Milton Friedman's theory of floating exchange rates, on which the international
monetary system has been based since 1971, has given rise to a coercive regime
in the sense that International Monetary Fund (IMF) statutes forbid member
countries from stabilizing the value of their currencies. A country attempting
to do that is branded "a currency manipulator" and is threatened with trade
sanctions.
The prohibition is understandable. It is designed to protect the scheme whereby
the US dollar balances of the surplus countries are stealthily embezzled. It
works as follows. The United States lures the unsuspecting surplus country into
the black hole of currency revaluation against the dollar. As their currencies
are
floating upwards, a part of the surplus countries' dollar balances is
appropriated by the US.
In effect, the US is forcing its trading partners running a surplus to grant,
unwittingly, a partial debt abatement. This exhausts the concept of
embezzlement. The US, bankers to the world, conspires to short-change its
depositors using the smoke screen of floating foreign exchange. This regime,
based on plunder, cannot endure. The only equitable monetary system is the one
based on fixed exchange rates. And the only durable way to fix exchange rates
is to make the currency redeemable in gold. Friedman's theory is a blot on
science and on the good faith of the United States in its dealings with its
neighbors.
Floating versus fixed exchange rates
In putting pressure on China to follow Japan's example to revalue the yuan, the
American money doctors fail to point out that they are in effect asking China
to take a loss, similar to those of Japan amounting to hundreds of billions of
dollars, on her holdings of US Treasury paper.
China carries her books in yuan, not in US dollars. Therefore, every change in
the yuan price of the dollar will have an immediate and predictable effect on
the value of China's portfolio of US Treasury paper. In particular, a decrease
in the yuan price of the dollar results in a loss in the yuan value of China's
dollar balances.
The question arises: by what right does the US, a country with severe deficits
and a history of reneging on its foreign debt - as on August 15, 1971 - demand
that China write off a part of the American debt to China?
There is more. If China yielded to American pressure to let the yuan float
upwards, it would mean not just a one-shot abatement of debt, but a standing
commitment to grant further automatic abatements as new debts are being
incurred by the US. This would make a mockery of the idea of independent
nations trading with one another for mutual benefit. It would make China a
vassal of the US, a role China in all dignity could not accept.
It is incumbent on the debtor, not on the creditor, to make the necessary
adjustment in case of a persistent imbalance. The contrary position, advocated
by John Maynard Keynes, is a fallacy. It turns logic upside down. It penalizes
hard work and thrift, while it rewards indolence and prodigality.
Water-torturing Japan
Immediately after making the dollar an irredeemable currency, the US started
running trade deficits on an ever-increasing scale. Using Milton Friedman's
spurious theory according to which floating exchange rates were supposed to
make the currency of a surplus country stronger, the US started twisting the
arms of its trading partners running a surplus, first and foremost, Japan, to
revalue their currencies upwards.
Thus the unsuspecting trading partners of the US were lured into the black hole
of currency revaluation. In listening to the sweet siren song from Washington
these surplus countries were oblivious to the fact that they were in effect
taking a loss - as they were granting a debt-abatement to the US proportional
to the dollar balances they held as a currency reserve.
For example, when the Japanese yen rose to the level where one dollar was worth
one third of what it had been (say, 100 yen as compared to 300 earlier), this
actually meant an abatement of the American debt to Japan in the ratio of 2/3
or 66%, without anybody recognizing what was going on. It was trumpeted as
"free market on the go". It was not. It was embezzlement, pure and simple. The
US in effect embezzled Japanese funds held in dollar accounts to the tune of
66%.
Embezzlement on that scale has consequences. In fact, it bankrupted Japan, one
of the strongest countries financially. As Japan fell on hard times and wanted
to draw on its foreign exchange reserves, it couldn't, for the simple reason
that the funds were not there. At that point, American money doctors rushed in
and explained to the Japanese that, rather than paying their bills by drawing
down their dollar balances, they should start running budget deficits and
finance their needs through debt. Up to that point, Japan was practically
debt-free. By now, Japan's debt is so huge that it is stifling the Japanese
economy.
The US has played the role of the bully-boy of international trade long enough,
bluffing that the irredeemable dollar is "an ultimate extinguisher of debt". It
is none too soon that someone call the bluff - after so many countries have
succumbed to pressure and suffered huge losses on their foreign exchange
reserves as a consequence.
Maybe China will stand up. If China is the first country to open her mint to
gold, thereby resolving the gridlock, then the US will be forced to give up its
monetary leadership in the world.
Antal E Fekete has since 2001 been consulting professor at Sapientia
University, Cluj-Napoca, Romania. In 1996, Professor Fekete won the first prize
in the International Currency Essay contest sponsored by Bank Lips Ltd of
Switzerland.
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