchange closer to $2 CAD = $1 USD, that way Canada can boost exports? Or maybe $3 CAD to $1 USD to increase exports even further?
It’s strange as to why exports became favoured as a talking point, but once the idea is explored the idea starts to fall apart. If a weak currency is good for exports, then by this logic it will make imports more expensive; but that is to say that life is better when the goods and services we import are expensive because of our weak currency. We can easily say the opposite and propose that “a strong dollar is good for imports,” because it allows people to buy things at a cheaper price and therefore save money or have funds left over to buy more things. Still, how many mainstream economists have ever said such a thing?
The data will also reveal the argument as hollow, per the World Bank, imports make up 15% of USA GDP[v] while exports make up 12% of GDP.[vi] There is little basis as to why media attention favours a weak currency to boost exports when it only makes up 12% of the GDP, while more questions are raised when you realize that US Personal consumption makes up almost 70% of GDP.[vii] Very few are able to conceptualize that when prices go down, consumption can increase and life is generally better for most people, nor can they fathom that a nation with a strong currency will have a relatively low cost of living, allowing life to become more affordable for the masses.
A weak dollar is not a strong dollar and when you start to think about it there is no truth or logic behind this idea.
How many times has someone praised FDR and World War 2 for getting America out of the Depression? If you were to ask the person to explain where they got the idea from or how they could link the two, they would never be able to explain it but they just know this to be true. This thinking dangerous because it is faith based and difficult to refute, yet it is still no different than the beliefs of the average economist. To those people we could never hope to change their opinions so the only hope to offer would be to read Rothbard’s America’s Great Depression and maybe they can change their view point.
If war was good to jump start the economy, then wouldn’t perpetual war be best? The trillions of dollars spent on the wars in this century alone was money well spent? And once again, what about Africa and the Middle East who seem to have perpetual wars and conflicts, does anyone know at what point will the war become positive to GDP and bring prosperity for all? Lastly, can this war-prosperity model be duplicated, such that we should strive for World War 3 in order to get the engines of commerce moving again?
The difficulty in trying to convey that central bank debt is bad, that a weak currency policy is foolish, or that war was not the cure for the Great Depression, is that you have to convince someone that their belief is based on the absurd. They will have to admit that they are wrong or that they have been fooled and cognitive dissonance may set it. We know that people hate this, whether it is our elected leaders, our University professors, central bankers, or most of the people on social media, very few people like to admit that they are wrong.
Even worse, no one wants to admit that they know nothing about economics, especially an economist!
[i] Keynes, John Maynard. “The Economic Consequences of Peace,” July 12, 2002, p. 112.
[iv] Keynes, Collected Writings (vol. 21), 334.