Mighty Bargain Hunter

Hey, let’s inflate the dollar 30% overnight to end the recession

Stumble it! Tip it! Facebook it! | 12/15/08

I really don’t know whether to laugh or cry when I read commentary like this.  From Forbes Magazine:

Dollar Devaluation to Fix The Great Recession

(That’s the first time I’ve heard our downturn called “The Great Recession.”  It’s an optimistic pessimism: It’s going to be bad, but not that bad.)  Now, this article is part of the “Adviser Soapbox” so I have to wonder how facetious it’s meant to be, but still, much of the supporting argument just doesn’t make sense.

Many of the author’s statements are just false, though some of them

• “Why not attack the situation in a manner that will benefit most everyone, an approach that has been successful before and, when compared to the current course, has little downside? … Here it is. Stand back. World currencies should be devalued overnight.”  This is wrong on all counts.  Devaluing currencies will benefit almost no one, as it steals from everyone.  It hasn’t been successful before.  It has a huge downside.  Inflation causes boom and bust cycles all by itself because resources are misallocated in the inflation-induced boom phase of the cycle and need to be re-allocated during the bust phase.  Inflation may appear to work in the short term, but not in the long-term.  Plus, how does one devalue a currency overnight anyway?  This doesn’t make any sense.
• “It can be done on a country-by-country basis, but a coordinated devaluation would work best.”  So now the problems present themselves in multiple countries.  More people lose.
• “A devaluation of 30% would raise the dollar value of all assets by 43%. A $200,000 home with a $230,000 mortgage would become a $286,000 home with the same mortgage. Presto! The homeowner who was $30,000 upside-down now has $56,000 equity and a good reason to make his payments. Both the homeowner and the bank are immediately better-off.“  This makes very little sense.  It’s true that the amount borrowed won’t go up.  But will be easier to make the payments?  The payment will be the same if it’s a fixed-rate mortgage (note, this is one place where inflation makes things easier for us) but the price of everything else will go up and eat into the amount that we can save.  If the homeowner was having trouble making the payments before the inflation, the inflation will make things worse, because his employer won’t all of a sudden increase his paycheck by 43%.  And if the rate was adjustable, the payment will eventually go up due to the inflation, as the bond rates to which the mortgages are pegged (LIBOR for example) will eventually have an “inflation premium” baked into the yield.
• “Admittedly, this is not a solution without the price of inflation, but the inflation would be short-lived. The current course will ultimately cause massive inflation that cannot be accurately estimated, and it may not even solve the problem.”  No, the inflation will stick around as long as dollars are worth anything.  It’s permanent.  Oh, and by the way, not only will inflation not solve the problem, inflation is a large part of the problem.
• “In 1933, through a series of gold-related acts, culminating in the Gold Reserve Act of 1934, America realized a dollar devaluation of 41% when the price of gold was adjusted from $20.67 per ounce of gold to $35 per ounce.“  Not really.  All this means is that dollars were 41% less powerful in purchasing gold.  The devaluing of the dollar from 1933 to 1934 was less than three percent, and this followed a period of year-over-year deflation starting in 1929.
• “Businesses would instantly become more profitable, and workers’ pay would increase, allowing each to pay their debts more easily, even while sending more tax dollars to Washington, without raising tax rates.”  This profitability would be short-lived because the business’s costs would eventually rise and trim the margins back down.  Washington would indeed get more tax revenue; this is one reason why it likes inflation.  It’s kind to tax revenues under progressive, fixed-dollar tax brackets.

Just in case my reservations weren’t clear, inflation isn’t the answer.  It’s what we’ll get, but it’s not the answer.  It might work short-term, but it’s just passing the buck to ourselves a few years down the road.  A less valuable buck.

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