4 minute read
Global Economy
DANIEL LACALLE is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.” Daniel Lacalle
Governments Steal the Recovery
Expansionary policies around the world are disproportionately hurting the poor
Most emerging and developed market currencies have devalued significantly relative to the U.S. dollar in 2021, despite the Federal Reserve’s aggressive monetary policy. Emerging economies that have benefitted from rising commodities prices have also seen their currencies weaken despite strong exports. As such, inflation in developing economies is much higher than the already elevated figures posted in the United States and the eurozone.
The main reason behind this is a global currency debasement problem that’s making people poorer.
Most central banks globally are implementing the same expansionary policies of the European Central Bank and the Federal Reserve, but the results are disproportionately hurting the poor as inflation rises, particularly in essential goods and services.
Many emerging economies have implemented a dangerous policy of boosting twin deficits—fiscal and trade—under the misguided idea that it would accelerate growth. Now, growth and recovery estimates are coming down, but monetary imbalances remain.
Therefore, most currencies are falling relative to the U.S. dollar. The policies implemented by global central banks are as aggressive or even more so than those of the Federal Reserve, but without the global demand that the U.S. dollar enjoys. If nations with sovereign currencies continue to play this dangerous game, local and international demand for their currency will evaporate and dependence on the U.S. dollar will rise. More importantly, if the Federal Reserve continues to put its global reserve status to the test, all fiat currencies may suffer a loss of confidence and a move to other alternatives.
States issue currency, which is a promise of payment. If the private sector
doesn’t accept this currency as a unit of measure, a generalized means of payment, and a store of value—backed by reserves and demand from the mentioned private sector—the currency is worthless and isn’t money. Ultimately, it would be useless paper.
Examples of state currencies that are neither a store of value nor a generally accepted means of payment are many. From the sucre in Ecuador, which has disappeared, to the Argentine peso or the Venezuelan bolivar, the examples in history are innumerable. In Cuba, inflation is now estimated at 6,900 percent due to the lack of demand for a worthless currency with no reserves to back it.
The state doesn’t “create money,” it creates a means of payment that may or may not be accepted.
More importantly, the value of the currency and its use isn’t decided by the government. It’s decided by the last private sector agent who accepts the promise of payment because they assume that it’ll maintain its value and its acceptance as a medium of payment.
As such, when a government creates significantly more promissory notes— currency—than the real local and international demand, the effect is the same as a massive default. The government is simply impoverishing the citizens who are forced to use the currency and destroying the credibility of the value of the government’s promissory notes.
When a state creates a currency without real reserve backing or demand, it destroys money.
When the government issues currency—promises of payment—that aren’t a store of value, a generally accepted means of payment, or a unit of measure, it not only doesn’t create money, it also destroys money by sinking the purchasing power of the poor captive citizens who are forced to accept its notes and little pieces of paper (government officials, pensioners, and so forth).
When the government destroys the purchasing power of its currency, it’s stealing from captive citizens by paying them in a currency that’s worth less and less every day. It’s a massive salary cut to the unprotected.
This is what we’re seeing in many nations throughout the world: a massive salary and savings slash created by government intervention on the monetary balance to its own benefit. Governments benefit from inflation because they pay their debt in a currency of diminishing value, and they impose a cut on the price they pay for wages and services. Even in developed nations with relatively stable currencies, inflation is a big benefit for governments and a big negative for savers and real wages.
Those who say that the state “creates money and spends it” and only has to create the money it needs to finance the public sector because it will be accepted by the rest of the economic agents should be obliged to receive their salary in Argentine pesos and enjoy the experience.
