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Forbes - - CONTENTS - // 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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