Steve Forbes : A Short Money Treatise for D.C. Dummies

A devastating trade war with China has once again been averted, thanks to some last-minute diplomacy. But the destructive idea behind this ongoing crisis is still there, which means the dispute will undoubtedly flare up again. Uncle Sam believes Beijing manipulates its currency, the yuan, to give China an unfair trade advantage. Washington claims that since China's economy has long been strong and growing rapidly the yuan should go up against the greenback as if it were a common stock experiencing a surge in earnings. This theory is preposterous, but it has a stranglehold on Washington policymakers in both the legislative and executive branches.

It's time to get back to basic economics. Money--both the paper and electronic varieties--is, in and of itself, worth nothing; it has no intrinsic value. It is a means--and a profoundly important one--of enabling people to more easily conduct transactions without having to go through the clumsy and utterly inefficient barter process.

For example, when we sell a subscription to Forbes we don't receive in return an endless variety of products (loaves of bread, goat cheese, hot dogs, shoes, blouses and neckties, etc.) or services (two hours of lawn mowing, etc.). We are paid in cash and can then determine for ourselves what products or services--such as a writer's salary--we pay for with that subscription fee. If policymakers could grasp that elemental concept, they'd save themselves and the world considerable grief and could then get down to the business of removing trade barriers between those who wish to do business with one another.

Money is a facilitator. It should be a fixed standard of measure, as are the minutes in an hour, inches in a foot and pints in a quart.

When I saw the title of this piece, I knew Forbes was going to eventually refer to the gold standard in the article (as he has been arguing the past 10 years) and he did )...

QUOTE :

“chronic problem of how to ensure that money is not manufactured beyond the needs of a free marketplace, which is why the gold standard was established.

Alas, the notion arose in the late 19th and early 20th centuries that if wise men could have “flexibility” in issuing money without the constraints of its being tied to the supply of gold, or even silver, they could rid us of financial panics, the business cycle and other human ailments! John Maynard Keynes and others thought that if the economy looked to be slowing you should just churn out more money, like putting more logs on a flickering fire, and do the opposite if things looked to be overheating. But manipulating the amount of money or the cost of it, à la the Fed’s fixing interest rates, gets in the way of prosperity. It does not facilitate prosperity but retards it. There is no way a handful of people—wise or unwise—in government and central banks can second-guess what markets made up of billions of people might need. We are living through a disaster that is the result of the latest Greenspan/Bernanke attempts to guide our economic destiny through central bank operations.”

I especially love this analogy he uses in this article, which I believe I can use to simplify explaining the debasement of currency to kids :

“Manipulating the amount of money or the cost of it, à la the Fed’s fixing interest rates, gets in the way of prosperity. It does not facilitate prosperity but retards it. There is no way a handful of people—wise or unwise—in government and central banks can second-guess what markets made up of billions of people might need. We are living through a disaster that is the result of the latest Greenspan/Bernanke attempts to guide our economic destiny through central bank operations.

Imagine if the government decided to increase the number of minutes in an hour from 60 to 70. You can hear policymakers congratulating themselves: “People will work longer at the same pay. This will be a boon to productivity!” Or if Washington increased the number of inches in a foot from 12 to 15: “Home buyers will thus get more house for the same price and that will stimulate home buying!” Preposterous? It’s no more foolish than what we and other countries routinely do with our currencies.”

His quotes are a pleasant surprise. To be honest, I thought he'd be homering for Goldman Sachs and the Fed (actually, how do you tell them apart any more?), or calling for a VAT or something. What a surprise! And yes, a flat tax would be both theoretically and practically the fairest way to treat taxes, if you can just keep the ants out of the sugar, the termites out of the woodwork, and the Yankees out of the tax code.

Tiny quibble: You aren't talking about money, Steve, you're talking about currency .... real diff ...

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