The Trumpian Myth Of Global Grand Theft, Part 3

Keynesian monetary central planning had its economics upside down. It sought to inflate domestic prices, wages and costs at +2% per year (or more if correctly measured) in a world teeming with cheap labor, whereas a regime of honest money would have generated deflationary adjustments designed to keep American industry competitive.

Likewise, its rampant money-printing had resulted in drastic financial repression, ultra-low interest rates and debt fueled consumption and financialization, while sound money would have caused the opposite. The latter would have entailed high interest rates, subdued consumption, enhanced levels of savings and productive investments in plant, equipment, technology and staff, not Wall Street financial engineering, in order to maintain sustainable competitive equilibrium with the rest of the world.

Above all, America’s historical economic strength was not merely embodied in the healthy and nearly continuous trade balances racked-up every single year between 1893 and 1971, but actually was rooted in the ideas and institutions of free enterprise, sound money and capitalist innovation and invention. Yet it had all gone wrong after Tricky Dick’s disastrous lurch into 100% state-controlled money at Camp David in August 1971.

America’s Leading Post-1971 Export—Monetary Inflation

By unleashing the world’s leading central bank to print money at will, Richard Nixon paved the way for the Eccles Building to become a massive exporter of monetary inflation. As we have indicated, these floods of unwanted dollars encouraged mightily the mercantilism-prone nations of the East Asia, the petro-states, much of the EM and sometimes Europe, too, to buy dollars and thereby inflate their own currencies. As we have seen, they did this in order to forestall exchange rate appreciation and the consequent short-run dislocations in their own heavily subsidized export sectors.

Needless to say, in the pre-Keynesian world there would have been no such thing as $15 trillion of continuous US  merchandise trade deficits over 43 years running. That’s because the aforementioned monetary settlement system anchored in gold governed the flow of trade and international finance. The drain of such reserve assets from chronic deficit nations triggered automatic compensating adjustment of domestic economic conditions.

Accordingly, the large US trade deficits caused by the mobilization of cheap labor from the Asian rice paddies and cheap energy from the sands of Arabia would have generated their own correction. To wit, the resulting outsized US current account deficits (largely from consumer goods and oil) would have triggered a painful outflow of the settlement asset (gold or gold-convertible currency), which, in turn, would have caused domestic interest rates to rise, domestic credit to shrink and prices, wages and costs to deflate.