Frank Beck has an Op-Ed at Forbes recommending that we devalue currencies to “solve” the current financial crisis:
Here it is. Stand back. World currencies should be devalued overnight.
It can be done on a country-by-country basis, but a coordinated devaluation would work best. 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.
It would even benefit those who purchased their homes responsibly, as the value of their homes would rise by the same 43%. The current course of throwing trillions of dollars at the culprits is without any benefit to those who acted responsibly.
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.
I have a few questions for Mr. Beck:
1. What exactly are we supposed to devalue these currencies against? We aren’t on a gold standard; we live in a world of fiat currencies. Should we devalue against the Euro? The Canadian dollar? The Yen? How do you devalue?
2. Since we can’t really devalue against another currency and we aren’t on a gold standard, what is the method by which this devaluation will be accomplished? Are you suggesting that the central banks of the world just print more money?
3. What do you have against creditors? Devaluing means paying back loans with devalued money so creditors get hosed. Do you have no shame? What would be the effect on the availability of credit in the future? Would you loan me money knowing that a devalution could be right around the corner? At what rate?
4. What about renters or those who don’t own assets? Won’t they be hurt or don’t you care about poor people?
I see no reason to believe we would have any different result today. Only debt would remain the same. All other assets would immediately be worth more (in nominal terms), whether it be a home, a stock, an ounce of gold or a used car. Bank balance sheets would immediately improve, as many loans would be moved from non-performing to performing status. Banks would be paid with devalued dollars, but they made millions creating the mess. The current use of government stimulus through the creation of dollars will certainly lead to a similar or worse devaluation, so this is likely a net gain for the banks too.
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. As assets are sold, the capital gains would send even more taxes to Washington. States and locales would receive more revenue via sales and property tax, improving the fiscal condition of school districts and local governments. The national debt would effectively be reduced by the same 25%, giving future generations a chance. Combine the move with a congressional pledge to only raise the budget by half the devaluation, and we could be on track for a balanced budget and paying down the debt.
1. What about banks that didn’t make stupid loans? Are they to be punished too?
2. How would businesses immediately be more profitable? Do you have some way to devalue and raise the price of what they sell without raising the cost of what they buy?
3. If workers are paid more dollars but they can’t buy more goods is that a raise?
4. How do you think the Chinese will feel about us paying them back with devalued dollars? Do you think they’ll be eager to finance future deficits?
5. What kind of message does this send to people? If we bail out every debtor, what incentive will they have to stay out of debt in the future?
I cannot believe that this tripe was published in Forbes. Their standards must be slipping. The one thing Beck gets right is that the current plan will also cause inflation and devaluation of the dollar. But it is not a good thing, won’t solve our problems and certainly shouldn’t be official policy. Inflation is essentially a regressive tax. It hurts everyone but the poor most of all. I can’t think of a policy that is more destructive of society than inflation. If you don’t believe that, take a gander at Zimbabwe.