John Tamny on The Dollar & US Economy

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Abridged Transcript

 On November 18, senior economic advisor to Toreador Research & Trading John Tamny discussed why the declining dollar has been hurting the growth of the US economy.  

Tamny’s discussion focuses on the importance of the US Dollar worldwide while making note that:

* “When the Dollar changes in value, market prices and investments worldwide

    are distorted”

* “Nearly 2/3^rds of all central bank holdings around the world are  

   denominated in Dollars.”

* “In cross-border transactions between two countries with thinly traded

   currencies, the Dollar remains the go-between currency for the majority of

   those transactions.” 

Because of this, Tamny believes that he US Dollar impacts nearly every transaction worldwide as well as every investment worldwide.  While keeping in mind that money does not buy things, it’s the goods that we produce that allows us to earn money and then in turn go and buy things, Tamny reminds us that “Money is just a measuring stick.” His philosophy states that if one is making an investment, they are offering up capital, but he/she needs to understand how it will translate in earnings if the US Dollar’s value is constantly fluctuating. With an ever-changing value of the US Dollar, this makes investing more difficult while increasing the amount of mistakes made.
 

By comparing the US Dollar to the measurement of a foot, Tamny breaks down his philosophy in simpler terms:
 

“If the length of a foot changed all the time, houses would still be made, but we’d make a lot more mistakes and a lot less [homes] would be made. When the value of a Dollar fluctuates we can still invest and still exchange, but we do a lot less of it and make a lot more mistakes in the process.” 

Since the US Dollar is so tightly intertwined with so many transactions around the world, when the value of the US Dollar fluctuates, it’s a worldwide event.  When inflation is exported through a weak US Dollar, the US is exporting ‘weakness.’ This results in international trading partners not being able to do as much.  

Tamny uses China as an example of how all the world’s economies are intertwined: 

“China’s success is our success and vice versa. When China creates things it is saving us work and giving us time to create the “Google’s” of the world and because of this, we are able to export to them innovative concepts that allow them to be more productive.” 

Not only is Inflation a dangerous thing, but Deflation can also bring about negative returns.  

When any currency loses its value, Investment flows away from assets of the mind (Innovations such as Microsoft and Google) and instead into commoditized earth assets. Hard assets such as oil and metals tend to do better when currency is weak. Tamny notes that this can be dangerous because, “inflation drives money into the taxable assets of the ground.” However, a Dollar that has become too strong becomes dangerous as well because then excessive investments are put into intellectual assets. Thanks to the dot-com bubble, we know that excessive investments of the mind produce negative results as well.  

Tamny states:           

“What’s truly essential is a stable Dollar… If [the Dollar] weakens or becomes too expensive you either have excessive runs into hard assets or you have excessive runs into intellectual assets, and tears always result because of the basic Austrian malinvestment.“ 

Reminding us that this 40-year period of “floating currency” in the US is the exception and not the rule, Tamny makes clear the importance of going back to a commodity-backed currency. He believes that when the US Dollar is backed by something real, it will result in plenty of economic growth and equity returns thanks to a stable currency model.  

The majority of currencies around the world are commodity-backed, and Tamny believes that if the US would switch over to the same school of thought, (Gold-Backed for instance) then this would foster new economic growth. 

(Click here if you would like to listen to the complete replay of the call with John Tamny)

During the discussion, Tamny answered three user-posted questions; the questions as well as Tamny’s responses are listed below: 

Question:         Doesn’t a weaker Dollar help us to export more easily around the world?  

Response:        “I don’t think it does because it has to be remembered that money is a veil. Just because you change the price of money doesn’t mean that you can change the price of the goods that you send around the world, and an easy example would be a US automobile. The vast majority of the imported inputs that go into a US car come from overseas, so when you devalue, the cost for a carmaker to go up commensurate with devaluation. It may not be instantaneous, but it’s fairly quick, and so the end result of devaluation is that inflation, true inflation, steals the benefits of it. If exporting were made easier by weak currencies then countries like Argentina, Zimbabwe and Turkey would be the largest exporters in the world, but the simple truth is that you can’t trick reality with changes in the price of money.” 

Question:         Doesn’t a weak Dollar reduce trade deficit? 

Response:        “No, it doesn’t and it should be said here that the trade deficit is an utter myth. Let’s first talk about trade. When a country gets more imports that means it’s exporting more, and this is important when talking about the trade deficits. Trades should only be discussed in terms of individuals and when we consider it in terms of individuals we see why this is wasted commentary. I have a trade deficit with my bartender, with my landlord, with my drycleaner, with restaurants I go to, but I run trade surpluses with my employers; that’s the same for all of us as individuals and so country trade naturally balances. The reason we have a trade deficit is because we are so productive historically in this country that we attract a lot of investments and it’s an important distinction. We buy things not in our economic self-interests to make, say, TVs, t-shirts, shoes and socks from around the world. That adds to the quote “deficit.” And in return for buying those things so that we can do more productive things like creating Google and Microsoft, we attract a lot of investments. When we export shares in our company that is not counted as trade and that accounts for the difference and that accounts for the quote “trade deficit.” But by definition you cannot import without exporting something of similar value and vice versa, so the trade deficit is not something to worry about. Although, I would argue if you devalue the dollar substantially and if we continue on this path you’ll actually see the trade deficit decline for the simple reason that people will no longer see [the United States] as a good country to invest in. Trade deficits are capital surpluses. We won’t have capital surpluses if we debase the very money that makes people want to invest here to begin with.” 

Question:         Most economic commentators define inflation in a nonsensical        way. How do you specifically define inflation? 

Response:        “I define [inflation] kind of the way the late Jude Wanniski defined it. Inflation is a decline in the monetary standard. The standard is the Dollar. I think gold should be the measure of the dollar because it’s the most stable of all commodities. Inflation results when the dollar price of gold rises. It should also be said that deflation is not what most economic commentators describe it as. Deflation is similarly a decline in the monetary standard. It’s when the Dollar price of gold declines from a level of dollar priced stability and so I think this is important because the CPI is just a collection of goods. It’s an imperfect collection of goods that economists use to say whether or not we’re inflating, but consumer prices change all the time for a variety of reasons and so we haven’t seen CPI inflation this year and it’s brought a lot of people to the mistaken belief that we’re not inflating, and that’s the problem looking at consumer prices. True inflation is when money loses value, and when you look at it that way you can better understand why the electorates aren’t happy, why the economy sags. It sags because when you devalue money, investment is less prevalent, jobs are less prevalent, they pay worse. That’s how we need to define inflation, because if we had defined it in that way, it might be possible that the treasury and fed would take care of it. But so long as they use faulty government measures they can go on oblivious to the major economic damage their monetary policies are causing.” 

Click here if you would like to listen to the complete replay of the call with John Tamny

                              About John Tamny:
Mr. Tamny is a senior economic advisor to Toreador Research & Trading, columnist for Forbes and editor of RealClearMarkets.com. Mr. Tamny frequently writes about the securities markets, along with tax, trade and monetary policy issues that impact those markets for a variety of publications including the Wall Street Journal, National Review and the Washington Times. He’s also a frequent guest on CNBC’s Kudlow & Co. along with the Fox Business Channel.