Inflationomics

Jawboning: So What’s New?

An article in the Monday, October 5, 2009 issue of The Wall Street Journal was entitled “Jawboning Starts to Complicate Currency Markets.” It started out by stating that “Currencies could experience volatile trading this week, as escalating rhetoric from officials worried about the strength of their countries’ currencies threatens to roil the market.” Later, it said that U.S. Treasury Secretary Timothy Geithner had to proclaim again that he would do “all necessary” to sustain confidence in the dollar, which has fallen by more than 15% against the Euro since early in the year.

There are several things the article didn’t mention:

  1. The value of the U.S. dollar has dropped roughly 15% relative to gold in the past year.
  2. The purchasing power of the U.S. dollar has dropped roughly 95% since the Fed took over managing it in 1914.
  3. When U.S. Treasury Secretary Timothy Geithner told a group of Chinese students that Chinese assets were safe when denominated in U.S. dollars, they laughed!
  4. It is illegal for individuals to try to manipulate commodity prices, but apparently it’s OK for government officials to create market volatility by escalating rhetoric?
  5. U.S. Government officials have been jawboning about their currency, credit easing, and the economy for decades.
  6. It is common practice for government officials around the world to jawbone (and do nothing more than talk) about their currencies. In Zimbabwe, reserve bank governor Gideon Gono even went so far as to outlaw inflation and threaten to arrest people who raise prices/wages!!! Obviously he either doesn’t care, or he doesn’t have a clue about the causes of inflation!
  7. Either the government officials who do the jawboning don’t have a clue what they are talking about, or they are perfectly happy to lie to the public (in an effort to keep everyone calm while the government continues to inflate the currency).
  8. That the U.S. dollar’s value would disintegrate if people were free to choose a currency to use; i.e., if there weren’t any legal tender laws.
  9. That the U.S. Treasury and Fed have been doing more than just jawboning about the value of the dollar; there is a growing belief that they have been actively manipulating the price of gold and silver vis à vis the U.S. dollar.
  10. That the U.S. government’s debt has exploded during the last year, adding to an already astronomical debt load, making it very unlikely that the government will be able to raise enough money to pay off its debts either through taxation or borrowing and that, therefore, it has no choice (politically) but to inflate its currency to pay off its debts. In the long run, this will doom the dollar to become worthless.

By the way, this is the same course of action that Adam Smith wrote about in The Wealth of Nations (1776) when he said, “When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment [i.e. payments made with inflated currency] … The honor of a state is surely very poorly provided for, when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious.”

What does all this mean? You can expect more jawboning, more lies, more price volatility, and more inflation! Stay tuned…

Robert Jackson Smith

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