Capitol Ideas / Trading for Dollars
Bethell, Tom
CAPITOL IDEAS TRADING FOR DOLLARS In a more perfect world one would hardly have to think about economics at all; and certainly not about that mysterious entity called The Economy, envisioned by...
...At the margin," Friedman said, "foreign funds are adding to investments here...
...may let the dollar fall unless Bonn eases credit"— Wall Street Journal, page 1, October 19, 1987...
...T et us consider the merchandise 1...r trade deficit as simply as possible...
...the other accumulates pieces of paper...
...Moreover, all plans for future investments abroad are rendered uncertain when the dollar's future value is uncertain...
...Should not the market determine the value of the dollar, then...
...Whatdoes the Japanese VCR manufacturer have...
...But he was not correct, I believe, when he expressed doubt in the same speech that "anything outside Wall Street and the markets had anything to do with" the crash...
...This is a promise to restore $300 to the Japanese VCR-maker at some point in the future...
...One country (in "deficit") accumulates goods, cars, television sets, computers, and so on...
...mative action), entitlement, and force...
...And this is precisely why such monkeying about with the dollar is so dangerous—because we now live in a world economy in which many dollars are held by foreigners who believe (mistakenly believed...
...It is greatly to our credit that he feels sufficient confidence in the United States to accept a promise to be repaid in the future...
...Milton Friedman, who agreed with Reagan's Cleveland comment that the trade deficit was a sign of strength, added that distinctions must be made between the debt of different countries...
...Some, such as Mexico and various Latin American nations, borrow funds "to live high on the hog...
...Instead of focusing on this key point, the unintelligent economist can see nothing but the interest payments, worrying groundlessly that the U.S...
...is The American Spectator's Washington correspondent...
...to the extent they believe 10 THE AMERICAN SPECTATOR MARCH 1988 this, Keynesians are also mercantilists...
...that their dollar-denominated investments were safe...
...Compare, by contrast, the hydraulic, or Keynesian, model, in which money is envisioned as circulating through pipes, thereby "driving" the economy, but when there is a trade deficit some money seeps out of the pipes and to that extent reduces GNP...
...It is a perilous thing when government officials in a country as important to the world trading system as the U.S...
...government officials that maybe the dollar will have to sink a little bit further if we are to eliminate that big bad trade deficit...
...Treasury bond...
...The money is used to subsidize home consumption...
...T hose who think that something I should be done about the trade deficit seem to envision the economy as a structure held up by props, many of which are in the hands of foreigners...
...In consequence $300 are sent to Japan...
...The economic recovery has now lasted for five uninterrupted years...
...government monopolizes legal tender in the U.S., and that is why markets (currency traders) don't know what is coming next...
...Their aggregated guesses continually create new and unpredictable currency values, and none of us has any term firma to stand on.E THE AMERICAN SPECTATOR MARCH 1988 11...
...If we had legally competing currencies, yes...
...called THE AMERICAN SPECTATOR MARCH 1988 9 a U.S...
...Milton Friedman of the Hoover Institution said he worries that Baker, unlike his predecessor Donald Regan, "can't keep his hands off the dials," and that the results "have been a disaster...
...Turn back once again to our Japanese VCR maker...
...has become a "debtor nation...
...Treasury...
...in the interim he will also receive interest payments, in compensation for his willingness to be repaid later rather than immediately for his labors...
...The stock market, I believe, reacted very unfavorably to the unmistakable signs that dangerous remedies to non-existent maladies were at hand: in particular to Secretary of the Treasury James Baker's remark, just before the crash, that if the West Germans didn't get their interest rates down, then perhaps the dollar would have to drop still further...
...Now we move into the period of nonsensical alarums about trade deficits and cries that the dollar should sink still further...
...Foreigners are discouraged from investing their money in a country whose currency is believed by Tom Bethell by its government officials to be in need of devaluation...
...In January, President Reagan said in Cleveland that in truth the trade deficit was a sign of economic strength...
...All depended on their finding allies within the Administration who could be persuaded that the trade deficit was indeed dangerous, and that something shouldbe done about it...
...Baker reiterated that the U.S...
...Showing great patience and confidence in the American system, he is the proud bearer of a piece of paper which entitles him to interest payments and an ultimate restoration of his $300...
...We are talking about Americans freely choosing to exchange promisesfor current goods," said Alan Reynolds of Polyconomics, "and about foreigners who are willing to take those promises in exchange for their goods...
...But there is a catch...
...I do not believe it is correct, as Ed Crane of the Cato Institute told me, that currency futures markets can come to the rescue here...
...But remember, when he cashes it in he will be at the mercy of the exchange rate...
...And one is readily at hand...
...It is "in surplus...
...And that undoubtedly is what happened in October...
...thereby resembling doctors who agree to administer unwise remedies to a patient with an imaginary illness...
...Claims that the U.S...
...Let us assume that the VCR I bought cost him 45,000 yen to make, and that the exchange rate was 150 yen to the dollar...
...In an unsettled world of time-space warps, earthquakes, and Black Holes, by contrast, we would all have to calculate very carefully before undertaking the simplest task...
...The great irony is that the one thing that really would (and I believe did, on October 19, 1987) provoke foreigners into making hasty and precipitous demands for instant repayment is the very remedy that the trade-deficit worriers seek to impose: namely, further decline in the value of the dollar...
...the exchange rate sinks until each seller has found a buyer...
...so much as contemplate the manipulation of the dollar's value...
...The complete reliability of this law of nature permits all of us, including Olympic high jumpers, to remain securely and confidently ignorant of its details...
...In the above VCR situation that I described, we are of course the debtor because the Japanese manufacturer has voluntarily postponed receipt of the repayment that was due to him for making the VCR...
...So, what do you think foreign holders of U.S...
...that reform, once achieved, was sufficiently important to restore a measure of economic tranquility...
...President Reagan understood that tax rates had to be cut to offset this injustice...
...Both are, provided the individual transactions which make up the trade aggregates are entered into voluntarily, as is the case in trade between Japan and the United States...
...dwindle away any further...
...Nonetheless, we are badgered in the public prints and on the publicly subsidized airwaves by figures such as former Commerce Secretary Peter Peterson, who bear the grim tidings that the balance of trade is unfavorable to the U.S., because we have become a "net debtor" to the Japanese...
...There has of course been some improvement under President Reagan, whose Administration will no doubt be remembered as a time when the economic terrain became more predictable, the earthquakes less frequent...
...My $300 has been returned to the U.S...
...They believe that the bad news about good news is that the good news may one day stop...
...If such economists were willing to assert in all cases, domestic and foreign, national and international, that debt was perilous to borrowers because it necessitates interest payments, they would at least be consistent...
...Let us assume that I purchase a Japanese videocassette recorder for $300...
...That is, more people want to sell dollars than buy them...
...If the soundest principles of political economy—the security of property, freedom of contract, the rule of law—were not merely constitutionally enshrined but respected by politicians, we would have little more occasion to think about economics in the abstract than we do to think about the law of gravity as we make our daily rounds...
...As it is, the U.S...
...What we have here is a spurious system of accounting which records as a national debit the foreigner's claim to receive interest payments, but fails to record as a national credit the initial transfer of capital that gave rise to that debit...
...They try to get out as fast as they can, that is what they do, and get back into their "home" currencies, before their misguided investments in the U.S...
...I have my VCR and it is working very nicely...
...This yields him $300 which is what he invested, remember, in a Treasury bond...
...But in point of fact they do not, leading to the suspicion, as Alvin Rabushka of the Hoover Institution notes, that nothing more than chauvinism is at work here, masquerading as economic analysis...
...stocks and bonds do when they get the message from U.S...
...Which of the two is prospering...
...It's strange," he said, "that economists worry about national accounts being in balance, when economics itself rests on the principle that individuals are the best judge of their own interests...
...But those who are hostile to the rule of law have remained alertly on the lookout for any opportunity to undermine "Reaganomics" (the word reappeared in the press after the October stock market crash), and they finally achieved a measure of success by repeatedly publicizing scare stories about the "trade deficit...
...at the same time dumping unforeseen revenues into the laps of the income distributors in Washington...
...In the 1970s the great problem was that inflation, combined with the "progressive" tax code, had resulted in a non-legislated confiscation of income from the people who go off to work every day...
...In other countries, such as the U.S., individual investments are made and debts incurred...
...A moment's reflection will show that if one country (America) is importing goods from another country (Japan), there is a voluntary exchange of goods for pieces of paper, and if either country is to be considered better off as a result, common sense would suggest it is the country gaining goods...
...In cashing in his bond, then, and in changing the proceeds back into Japanese money, he finds that he has lost 7500 yen, or one-sixth of what he expected when he bought the bond...
...At any moment they may "demand repayment" of their investments, i.e., pull out the props...
...moreover such markets are really only available to companies large enough to afford finance departments...
...But dollars are not legal tender in that country, and so they are sent back across the ocean, in exchange for another piece of paper in the U.S...
...and certainly not about that mysterious entity called The Economy, envisioned by so many economists and journalists as a centrally located piece of hydraulic machinery, powered by a rushing stream of dollars...
...Now let us assume that the exchange rate has reached 125 yen per dollar (which is about where it is as I write...
...The "remedy" of a lower dollar is advocated by deficit-worriers because this would make imports to the U.S...
...is becoming a debtor nation are "utter nonsense," he said...
...more expensive, hence less inviting to consumers, who would then (in theory) buy fewer goods from abroad...
...In this he was correct...
...A declining dollar not only imposes a non-legislated tariff on all incoming goods (and these incoming goods are needed to help make more goods here), it also rewrites the terms of all existing contractual agreements between Americans and their foreign trading partners, because the units of account no longer mean what they did when the contracts were written...
...What, at this point, is the "balance of trade...
...Our VCR maker in Japan now has a $300 bond which, at the new exchange rate, is worth only 37,500 yen...
...And that is more closely analogous to the real economic world that we find ourselves in: a world of somewhat insecure property of uncertain contract, and persistent, unsettling efforts to replace the rule of law by privilege (affirTom Bethel...
...These markets only extend one year into the future (for the yen no further out than September 1988, in today's Wall Street Journal), whereas investments often take far longer to pay off...
...The theory that the stock market drop was caused by the stock market leaves something to be desired—an external agent...
...Currency speculators, believing that this indeed may be the will of the Administration and that such a dollar decline will therefore come to pass, proceed to bid the value of the dollar down and the yen up...
...Of course the truth is that both countries are improving their position: evidently the Japanese prefer to accumulate pieces of paper (because they are doing so voluntarily...
Vol. 21 • March 1988 • No. 3
