Dollars, Dollars, Everywhere –
And Not a Cent to Spare
By Rickey Gard Diamond
We think about dollars every day. We weigh prices in dollars, pay for goods and services with them, and try to earn as many as we can. Without them, we couldn’t pay taxes, buy food, pick up prescriptions, or shop for new clothes.
Yet if women, who are considered the lynchpin of this consumer-based economy – you and I – fail to look more closely at what money is and how dollars get created as a unit of exchange, we might find our purses one day filled with worthless paper – may it not come true, please.
Do I sound worried? I am, but only when I think of the economy as it is now: an alpha-male-dominated house of cards on Wall Street continuing with business as usual. No complex society can survive without a shared trust in its currency. As I explain what is happening to the dollar in the larger picture, I hope you’ll be scared a little, too, but also inspired, as I have been, to become part of the movement to redefine the rules of today’s economic game, including our monetary policy. If you’re like me, you never dreamed you’d take an interest in something so seemingly far removed from life. But then it turns out monetary policy affects absolutely everything.
Most economists say a failed dollar will never happen here. The dollar still enjoys “reserve currency status” around the world, and has since FDR’s famous world financial conference in 1944 in Bretton Woods, New Hampshire. In those days the U.S. represented nearly half of all global economic activity; it exported goods, had a strong manufacturing sector, and our main competition had just blown itself up in a war. Earlier, in the midst of the Great Depression, FDR had ended the redemption of dollars (once a kind of coupon) for gold; he also made gold a “controlled substance.” It became illegal to hold gold bullion or ingots or more than $100 in gold coins. Bretton Woods agreed upon a “pegged” value for nationalized gold and mandated reserves be maintained for international trade. Currency trading then was rare.
All of this has changed. President Nixon removed the U.S. dollar from the gold standard in 1974 when France suspected we were printing more dollars to pay for the Vietnam War than our gold could possibly back up. Nixon also imposed price and wage freezes to offset inflation (see box) and put a surcharge on imports to improve the trade balance. His closing “the gold window” went nearly unnoticed by most Americans concerned with sales and salaries. But the dollar no longer would be “pegged” to a specific value in any commodity; instead it would “float” relative to other currencies. Market forces determined its value, setting it free from the former fixed rate. Other nations quickly followed suit.
Currency is now traded as if it were itself a commodity, or a tangible resource of value. International currency trading is where the real global money is to be made these days and it’s happening at an unprecedented rate, helping increase the number of multi-millionaires and billionaires on the planet. Forbes Magazine reports numbers grew from a measly 793 billionaires in 2009 to 1011 billionaires in 2010, averaging $3.5 billion each. Forbes ranks them and keeps score, as if the economy were a horse race with only one blue ribbon.
For most of us, it’s more valuable to think of the economy as a collective set of exchanges, hopefully good and fair ones for as many as possible. Individuals in national economies have sometimes been likened to boats in a harbor – what floats one will float us all. In recent years, however, the American harbor has gone out with the tide to a global ocean, and women especially have been left high and dry.
Nations swallowed by either government deficits (that is, budget deficits) or trade deficits (meaning they’re importing more than they’re exporting) will often “devalue” their currency. Today, the U.S. faces both kinds of shortfalls. Since our nation’s companies began manufacturing overseas where labor is cheaper, we have suffered a huge trade deficit. In fact, the last time the U.S. had a trade surplus was in 1975.
As I write this, Congress is making budget cuts to reduce our government’s deficit. Politicians in Washington seem agreed the best course is to maintain tax cuts, especially for the wealthy, reducing the nation’s revenue at the same time that we conduct three unfathomably expensive wars in Afghanistan, Iraq, and now Libya. Most Vermont women I know would handle this differently. They’d hold a special fundraiser potluck and never allow anyone to eat all the chocolate pie – unless they paid extra. Nor would they approve of taking our best casseroles and smashing them in wars.
Congress is also busy weighing whether we should lift our debt ceiling, something it has done 74 times since 1962, and 10 times since 2001, without much fuss at all. But today the deficit approaches an unprecedented $14 trillion. It’s hardly surprising that last week the credit rating agency Standard & Poor changed the U.S.’s status for global investors from “stable” to “negative.” Remember, though: this same agency rated toxic mortgage securities AAA investments.
Devaluing the currency is a trick that can help both a budget deficit and a trade imbalance. If the dollar is worth less, then in theory a deficit also grows smaller. We will still owe $14 trillion, maybe, but we’ll pay it back with dollars only worth, say, $7.5 trillion, really. It’s the backside of inflation. In a similar way, if a dollar can only buy 50 Chinese chopsticks this year, instead of the 100 we bought last year with our more valuable dollar, China’s exports will be affected without our even imposing a tariff or surcharge. Instead, with a devalued currency, our exports grow cheaper to buy and this helps even out the trade balance.
A Dollar is a Dollar is a Dollar … Not
Devaluation of a currency used to mean an economy was in big trouble. Nations avoided it. Yet in the “free” market, the U.S. has deliberately moved to devalue our dollar, in ways intended to avoid panicking global markets or we the people. In 1985, for example, James Baker, then Secretary of the Treasury, successfully signed the Plaza Accord to deliberately devalue the dollar and address a trade deficit with Japan. Most recently, the Federal Reserve Bank (more on that next month) has been quietly adding more dollars to the economy through something called “quantitative easing,” essentially accomplishing another kind of devaluation.
Learning about this, you can feel like Alice in Wonderland, entering a world where currencies –paper notes – are being treated as if they were actual commodities, or teacakes with signs saying “Eat Me.” Their values float up and down like stocks, only down is sometimes up. And who are the Mad Hatters of this Wonderland? I’ll try to explain more, but I warn you: it seems one very crazy tea party, and not the one that’s in the news.
Currency manipulation is our “free market” at work, though in practice for the U.S., devaluation of the dollar has allowed us to bully less powerful countries. The U.S. dollar still dominates the currency market and has long been global trading’s currency of choice, considered the safest bet of all for global investors. Foreign nations stock up on dollars for their reserves, and this has kept the dollar desirable despite its shrinking value; another plus has been OPEC’s pricing its oil only in dollars, though oil-producing member nations are beginning to talk about trading in other currencies as the dollar keeps falling.
In 2000, Saddam Hussein refused to accept dollars and began demanding euros in payment for Iraq’s oil. Since 2010, the media has reported on a currency “war,” with nations competing in a new race to the bottom. What used to be accomplished with military might instead is accomplished through financial methods and currency devaluation. But other countries are catching on and beginning to resent it. In recent months, China has gone to Turkey, Malaysia, Thailand and others, trying to avoid the dollar in their trading. New blocs of countries, influenced by what are called the BRICs (Brazil, Russia, India and China), or new highly developed countries, seek to isolate the dollar and end its global monopoly.
All this happens in Foreign Exchange Markets, called Forex. These enable global traders to bet on which currency is going up (buy that one) and which is going down (sell that one.) American billionaire George Soros made his money busting the English pound in 1992, and everyone in this exclusive club of investors knows that too quick a dump of currency can flatten a national economy. This happened to Thailand’s bhat in 1997, becoming tinder for a wider Asian meltdown. It happened most recently to Iceland’s kroner.
Cato Institute’s Dan Mitchell explains that Iceland’s three banks had been involved in currency trading and when the economic downturn hit in 2008, they found themselves “exposed.” Iceland’s government had to bail the banks out, said Mitchell. “[B]ecause of things like deposit insurance, there was a new debt burden placed on Iceland's economy, and the country may never be able to recover from it.”
How Far Can the Dollar Fall Before You and I Feel It?
By creating $600 billion last year and inserting this directly into banks, the Federal Reserve intended to encourage American banks to finance more domestic loans and refinance troubled mortgages. But the funding, called “quantitative easing,” had no such requirements. Instead Wall Street investment banks took this publicly funded money to find the best return. This meant investing in emerging markets overseas and foreign currencies, not the U.S. Despite this new influx of cash and accompanying low interest rates, Nobel-prize winning economist Joseph Stiglitz puts our current lending rate to Americans below what it was in 2007.
Both Stiglitz and Michael Hudson, former Wall Street economist and Distinguished Research Professor at University of Missouri, have pointed to this misguided move, which is bound to lead to inflated asset prices for homes and businesses. Scott Boyd, a currency analyst for a Forex trading company with offices in New York, Toronto, Singapore, and Dubai, wrote reassuringly in The Christian Science Monitor last fall that while investors would be wise to “look beyond dollar-denominated assets in order to protect investments over the long term,” it was unlikely the dollar would fall to the level of pesos. This was a reference, not to Mexico, whose currency failed in 1994, but to the 2001 crisis of the richest Latin American country at the time, Argentina.
Naomi Klein wrote about American economist Milton Friedman’s link to Argentina and dictator Pinochet in her book, The Shock Doctrine, reviewed at Vermont Woman early in 2008. In it, Klein describes the Washington consensus, including the economists of The World Bank, The International Monetary Fund, and the Federal Reserve and their use of “shock treatments,” or drastic methods supposedly good for a nation’s economy, if not for its people. (When these entities speak of the “economy,” they actually mean their global agents, world investment bankers.) Shock treatments include demands for draconian budget cuts for government safety nets, privatization of public assets and devaluation of currencies. Sound familiar?
About the 2001 crisis, Klein later reported: “[T]he indebted government of Argentina declared a freeze on bank withdrawals. While the accounts were locked, the peso was “unpegged” from the U.S. dollar and the currency went into free-fall. When the banking freeze was partially lifted a year later and customers could once again get at their money, their savings had lost two-thirds of their value.”
Yet few economists believe anything like what happened in Argentina could happen in the U.S. Why? Because, they say, the U.S. is “too big to fail.” Freezing of U.S. bank accounts is nowhere rumored, but already Americans are dealing with an economy flooded with credit and debt. Bank accounts, the safest route for savers, earn only about one percent, not enough to keep up with inflation or create a pension for the future. Those retired find themselves short of funds with food and gasoline prices rising. Taking greater risks on the stock market or in currency trading seems the only route to take, yet global markets move constantly and at inhuman speeds. It requires a specialization few participants in the grounded economy find feasible. They count on experts, and even experts sound less confident.
State pension funds in California and Utah, for instance, have loaded up on hedge-fund holdings in recent years as a way to reduce the risk of their traditional equity holdings, badly burned in 2008 by toxic mortgage securities. The Chartered Alternative Investment Analyst (CAIA) Association writes: “[A]s numerous other studies and surveys have noted, putting cash to work in hedge funds isn’t as simple as writing a check to the best known hedge fund and waiting for the double-digit returns to pour in. Of critical importance is ensuring transparency, liquidity and diversity – for when the elevator cable snaps again.”
At least you’re better off with a devalued currency to pay off your credit card. It’s a little like the trick of paying back the Chinese with devalued dollars. But issuing banks have an easy response to this situation: they can increase your credit card interest rate. As a consumer, you don’t have a comparable move to make when your dollars won’t buy as much and products become more expensive – except not to buy them, which then helps deflate prices and the economy.
A hot debate continues to be waged between economists who fear inflation and those who worry about deflation. We’ll examine the money supply and whether it’s too great, or too small, more closely in our next article on the Federal Reserve Banking System. I promise you, it won’t be boring. It’s the most amazing piece of all.
Time to Organize and Find New Allies
Vermont women’s interests and those of Wall Street bankers and the Federal Reserve are clearly not one and the same. Vermont’s 22 banks discovered something similar this year and this could be an opportunity for new exchanges of local economic ideas. Anne Galloway, writing for Vermont Digger in February, quotes the head of the Vermont Bankers Association, Chris D’Elia, who told lawmakers to expect five to seven institutions to consolidate in the face of new compliance requirements under federal law. Growing bigger banks was never its intent, but the 2010 Dodd-Frank Wall Street Reform and Protection Act could hit banks with $1 million each in new compliance costs, D’Elia told Galloway. The new law is 2300 pages long, describing 250 new rules.
Known for being fiscally conservative, Vermont banks never engaged in predatory lending practices and have low foreclosure rates. Nor were they seriously affected by the 2008 meltdown. But they are required to comply with rules intended for big banks in big cities – for instance, defining municipal procedures – which neither small banks nor small towns are staffed to handle. According to D’Elia, banks have had to revamp truth-in-lending and real estate settlement procedures, which has led to mortgage closing delays. “Typically, it took 25 to 30 days for a bank to prepare for a closing; the turnaround time is now about 45 days,” D’Elia said.
There’s a big difference between Vermont’s savings banks and credit unions on our Main Streets and the Wall Street/Washington gang this article describes. The latter seek global domination, and think of currency as a weapon, waging war, even when economies are historically only damaged by such wars. Vermont’s local banks mustn’t become another casualty, along with small towns and average citizens throughout our state.
Women’s understanding of what we’re up against in this economy is half the economic solution. Once we better understand how our present system operates, we can begin to reshape American thinking as women have done so many times in the past. For starters, the dollar itself might be rethought. A vehicle for value, easily exchanged because of its uniform units, is a brilliant idea; without dollars, we’d be stuck with bartering for whatever we need. But from the time the U.S. was a colony, it has created many currencies for its units of value exchange – of which 3,800 are no longer in use. So there’s no reason why the dollar cannot be further rethought.
In fact, this year one of our state Representatives, Michael Fisher of Addison County, has introduced a new bill, H.361, proposing a method for creating a new Vermont dollar – what he calls a “companion currency.” His proposal involves creating a new state bank for local dollar creation. And he wants the Legislature to conduct a detailed study (introduced as H.287) on the legalities and methods for introducing the new currency. Fisher says that he has long been interested in monetary policy and envisions a currency that could be used for aiding business development. Why not for underfunded and essential jobs like childcare and eldercare, too, so that women, who traditionally take on this work, can fully participate in the economy?
Others have begun to talk about redefining the role of the Federal Reserve Bank and its regional system, and instituting state public banking to help leverage needed funds for energy, the environment, and other things we know we need but can’t seem to afford. Wall Street billionaires may not find these ideas attractive, but that may be a plus. Our choosing to stay small, local, and fiscally responsible will continue to make Vermont a desirable place to live.
In our next installment, “Dollars 4 U” – Who creates and prints your dollars? (Hint: it is not the U.S. Mint).
Rickey Gard Diamond is contributing editor at Vermont Woman. She lives and writes in Montpelier and especially enjoys taking politics and economics quite personally.