James Rickards is a hedge fund manager in New York City and the author of Currency Wars: The Making of the Next Global Crisis from Portfolio/Penguin. Follow him on Twitter: @JamesGRickards.
On most issues, former Gov. Mitt Romney tries to distinguish himself from President Obama and set his policies apart from those of the current administration. Yet, in one area Romney is not only a clone of Obama but has doubled down and insisted that the president's policies be applied with even greater force. This area involves China and its alleged currency manipulation.
The exchange rate between the U.S. dollar and Chinese yuan is the main battlefield in the global currency wars. Romney demands that China be officially branded a currency manipulator and suffer retaliation in the form of taxes and trade sanctions from the United States. This is just a more extreme form of Obama's continual diplomatic pressure on the Chinese to revalue their currency upward.
Some background on this is helpful. In his State of the Union Address in 2010, President Obama declared the National Export Initiative, the goal of which was to double U.S. exports in five years. What was clear to analysts at the time was the only way to double exports was to drastically cheapen the U.S. dollar relative to other currencies. In effect, the United States would have a "half-off sale" of its goods and services if it could cut the exchange value of the dollar in half.
It is true that China manipulates the exchange value of its currency—all countries do. Exchange rates are just another policy tool like interest rates, tax rates, and tariffs. But there is no greater or more persistent currency manipulator in the world than the United States. The U.S. policy of money printing by the Federal Reserve is best understood as a thinly veiled way to cheapen the dollar.
The appeal of a cheap dollar to politicians and big business is undeniable. Politicians think about increased exports and the jobs that come with them. Big business such as Boeing, General Electric, Microsoft, and many others think about increased sales of aircraft, wind turbines, software, and more as the dollar declines. Superficially it's hard to see anything wrong with this picture.
In fact, there's a lot wrong with it. Other countries don't just sit there and let the United States cheapen its currency. They fight back by trying to cheapen their own currencies—this is the essence of the currency wars. Countries do this by lowering interest rates, easing bank reserve rules, and direct intervention in exchange markets.
Politicians overlook the fact that the United States imports more than it exports. A cheaper dollar may mean cheaper exports but it also means more expensive imports, which can destroy jobs in U.S. businesses that depend on imported parts and supplies.
This toxic brew of global monetary ease and more expensive imports brings inflation to the United States in the form of higher prices for oil, imported cars, electronics, textiles, and many other goods and services. This is exactly what happened when President Nixon cheapened the dollar in 1971. By the end of that decade, oil prices had quadrupled, inflation was over 13 percent, interest rates skyrocketed, the stock market collapsed and the United States suffered three recessions in seven years.
A cheap dollar appeals to all of Romney's worst instincts. It favors big business over small business. It favors established export categories like heavy equipment over innovative new products. Romney desperately needs to appeal to younger voters and independents. His cheap dollar policies appeal instead to multinational corporations and those like banks and hedge funds who know how to bet on a declining currency.
Worst of all, Romney's cheap dollar policy will result in inflation imported from abroad. This inflation robs the savings of the elderly, retirees, and middle class Americans who rely on insurance policies, annuities, and bank deposits to protect their income security. A cheap dollar causes a wealth transfer from everyday Americans to the wealthy who can see inflation coming and know how to hedge against it. The cheap dollar policy is in keeping with the stereotype of Romney as a rich, out-of-touch elitist who does not share the concerns of his fellow citizens and does not suffer the consequences of his own misguided policies.
The currency wars that Romney has vowed to fight are a recipe for disaster. The right course is sound money as embodied in the King Dollar policies of Paul Volcker and Ronald Reagan. The way to compete in international trade is not with a cheap currency but with technology, innovation, education, good labor-management relations, and a business-friendly environment. This is exactly how the Germans succeed at the export game. Germany has had export success for decades even with a strong currency because they have a favorable business climate.
The United States needs to innovate, not cheapen, its way to export success. Romney should embrace the Reagan strong dollar model and reject the cheap dollar policies of Obama. If Romney sticks to the Obama cheap dollar policy, then the next election will guarantee increased inflation—regardless of who wins.