If you want to buy a house in Argentina, you better have dollars. Yes, you read that right. Since the Argentine peso has depreciated so radically over the past 75 years, it is not used much by those with real wealth to exchange it in Argentina. The dollar rules.
Crucial to the role of the dollar in Argentina’s transactions is that unlike various economic religions, the Fed does not “supply” dollars to Argentina. Dollars circulate in Argentina because there are goods and services worth exchanging there. Monetarists of the various Schools (think Keynesian, Monetarist, Austrian, and Supply Side) imagine money as the driver of economic activity and “provided” by central banks, but if every dollar in the world disappeared by tomorrow , the US would be pregnant with currencies by tomorrow afternoon. Where there is production, there is always money. Money in circulation is a direct and demanding consequence of production.
It brings a conversation that will not die. Last week’s column made some members of the aforementioned faiths a little touchy. Some have claimed that they don’t believe the Fed is the solution to inflation, even though they’ve been claiming for decades that the Fed is the cause of inflation in the US (if it’s allegedly the cause, it’s logically the solution, right?), he said that it is “absurd” to say that the lack of standards is the only source of currency depreciation (more evidence that religions believe the world revolves around the Fed), some imagine that the Fed and other central banks can expand or contract called “money supply” on the way to inflation or arresting it, and then some assumed that if the Fed simply managed the “supply and demand” of money, then the dollar would be stable. Wrong, wrong, wrong and wrong.
Indeed, while economists of various faiths have convinced their flocks that the Fed controls inflation, it does not. Consider the major devaluations of the dollar during the 20thu century. In 1933 FDR devalued the dollar from 1/20.67 of an ounce of gold to 1/35u. So incensed was Fed Chairman Eugene Meyer that he resigned over FDR’s decision and then bought the Washington Post as a vehicle to attack FDR’s inflationary policies. What is important is that the Fed was powerless to stop Roosevelt.
The same was revealed in 1971. Fed Chairman Arthur Burns passionately opposed President Nixon’s decision to sever the dollar from gold, but was once again powerless. In short, the Fed does not control inflation, period.
Some will say that the Fed can control the so-called “money supply” and that it can control inflation by matching the supply of dollars with the demand. Such a view is not serious. What makes a currency stable is the role model this defines the meaning of money, not central banks acting as croupiers. If you doubt it, just pick up a copy of Niall Ferguson The Cash Nexus. In it, among other things, he writes about government bonds from the 17u and 18u centuries that were of the 100-year-old variety. Why was it, or rather, why could it be? The answer is simple: as written last week, gold as a money standard gives money enormous stability. When currencies were fixed in terms of gold, investors were willing to trade bonds that would pay off over huge time frames. On that note, does anyone think that central banks hundreds of years ago somehow matched the supply and demand of currency during the horse races? Hopefully the question answers itself. The standard, one measured in gold, is what gave credibility to money.
It is no different today. The Fed does not, nor has it ever played “croupier” on the path to dollar price stability. Monetary stability is born of standards, but the dollar has not had a standard since 1971. That it has been unstable and that there have been periods of inflation since then is a statement of the obvious.
But wait, the focused Fed will say. Since the Fed controls the so-called “money supply,” it can shrink or increase the money “in the system,” thereby affecting the value of the dollar. Wrong and wrong. First, the Fed does not control the so-called “money supply.” The latter is determined in production. This is why dollar arbitrage transactions worldwide, including housing purchases in Argentina. Second, the Fed could not devalue the dollar by increasing the “supply” of it simply because any attempt to “print” it would logically result in fewer dollars circulating. Check out the peso in Argentina, the rial in Iran, and the bolivar in Venezuela if you’re confused. Printing does not increase money in circulation, rather it decreases it. Of course he does. Would you sell your house, your car or a sandwich to someone holding a bolivar?
Various religions imagine that “too much money” or too much “money supply” causes inflation, but they put the cart before the horse. The simple truth is that there can never be too much good money. Saying there could be is like saying there could be overproduction.
Actually, “too much money” or too much “giving money” is logically that follows inflation. There is a devaluation of currency, and then there is an excess of currency that is not as reliable, and that circulates less visibly. Something that brings us back to normal. When forms of money have a fixed definition respected by producers, there is no inflation. To beat inflation, return the dollar to a standard definition.
