Floating Exchange Rates: Scheme to Embezzle the Dollar Balances of Surplus Countries
Milton Friedman's theory of floating exchange rates, on which the international monetary system has been based since 1971, has given rise to a coercive regime in the sense that IMF statutes forbid member countries to stabilize the value of their currencies. A country attempting to do that is branded "a currency manipulator" and is threatened with trade sanctions. The prohibition is understandable. It is designed to protect the scheme whereby the dollar balances of the surplus countries are stealthily embezzled. It works as follows. The United States lures the unsuspecting surplus country into the black hole of currency revaluation against the dollar. As their currencies are floating upwards, a part of the surplus countries' dollar balances are appropriated by the U.S. In effect, the U.S. is forcing its trading partners running a surplus to grant, unwittingly, a partial debt abatement. This exhausts the notion of embezzlement. The U.S., bankers to the world, conspires to short-change its depositors using the smoke-screen of fluctuating foreign exchange. This regime, based on plunder, cannot endure. The only equitable monetary system is the one based on fixed exchange rates. And the only durable way to fix exchange rates is to make the currency redeemable in gold.
Friedman's theory is a blot on science and on the good faith of the United States in its dealings with its neighbors.
Floating Versus Fixed Exchange Rates
In putting pressure on China to follow Japan's example to revalue the yuan, the American money doctors fail to point out that they are in effect asking China to take a loss, similar to those of Japan amounting to hundreds of billions of dollars, on her holdings of U.S. Treasury paper. China carries her books in yuans, not in U.S. dollars. Therefore every change in the yuan price of the dollar will have an immediate and predictable effect on the value of China's portfolio of U.S. Treasury paper. In particular, a decrease in the yuan price of the dollar results in a loss, at the same rate, in the yuan-value of China's dollar balances.
The question arises: by what right does the U.S., a country with chronic deficits and a history of reneging on her foreign debt – as on August 15, 1971 – demand that China write off a part of the American debt to China?
There is more. If China yielded to American pressure to let the yuan float upwards, it would mean not just a one-shot abatement of debt, but a standing commitment to grant further automatic abatements as new debts are being incurred by the U.S. This would make mockery out of the idea of independent nations trading with one another for mutual benefit. It would make China a vassal of the U.S., a role China in all dignity could not accept.
It is incumbent on the debtor, not on the creditor, to make the necessary adjustment in case of a persistent imbalance. The contrary position, advocated by Keynes, is a fallacy. It turns logic upside down. It penalizes hard work and thrift, while it rewards indolence and prodigality.
Japan's Water Torture
Immediately after making the dollar an irredeemable currency the U.S. started running trade deficits on an ever increasing scale. Using Milton Friedman's spurious theory according to which floating exchange rates were supposed to eliminate trade imbalances the U.S. started twisting the arms of its trading partners running a surplus with the U.S., first and foremost Japan, to revalue their currencies upwards. Thus the unsuspecting trading partners of the U.S. were lured into the black hole of currency revaluation. In listening to the sweet siren song from Washington these surplus countries were oblivious to the fact that they were in effect granting a debt-abatement to the U.S. proportional to the their dollar balances they held as a currency reserve.
For example, when the Japanese yen rose to the level where one dollar was worth three times less (say, 100 yens as compared to 300 earlier), this actually meant an abatement of the American debt to Japan in the ratio of 2/3 or 66 percent, without anybody recognizing what was going on. It was trumpeted as "free market on the go". It was not. It was embezzlement, pure and simple. The U.S., bankers to the world, embezzled Japanese funds held in dollar accounts to the tune of 66 percent.
Embezzlement on that scale has consequences. It bankrupted Japan, financially one of the strongest countries. As Japan fell upon hard times and wanted to draw on her foreign exchange reserves, it couldn't, for the simple reason that the funds were not there. At that point American money doctors rushed in and explained to the Japanese that, rather than paying their bills by drawing down their dollar balances they should start running budget deficits and finance their needs through debt. Up to that point Japan was practically debt free. By now, Japan's debt is so huge that it is stifling the Japanese economy.
The U.S. has played the role of the bully-boy of international trade long enough, bluffing that the irredeemable dollar is "an ultimate extinguisher of debt". It is none too soon that someone call the bluff – after so many countries have succumbed to pressure and suffered huge losses on their foreign exchange reserves as a consequence. Maybe, just maybe, China will stand up. In allowing China to open her Mint to gold first, the U.S. will give up her monetary leadership in the world.
Posted by Peter on 07/06/10 09:18 PM
I think the charm of today's, majority of the worlds marriage of convenience, fogging disparate interests, disintegrates as the destructive burden of fiat money and credits destructive, forced superimposition lays visibly bare today's dominant political actors and their actions, further sterilising the remnants of our economy and productive interaction.
Then intense insecurity will prevail.
We are not yet there as a debilitating focus on reviving an impossible past persists, but when we are all our perspectives will instinctively narrow, primarily perceiving a future of fewer viable options more polarised and highly defensive of local and self interests.
Posted by DRUNK AND DISORDERLY on 07/06/10 06:48 PM
I recognize that a gold and/or silver standard is seen as a popular solution to a fiat currency. Anything is better than fiat money but there are pitfalls; a new gold dollar would still be issued in paper form and subject to all the corruption of the greenback.
Would a new gold dollar be fully redeemable? If not, using the scam of a fractional reserve, and without an audit of Ft. Knox, any amount could be printed. We could then correctly call it the new Fiat Gold Dollar.
Posted by Peter on 07/06/10 05:49 PM
In time China will see advantage in not falling to the will of the US,
Then all kinds of exciting things will happen.
Reply from The Daily Bell
China's elite already married to the West?
Posted by Bionic Mosquito on 07/06/10 02:28 PM
Well, I was able to post on the Bell's site for one out of three. My apologies as I am certain it is user error.
Comments to this editorial here:
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Reply from The Daily Bell
Again, unable to post at the Daily Bell...so here it is:
Click to view link
I have strongly disagreed with Dr. Fekete's commentary here at the Daily Bell in the past, and have commented accordingly. This time, I agree. Morally and philosophically he is correct - by what "right" does the US have to dictate to its largest creditor that the creditor destroy the value of the debt owed?
None, of course, in a moral world.
However, I will posit that eventually, China will have no choice but to act and in fact will take actions that offer the least of several bad alternatives.
China will eventually back its currency with gold, silver, and/or other assets. China is currently securing these assets via contracts around the world. These are likely priced in USD. When they go to a gold backed Yuan, the Yuan will rise and the dollar will sink, making these commodities much cheaper for China to pay for.
They may bring Russia along for the ride, as Russia has plenty of resources for which they will want some currency besides the dollar in exchange, and Russia has a military that, when added to China's (although China could also somewhat go it alone) would deter any possible threat from the US. So Russia will trade protection for pricing in a (relatively) hard currency.
To China, the Anglo American power elite is a short term blip on a 6,000 year radar.
I believe I read it at the DB first, perhaps Mr. Suess - we are very likely in the midst of the real WWIII, and the battle will be played out financially, as the Bell has pointed out the world cannot afford to play this out militarily.
Posted by Bill on 07/06/10 01:46 PM
THE GOLD HAS BEEN MOVED TO THE FED BUILDING IN NEW YORK-IT IS NOW OWNED BY BANKERS.
Posted by Philip Mccormack on 07/06/10 12:23 PM
professor Fekete has just visited China and if the powers that be in China listen to him maybe, just maybe they will open up their mint to gold and silver. Fekete, he's the man, no wonder Pres Bush (I ) wouldn't listen to him and neither would Paul Volker. Politics comes before people. What amazes me is how the Japanese were sucked into floating rates. DB any thoughts on that? Happy days. Philip
Reply from The Daily Bell
The Japanese lost the war?
Posted by Charles Pasley on 07/06/10 10:56 AM
Another fantastic article by Dr. Fekete. I have printed out and archived every article by him that I have been able to find on line and have recommended his articles to many of my friends and family.
Posted by Victor Barney on 07/06/10 09:40 AM
The Marxist revolution(anti-messiah, according to Karl Marx himself)has taken over our country(by the way, which is the "real" Israel through the seed of Joseph, not Judah, given race, not grace)! That is if you believe your bible(although it does not matter because the two-witnesses are coming any way to punish u.s. for 3 1/2 years)! You do realize that Marxists do not give back what they take-away; right? Just like Adam was placed in a "box" the day Eve ate the Apple almost 6,000 years ago! In addition, you do realize that like the case 6,000 years ago, Marxists do not give back what they take away by their own history! Women put these anti-messiahs in power again, so nothing has changed in almost 6,000 years! I just wonder who are these "people" who give each others presents after the two-witnesses described in the Book of Revelation are killed by the "beast!" Duh! Think about it?
Posted by Mr Carpenter on 07/06/10 08:11 AM
Yes, it is absolute theft, and to be perfectly clear, the United States Government (run by the banking and corporate elite, let us have no illusions) is a criminal enterprise. I know; I live in the US. Under BO, the usurper in the White House, and W, the prior usurper in the White House, we have degenerated to a tyranny run outside of the foundational law of the land. It's like the Chicago mob literally has taken control (and in a sense, it has).
This obviously will not end well for American citizens (?) now subjects, nor will it end well for the rest of the world's peoples.
Posted by V. Heddins on 07/06/10 07:28 AM
I hope to see America on a "Gold & Silver" standard before I die but even as I say that, I fully realize that if the doors to Fort Knox are ever opened to accountability by the American people, there may be absolutely "NO GOLD THERE"!
We're not allowed to see inside the vaults, so is Bernie Madoff keeping the books?