Be a Good Neighbor...If It’s Convenient

“Like a good neighbor, State Farm is there,” is the trademarked jingle originally penned by Barry Manilow back in 1971, the same year Richard Nixon closed the gold window. Some neighbor! He sold the farm.

Suddenly now everyone wants...everyone else...to be a good neighbor. The Wall Street Journal recently reported: “The Group of Seven leading economies last Tuesday attempted to head off a potentially destabilizing round of currency devaluations, issuing a statement that reaffirmed their commitment to let market forces determine exchange rates, and saying central bank policy will be focused solely on domestic objectives.”

The Journal’s Sudeep Reddy noted: “The question of currency devaluations is an awkward one for industrialized nations, many of which have embarked on monetary policies designed to boost their economies that have the side effect of lessening the value of their currencies. The U.S. Federal Reserve’s bond-buying policy has previously sparked world-wide concern given its impact on the dollar.”

Writing in the Financial Times, Komal Sri-Kumar, president of Sri-Kumar Global Strategies, wrote how we got to this strange place in economic policy “The pursuit of an exchange rate level as a target in itself has...resulted in misplaced priorities. The US Treasury and Senate have spent the past 15 years criticising Chinese authorities for not permitting a bigger appreciation of the yuan. This was time wasted. Foreign exports to China did gain competitiveness in recent years, but due to increased Chinese wage costs rather than from a stronger yuan.” He added: “Instead of focusing on the yuan’s exchange rate with the dollar, foreign negotiators should have pushed China to open its markets to foreign competition, and to reduce restrictions on foreign capital inflows. Trying to force Chinese monetary authorities to move the exchange rate faster shifted the focus of western governments from the need for structural reforms in the Chinese economy.

Dr. Sri-Kumar observed: “As central banks in the US, Europe, Japan and China wrestle with recession or slower growth, they will find that competitive monetary easing measures, and uncertainty about exchange rates, hold back rather than promote recovery. Providing the security that comes from fixed exchange rates, and pursuing policies compatible with those rates, would be more effective in reviving growth.”

So there they have it: The same policies that have been touted as the salvation of the developed world are coming back to haunt efforts to stimulate growth.

So too that day on August 15, 1971 when Richard Nixon cut the last link between the dollar and its monetary base. It’s like Barry Manilow sang in “Every Single Day.”

Every single day.

We'll remember what we do today

Words we didn't say

We'll remember every single day

 

Then years go by

To wonder why and wonder what we learned

Was that the bridge we should've crossed

The one we burned?

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Exclusive Interview With John Mueller, one of the most important aides to Rep. Jack Kemp and an intimate participant in the formulation and implementation of what became known as "Supply Side Economics," Part 3

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