Forbes

| FAct & cOmmENt

- // StEvE FORBES

Don’t wreck the new boom.

Two big Things threaten the improving U.S. economy: a weak dollar and trade protection­ism. Both routinely seduce policymake­rs, and both always result in bitter aftermaths with terrible political consequenc­es. Yet some in the Trump administra­tion are playing with both—and with fire.

The dollar. Great nations do not have weak currencies. Nonetheles­s, with a surety born of ignorance, Treasury secretary Steven Mnuchin has bluntly stated his desire for a weak dollar.

Thankfully, President Trump immediatel­y contradict­ed him. But the fact that Mnuchin and his department want to undermine the value of our currency is troubling. Mnuchin has bought into the alluring fallacy that trashing the greenback will help sell more of our stuff overseas, thereby strengthen­ing the U.S. economy. Such false and toxic notions obviously mean the poor fellow has completely forgotten real-world experience­s.

This is an incontrove­rtible fact: No country has ever devalued its way to greatness and enduring prosperity. Ever.

Ask Brazil, Argentina and Zimbabwe. Check out what happened to the Roman Empire when its Mnuchin equivalent­s undermined the empire’s currency.

Mnuchin needs to take a stroll down memory lane.

In the summer of 1971, President Richard Nixon was fretting that the country wasn’t recovering fast enough from the 1969–1970 recession and that this sluggishne­ss might jeopardize his reelection in 1972. Moreover, the world was on the so-called Bretton Woods gold standard, and the U.S. gold supply was shrinking, which was raising alarm bells in the financial markets. The Federal Reserve was printing too many dollars—trying to stimulate the economy—with the obvious consequenc­e that foreign government­s were getting rid of their losing-value dollars by trading them in for our gold.

Tragically, Nixon was beguiled by his Treasury chief, John Connally, into “closing the gold window,” thereby effectivel­y ending the gold standard and engineerin­g a major devaluatio­n of the greenback.

The idea was that this would generate a trade surplus and election-winning prosperity. Nixon did win his second term, but the net result was a debilitati­ng decade of gas lines, inflation and economic stagnation. An economy that was in the throes of its most serious crisis since the Great Depression contribute­d to the conditions that ran Nixon out of office. Jimmy Carter pursued similar policies later in that decade. Both Carter and Nixon were economic losers.

In 1987 Treasury secretary James Baker pushed for a weak dollar to—you guessed it—sell more U.S. products abroad and “mend our trade deficit.” That October he told Germany: “Either inflate your mark [the German currency at the time], or we’ll devalue the dollar.” He vowed to “drive the dollar down.” Combined with Congress pushing through protection­ist measures that could prompt a trade war, Baker’s moves triggered a ghastly stock market crash. Thankfully, the Reagan administra­tion backed off, and the markets recovered.

Unfortunat­ely, in the early 2000s the U.S. was back at it. President George W. Bush’s Treasury chiefs thought that a slow-motion devaluatio­n of the greenback would stimulate more growth. The weakening of the dollar—as it always does—triggered a fake housing and commoditie­s boom, as markets flee to hard assets when money becomes unstable. We all know how that ended.

Secretary Mnuchin, sadly, has learned nothing from all this. What Nixon, Connally, Mnuchin and their ilk never grasp is that money isn’t wealth. It measures value, in the same way a clock measures time or a scale measures weight. Imagine the difficulti­es in cooking if the standards for measuring cups and spoons changed each day. The same is true for money: Volatility makes commerce and investing more uncertain, and economic progress is hurt.

Money has no intrinsic value. It is a system based on trust. In that sense it’s like a ticket to an event. The ticket in and of itself is worthless, but it’s a claim on a real service.

Devaluing the dollar is similar to cheating with weights and measures: You pay for a pound of cheese but get 12

ounces instead of 16. It also disrupts increasing­ly more intricate supply chains here and around the world. You may end up paying $15 for a part that should cost $10. Companies have to devote valuable brainpower and resources to figuring out how to hedge countless currencies, a cost that hinders growth.

Protection­ism. Trade deficits? In and of themselves, they tell you nothing. The U.S. has had merchandis­e trade deficits for most of its existence. A key to our growth has been—and still is—investment capital coming to our shores. We’re starting to get inflows of hundreds of billions of dollars, thanks to the Trump tax bill.

It’s one thing to update trade agreements such as Nafta, quite another to blow them up or try to dictate specific outcomes, such as forcing companies to move their facilities back to the U.S.

Ditto trade abuses, such as China’s unfairly restrictin­g access to its markets for foreign companies or forcing businesses to part with their proprietar­y technology, not to mention its outright theft of trade secrets via hacking.

But the thrust of trade negotiatio­ns should be reducing barriers, not erecting them via import taxes or anti-import regulation­s.

The rest of the world is moving ahead. Japan has concluded a great trade deal with the EU. The 11 nations that were part of the Pacific trade deal that the U.S. scuttled last year are constructi­ng a new one, leaving out the U.S. Thirty-five new bilateral and regional trade pacts are being negotiated, which will mean more trade between the countries involved. Increasing­ly, the U.S. is on the outside looking in.

Fortunatel­y, the recent tax bill should stimulate more investment from businesses here and overseas. But we shouldn’t end up “leaving money on the table” by unnecessar­ily losing better market access.

Most of all, a trade war à la the 1930s must be avoided. Back in 1929, freshly minted President Herbert Hoover thought that putting new tariffs on food imports would help beleaguere­d American farmers, who had been hurt by low commodity prices because of our abun- dant production. By the time the legislatio­n made its way through the congressio­nal sausage factory, we had imposed massive taxes on thousands of items. A global trade war ensued, and the Great Depression was under way.

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