With one eye on a mess of intraday charts and the other on CNBC, I caught this exchange yesterday between two people that can only be described as polar opposites-Ron Paul and Ben Bernanke. It was classic-if you're a Fed nerd like me.
Congressman Paul, as you might expect, was busy letting the Fed chief have it for his continued devaluation of the dollar. In fact, at one point Paul practically accused the Fed of stealing people's money.
"There is a dollar crisis out there and people's money being stolen," Paul said. "People who have saved, they're being robbed. I mean, if you have a devaluation of the dollar at 10 percent, people have been robbed of 10 percent."
Bernanke, of course, gave his usual canned answer about price stability and the economy, but the look on his face was priceless.
It reminded me of that commercial.
You know the one...Want to get away?
Paul, of course, nailed it.
The presumption was what, that Helicopter Ben made the dollar go down? Sorry Ron, you missed the mark by about 8 years.
Do this experiment: Using DXY, the symbol for the dollar index, comparing it's price on 1/1/2002 and 12/31/2007. The dollar dropped from about 120 to about 70. "Coincidentally" the market "soared" between 2003 and 2008. Do the math: $100,000 converted to Euros (as a proxy for DXY) on 1/1/2002 then converted back to dollars on 12/31/2007 would have yielded a 54% return! Seriously.
So, multinationals - let's use Intel for example - who built product in (let's say) Taiwan for sale to producers in (let's say) Korea saw what? Even with no increase in profits between the two local currencies, Intel's profits would have gone up by 54% in DOLLARS during that period - due to the devaluation of the dollar. And you wondered why the administration had such greasy grins when they said "We're for a strong US Dollar" while doing nothing to help strengthen it.
And you've got to wonder, didn't anybody but me notice this? Well of course they did, which is why the stock market soared (not withstanding the war and such stellar producers of war goods as ceradyne and who was the boot company that soared? But I digress...). And when they said "it helps US exports" did anyone take five minutes to ask, "Hmmm, specifically, which exported products?" You thought every computer chip Intel made was made in Santa Clara, CA or each car sold by Ford, made in Dearborn, MI? Hmmm. Not so likely.
The "myth" that absent any government intervention fails on a few counts as well, starting with the historical evidence: Prior to 1900 when markets were virtually totally free of any government control that there were never booms or busts, recessions and periods of great inflation? Of course there were, much worse, actually that following 1900 excepting perhaps/probably the Great Depression, itself prolonged unnecessarily by the trade-inhibiting Smoot Hawley (sp?), a monumental act of government stupidity disguised as protectionism. Bernanke, one of the world's foremost scholars on the Depression (fortunately) didn't repeat that action (we can all be grateful congress didn't either).
In any closed system, wealth tends to gravitate to a minority of the citizens, making virtual slaves to the system of the rest of them. From a poker table to industrial England, the results are predictable and the same. Why? Human nature. Even when there are rules of behavior, the person who most successfully bends those rules gains an enormous advantage over those that don't, and wealth flows their way. That's why we have rules. No marking the cards - no unpunished killing of your rivals, which, when thinking of feudal Europe in the dark ages was how commercial rivalries were often settled throughout Europe, though we usually call it war. So too for Ford and the Pinkerton agency when Union organizers were killed. Then there's JP Morgan's accumulation of 10% of the wealth of the US during his lifetime, and enormous accomplishment give the short length of an adult life versus the size of the country at the time.
On a global scale, there's the dominance of the US over world markets following the rivalry called WW II.
The reason people cheat is because it pays, and pays big, especially if you can evade punishment by controlling the rules, the rule-makers or the post rule-breaking judgment apparatus. It is specifically why we make rules, and it is also specifically why people try to break them, or in more civilized times, lobby for rules that favor them. "To the victor go the spoils" isn't simply an economic OR war caveat; it's both.
It's rarely about "fair play" or a level playing field, which is Ron Paul and others think they're lobbying for of the world imagine it would be when they complain that "everything would be better if government just got off our backs." Better for whom?
Feel free to name a time period when the absence of rules - "government intervention" to some - resulted in anything buy either stagnation or chaos. I don't know of any and I've studied both history and economics fairly extensively for a lay-man. I know; "It would have occurred at such-and-such a time if only..." It's always something that gets in the way of "total freedom" that keeps things from working in the ideal manner - and it always will be, which is why it's called idealism or idealistic, but also why it never seems to work in practice. "It is a jungle out there," which is certainly true, so let's look to the real jungle to find where a total lack of government involvement has benefited the animals of the jungle. Can't find one? Of course not. Specifically, the reason government evolved in the first place was to eliminate the "law of the jungle" and impose order and attempt to create an artificially-leveled playing where otherwise one would not exist.
I wish it were not so, but human nature being what it is, is too close to the jungle to NOT be regulated and managed. Certainly, some regulations are inane, not to say insane, but over time, they're generally leavened. It's periods of unbridled go-for-the-gust of McMansions and granite countertops spurred on by runaway housing prices themselves fostered by the politicians pandering (think "Ownership Society") or the Larry Kudlow's of the broadcast industry (to name just one) bellowing about the Goldilocks economy and "the greatest story never told." The tale has been told alright, and the tale is that greed only pays the early adapters smart enough to get out before it crashes, but the collateral damage crushes the guilty and innocent alike - witness the one-third-of-all-homes-in-America-are-underwater (more owed than the house is worth) situation we now find ourselves in and one can't help but wonder why Ben Bernanke is under fire for trying to fix the problem while those who caused it are still worshiped by the faithful? Ah, the inability of humans to admit when their actions have resulted in error: blame the firemen for not putting the fire out fast enough or doing it "wrong" rather than go looking for the people who started the fire in the first place. We have such short memories...