The Shrinking Dollar
Mason Gaffney
[
GroundSwell, November-December 2007]
In January 2006 Insights showed how successive administrations in
Washington have doctored the Consumer Price Index (CPI) to conceal
the real rise in the Cost of Living (COL). Self-defined mainstream
economists have served as tools, some as active leaders and others
as sheep in the herd.
As late as the spring of 2007 Professor Robert Gordon of
Northwestern University, speaking at U.C. Riverside on another
topic, strayed from his theme to defend the doctored CPI. He himself
had been one of the doctors, as a member of the (Michael) Boskin
Commission of 1995. That Commission, recall, had accepted a directed
mission from House Speaker Newt Gingrich to show why the CPI should
be lowered; and it obliged. Since then its findings have been
parroted, and never questioned, in dozens of new economics textbooks
by individual authors supposedly responsible for their own
judgments.
By the spring of 2007 it was clear as a silver bell that the true
COL, led by land and raw materials prices, had far outraced the CPI.
Dozens of journalists had ganged up on the obvious point, but Gordon
did not budge. Neither did the dozens of overpriced textbooks
foisted on college students taking economics, even though they come
out in new editions every two or three years to spoil the
second-hand market that would save students hundreds of dollars
yearly.
Gordons stance was a personal sorrow, too. His father,
Aaron Gordon, had been a Professor of Economics at Berkeley when I
went through that mill. Aaron was a Mensch, one of the few in that
icy group. He had pulled my chestnuts out of the fire, although I
had given him no reason to care what happened to me. Some other
professors had tried to throw me out of graduate school for the
misdemeanor of soliciting a letter of recommendation from Carey
McWilliams, Editor of The Nation and a land reformer sympathetic to
Henry George. This was during the McCarthy era, when the charge
was not as laughable as it would seem at most times. Professor Paul
Taylor, on whose support I had counted, disparaged me as that
single-taxer. Aaron befriended and helped me through that time
of troubles. It also helped, I suppose, that the Dean of the
Graduate School doted on my new wife, a favorite student of his,
but, well, one goes to war with the army one has. Anyway, I owed
Aaron and he still holds a warm spot in my heart.
While Robert gravitated rightwards to Northwestern, which hasnt
changed much since Richard T. Ely, Aarons other son, David
Gordon, took a left turn to the New School in New York. David was
outstanding but died young, and Aaron is gone, leaving us with
Robert and the Boskin connection, a sorry trade.
You can fool some of the people all of the time, but it is harder
to fool traders on the foreign exchanges. The dollar price of the
Euro has soared over 60% since the Boskin Report. The dollar price
of copper on the London Metals Exchange has risen six-fold,
2001-date. The price of gasoline, which is somehow kept out of the
CPI, is on everyones mind. Corn is way up, along with
corn-land, while Congress continues its annual giveaways to the poor
farmers.
Meantime the CPI creeps up at about 2-3% a year, along with the
social security checks that are keyed to it, while politicians in
Washington blame national bankruptcy on these elderly pensioners who
might interfere with their routine welfare for the rich.
An early theory of foreign exchanges was called Purchasing Power
Parity (PPP). The idea was that if your COL doubles, your currency
value is halved. It was far too simple, by omitting many other
factors that move foreign exchanges, so economists disparaged it.
They overreacted, as herds will, and PPP became politico-academically
incorrect. One hardly dared mention it, for fear of losing
caste, so the profession threw out the wheat with the chaff. Today
we might benefit by noticing there is a strong connection, since all
prices are linked by markets.
The various other factors have sustained the dollar
for years now, while its domestic value fell. It has been a glorious
time for big spenders in Washington, careening down the primrose
path, but there is a reckoning due. These factors can work in
reverse, and turn an orderly correction into a rout. Here are some
of the factors.
- Foreigners hold a big part of the national debt, denominated in
dollars. As the debt turns over, why should they relend to a
prodigal nation whose leaders keep spending more and taxing less?
Each withdrawn loan weakens the dollar, prompting more
withdrawals, and round and round she goes, and where she stops,
nobody knows.
- Foreign banks hold huge dollar reserves. They have used the
dollar as the basic international currency because its value was
so stable. Now it is dropping fast they are likely to seek a
replacement, of which there are many candidates. Iran has already
stopped selling oil for dollars; Chavez could well be next. This
could lead to a run on the dollar. Such a run is cumulative in a
positive feedback loop aka a vicious downward spiral.
- We have induced oil-exporting nations to recycle
their huge rents into buying U.S. assets, including lots of income
properties and trophy properties in high-grade
locations i.e. land. The combination of a falling dollar
and falling land prices will encourage dumping, possibly in a
panic.
- U.S. banks and other mortgage lenders have bundled
their loans in what once seemed like attractive packages, hiding
the sub-prime loans in the bundles. Foreigners bought into these
bundles, which seemed sound on the upswing of the land cycle.
Bundling made it so easy to forget that it IS a cycle, always has
been and probably always will be. On the downswing, all the
bundles, good and bad, are tainted by the subprime loans hidden in
the bad.
- Collapse of the U.S. homebuilding industry lowers investment
opportunities in the U.S., sending foreigners looking elsewhere
for higher yields and sounder collateral. Bernanke of all people
should have seen this coming: he published an early
career-building article on how credit-rationing cum collateral
value collapse choked off loan volume in the Great Depression,
even though the few loans that were made were at low interest
rates, because they were made only to the few borrowers whose
collateral was still good
- Ben Bernanke has bet his reputation and our farm on there being
a continual glut of foreign loans from thrifty savers in new
economic giants like China, to sustain the dollar. He is losing
that bet.
- Washingtons fiscal crisis will force cuts in military
spending, releasing and encouraging obstreperous foreign nations
to go their own way, as several, including Putins Russia,
already are. The glorious hayride is over; the bills are coming
due.
Far-called our navies melt away; on dune and
headland sinks the fire
And all our pomp of yesterday is one with Nineveh and Tyre
Lord God of Hosts, be with us yet
Lest we forget; lest we forget Kipling
Michael Hudson did not forget, he warned us
more than once. A majority did forget, however, and here we are facing
an ever-shrinking dollar and all the wrenching adjustments that will
imply. More denial wont change the facts, and the Lord God of
Hosts is not likely to let us off the hook, however much we invoke His
name to get votes. The Fed cannot stop the recession by easing money
because we must keep interest rates up to attract foreign loans, and
avoid losing those we already have. This is a constraint that small
nations have always had to face and understand, but it is new to the
swollen-headed U.S.A. which still lives in denial and will probably
not learn without a severe economic chastisement.
Higher interest rates will help collapse land prices. This is
desirable and inevitable in the long run, but painful in the short
because it is offer prices that will fall first, not asking prices.
How do I know that? Because it has always happened that way, cycle
after cycle. Sales and records of deeds recorded have
always fallen much sooner and faster and farther than prices after
the peak of a land boom, its the nature of the human beast,
almost as though genetically imprinted. Oh, yes, governments will
intercede, as they always have, to sustain land prices and avoid the
calamity of making land affordable. This we will observe
from our storm cellars, hoping the value of our remaining dollars
does not blow away in the tempests. Let us Georgists resolve to use
this opportunity to promote better ideas for avoiding the next cycle
of boom and bust.