The biggest mistake that the Biden administration can make is to follow the siren calls of its competing economies to massively devalue the U.S. dollar, print money endlessly, and go full-MMT (Modern Monetary Theory), which is neither modern nor a theory.
Destroying the currency’s purchasing power to finance bloated government spending has been used for centuries with the same final effect: collapse of the economy.
After an unprecedented increase in debt and government spending, many countries face the almost inevitable prospect of more currency devaluations, which has triggered preemptive responses around the world.
A Currency War?
What is a currency war? A currency war is a conflict between nations trying to artificially devalue their domestic currency in order to be more competitive internationally, but also to hurt their opponents—using the currency to make the other nations less competitive, while at the same time weakening their power.
It’s based on a myth—that devaluation helps competitiveness and that having a strong currency is negative. Devaluation isn’t a tool for exports, it’s a tool for cronyism, and it destroys the purchasing power of salaries and savings to benefit low-productivity sectors and the government. It’s a transfer of wealth from citizens to the government.
The decision of the U.S. administration to consider some countries as currency manipulators is very relevant and can have significant implications for markets and the global economy, including excluding firms from U.S. government procurements; blocking or stopping trade deals; calling for heightened International Monetary Fund (IMF) surveillance; sanctions on firms trading those currencies; and actions at the IMF to take away their currency status.
It’s easy to prove that a country isn’t a currency manipulator: the elimination of capital controls and indirect or direct exchange rate fixing. The United States would have never been able to consider China a currency manipulator if the yuan wasn’t artificially fixed daily and capital restrictions had been eliminated.
The problem is that China, the eurozone, and other countries need a collapse of the U.S. dollar as the world reserve currency in order to present themselves as an alternative.
As such, it’s no wonder that so many governments, banks, and economists globally are telling the Biden administration to print dollars to eternity, forget about limits to monetary policy, and follow Argentina and Venezuela down the “printing money for the people fallacy.” Their ultimate objective is the destruction of the U.S. dollar as the world reserve currency and the end of the United States as a leader in capital attraction.
Devaluing isn’t a tool to export, it’s a tool to disguise structural imbalances and always harms much more than it benefits.
Unfortunately, in the United States, there are voices who want to “weaponize the dollar” (politically intervene in the currency) by defending the obsolete and pointless policy of devaluation, which would be the biggest mistake in history and put the U.S. economy and its status as a reserve currency at risk.
If the world gets into a currency war, with the assault on wages and savings that devaluation entails, no one wins.
A currency war is a war against citizens, their salaries, and their savings to benefit inefficient and indebted sectors.
A currency war would devastate the purchasing power of salaries and suppress investment and consumption decisions. When governments attack the currency, economic agents’ reactions aren’t to invest and consume more, but, instead, we see a generalized slump in spending and capital allocation.
If a country enters a currency war, it disproportionately hurts its own citizens. If China, the eurozone, Russia, and the United States do it, it will likely lead to a severe global crisis.
A currency war isn’t about who wins, but who loses the most. And if countries embark on an assault on their citizens’ wealth via devaluation, the message to the world is only one: buy true value-holding assets, such as gold or silver, and hide.
Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.