Deviant Median

The following is a recent message I received from a friend of mine who lives in Nelson, BC, Canada. [Note: some sections edited for length and to protect the privacy of my friend.]

George, what are your thoughts on the UN report that was released on Tuesday pressuring the world to drop the dollar as the reserve currency and move to SDR‘s?

One of your last comments to me was that the current system is a good one and you see it lasting for years to come. You must be following the markets and relies what is happening right now and has been happening for the last few years.

You said You would read what I sent you. Well some books you might want to start with are:

Economics in One Lesson by Henry Hazlitt

A Free Market Monetary System by FA Hayek

Prices and Production by FA Hayek

And anything by Rothbard is a must. Sorry man got to run, just wanted to get your thoughts.

Hope your having a good summer.

Here is my response:

Ok [redacted] I’ve been a tad busy so I’m finally getting around to replying to your note.

With regards to the report you mentioned, I have a simple answer for why it is irrelevant. Policy is a unique academic pursuit, because it is not constrained to the purely theoretical realms of many other disciplines: the real world matters more than theory. Theory can help you but without an acknowledgement of the subjective political, technological, social, military, etc. realities, no theory is worth the paper it’s printed on.

I’d have a pretty impossible time arguing that SDRs would be “bad” policy. And I have no interest in doing so. My argument is that SDRs are unrealistic policy. They will not come into wide use (for the *foreseeable* future) because of non-theoretical realities as follows.

First, taking vested power away is very difficult. See: the demise of the British Empire, Roman Empire, or the current struggle to move beyond a carbon-based energy supply. The US is the global hegemon, and there is nothing any one country (and yes, that includes China) can do about it. America has near-monopoly on military tech, a vast population, huge resource base, the world’s most powerful economy, enormous political clout, very strong political institutions, etc, etc, etc. The list goes on. This means that reducing American power by removing the reserve status of the dollar is a virtually impossible task.

Second, the dollar is the reserve currency for a reason. It is always in high demand because the US economy is so powerful. A dollar has and always will buy you so much in the broader world because it will buy you so much in America. That hasn’t changed, and won’t change anytime soon. The following paragraph is why I say that.

The US has enormous resources, a dynamic population, high education levels, massive resource and manufacturing base, a huge brain power advantage and most importantly a political system which empowers its citizens to create wealth and then share in its rewards. The nascent Chinese economy does not share this system. It is a totalitarian autocracy which can expropriate goods and capital at will, which is why it cannot attain dominance of an American style in the near term. Until that political system credibly changes, the Sino-American balance of power will not.

Third, the USD will maintain its reserve currency status because of invested inertia. Doing away with the dollar would do enormous harm to its value, canning the value of literally dozens of countries’ (including China and Japan) foreign reserves. This negative offsets a huge amount of the benefit these countries would receive with a shift in policy.

Now let me address the UN report which touts SDRs. The UN is a totally powerless institution (see: the Iraq War, which was illegal under UN law but was rubber stamped by that organization under US pressure.). Furthermore, pre-eminent economists and financiers are not at the UN. The IMF, maybe. But the UN is not known for anything approaching strong financial and monetary policy, because it’s not their job at this point in history.

With regard to those readings, I will look into reading them, and at least skim them (depends on their length). However, I do note that the fundamental issue I take with Austrian economics is one which has philosophical underpinnings. The assertion that any one unit can measure value, that there is in fact a constant store of value (be it productive capital, gold, the USD, SDRs, etc), is not one I can accept.

Finally, with reference to the markets, this past month’s Euro crisis demonstrated that the USD/EUR is a risk trade: market players fled to safety at the sight of instability in Europe, and the value of the USD spiked. During the Financial Crisis, the same thing was true. And that trade will continue to be a safety play for the foreseeable future.

-George

Comments welcome.

Apologies for an insanely long break between posts.  My life got caught in the three headed maelstrom of exams and end of semester, Christmas break, and fraternity rush season.  Now, however, I’m back on the grind with Deviant Median and as my life has returned to some sort of order.  In order to re-start my blogging efforts, I really needed a catalyst, so when one was kindly presented to me in class this evening, I was excited to provide some commentary.

I’m in the midst of working my way through three Duke undergrad programs: a major in Public Policy Studies, a minor in Economics and finally a certificate in Markets and Management.  Every Monday this semester I am lucky enough to study under George Grody in his Markets and Marketing class, a marvelous sociological interpretation of markets and their function, with a heavy emphasis on practical marketing techniques and theory.  Today’s final half hour of discussion focused around the recent Toyota recall debacle and associated impact for both the company’s economic health but also brand status.  Altogether, the discussion was a very productive analysis of the benefits and costs to both Toyota’s bottom line and it’s brand image.  The consensus was that Toyota did the right thing in issuing the recall, primarily because of the amount of trust the move would generate with consumers, who will probably perceive Toyota as looking out for their best interests.

There were, however, exceptions.  Primarily, one of my classmates gave the opinion that the damage to Toyota’s profits the entire incident caused justified an effort to keep the entire thing out of the public eye, and damn the consequences…”I don’t think it’s a good decision to issue the recall because it will cost the company to much money.”

Does this bother anyone else as much as me?  I’m all for capitalism, and pursuit of a maximized bottom line is not an evil thing.  However, there needs to a be a line drawn somewhere in the sand.  Where do we stop being human for our profits?

Another concern is the ethical implications of such a statement for Duke as an institution.  Should the institution really be producing this kind of mindset?  I certainly doubt it.