Earth to UN: We have a global currency. Purchasing power parity quickly evaluates the real price of a basket of goods in any market in any currency, denominated in the currency you choose. So really the UN isn’t speaking out against any given currency, but rather against math.
I can’t say that I blame them; I’m not a big math person myself. But really — more pegs? Pegs fail miserably and consistently. For each country actually able to pay back steep IMF loans that infamously and inevitably come with misguided “peg to the dollar” conditions, three sunk farther down to the depths of what acerbic Argentines call the “dirty peso.”
Usually when misguided, white-tower globalists call for a currency peg, they aim to encourage tourism in Weak Country, thus driving up WC’s currency value and buoying its economy.
Why Currency Pegs Fail
Currency pegs simply don’t work. Here’s why:
1) Currency exchange no longer presents a deterring transaction cost. Americans don’t eschew Third World Capital because we’re afraid to exchange currency; it’s because we watch Nat’l Geographic”s kidnapping primer, “Locked Up Abroad” and they’re afraid of becoming a ransom prize. Whether they’re stealing dollars or pesos, thugs don’t skedaddle just because the UN’s long arm reached all the way into 3WC’s pocketbooks.
2) Currency pegs benefit rich people in Weak Country’s neighboring nations rather than WC’s own population. When money pegs make prices cheap, foreigners don’t simply visit; they colonize. Ask any Croatian whether he can afford to buy property in his country since Germans started buying greedy bundles of cheap Croat beach-front.
As for (1), the UN should recall the principle of conservation of mass. If we push on a ghetto, the inhabitants don’t simply cease to exist; they move. Even if a peg does successfully gentrify one area, the population gentrified “out” simply moves inland. Pressuring poorer groups to abandon their land seldom results in happy gangstas. Imposing a paternalistic single currency on the world sounds a lot like a cooing humanitarian tut-tutting over Iraq: Sunnis and Shi’as have so much in common! Why can’t we all just get along?
Just because we have a lot in common doesn’t mean we’re ready to share cultural identity. We can prevent civil wars by keeping civil factions separate. Happy families are all alike, but what unhappy families could have more in common with the Montagues than the Capulets? Forced togetherness will always make factions yearn to stay apart.
My point (2) speaks for itself. When some nation becomes a veritable bargain basement, wealthier aliens exploit its still-developing legislature and not-yet-protectionist constitution. Single currency arguments typically center on the idea that, for example, when Germans “colonize” Croatia by buying all the beachfront property, this pumps more money into Croatia, thereby raising everybody’s standard of living. Movers and shakers in Croatia are thrilled with this, because they already own some land and they’re excited for better opportunities at the Germans’ entry.
The problem with such a system is that it presents inevitability harsh social Darwinism. Free trade and global trade are always good. But new policies always come with fresh regulation, wet-ink legislation, and a big dose of protectionism. Together these separate an already-stratified population into casted classes. Rich Croations benefit and, while poor Croations benefit peripherally from a generally better bounty, classes stratify further. Croatians without educations grow less competitive in a market suddenly attractive to Germans and Italians and simultaneously grow less competitive globally now that all markets pay w/ that same currency that will secure land in Croatia.
World currency will change the denomination, but it will not change the real cost of a basket. It will not alter the purchasing power parity. While renewed PPP ultimately dictates price disparity identical to what we see now, to return to baseline we’ll slog through major class stratification first. This will place us much further down the road to serfdom than where we find ourselves now.
Bretton Woods: Not a Golf Tournament
The Telegraph itself admits that a new world order entrenched in one giant currency peg will require massive intervention:
In essence, the report calls for a new Bretton Woods-style system of managed international exchange rates, meaning central banks would be forced to intervene and either support or push down their currencies depending on how the rest of the world economy is behaving.
This is Krugman-style Keynesianism if I ever saw it. First, why would we want a currency system that requires more intervention? Central planning has never worked. It didn’t even work for Chrysler this year, over the three bail-outs that neutered the American market in ways that will haunt us for years to come.
Second: Bretton Woods management sounds more like a golf tournament than any other suggestion in law or policy. Why would we want the global economy to look like a golf game? The last thing we want is to centralize management into the hands of whoever believes s/he “knows best.” Forget the innumerate obvious reasons why not and just focus on the single most durable reason: He too shall pass.
Just as it makes no sense to hand Obama the keys to the city because someday someone else will be President and will inherit those keys, we shouldn’t allow a central management system to unseat market forces in favor of government intervention because that will require ever more G-forces and will continue neutering the market bit by torturous bit.
The Turning of the Screw
Economists love to tell the anecdote about Russia’s most egregious central planning years. After nationalizing the market central planners decided to buy screws by weight. Smart screw producers began producing huge, heavy screws most valuable under the government pay scheme. But merchants could not use these huge screws; they needed small screws to hold their wares together. Unfortunately when the nationalized market could not exert pressure over pricing, small screws became completely unavailable. Merchants could still not use the huge screws that were available, so wares simply fell apart.
Similarly, if a central Congress decides to nationalize the market such that auto manufacturers don’t get paid by the quality of their car, but rather by the American-ness of their car, we neuter the market for quality cars. Americans can have the Camrys and Hyundais we obviously want, but all who pay taxes will also receive, absolutely laden w/ charge, a share of Chevy as well.
Indeed, when Cash for Clunkers removed the market for decent used cars, Americans voted with our feet. We did not re-invest in the cars we never bought in the first place. #1 seller under Cash for Clunkers? The Toyota Corolla.
Corollas are the small screws we prefer. Chevys are the giant screws no one buys. But given the option of ending our misery with one final blow in Detroit or dragging this out so every taxpayer suffers and Chevy foolishly hires people back? We got the big screw.
Don’t TARP Me, Bro
Consumers want more choices, not fewer. No one wants the government to tell him which size screws are available. Bail-outs didn’t work for Chevy or for AIG. Bailing out the entire dollar with an artificial currency will not buoy us; instead, it represents another branch for us to hit on the way down.
We have an alternative. We can pull back and let the market operate the way it will inevitably operate despite G-force intervention. If order evolves towards chaos, let’s capitalize and build a market based on chaos, driven only by the invisible hand. Taxpayers will always vote with our feet. Replacing production-based currency with one big peg will still result in price adjustment.
One big screw, one big peg — why can’t we learn from history, rather than dooming ourselves to repeat it?