Thanks to the financial crisis there has been a flood of new books on finance. Most have focused on the drama itself or on the lengthy steps leading up to it.
But few have raised the bigger issue is our financial system itself the problem.
That’s the question Chris Whalen poses in his new book “Inflated.”[i]
The U.S. dollar is the only currency large enough to finance global trade. But that system is in decline according to Mr. Whalen.
The overvaluation of the U.S. dollar and the very low interest rates puts this system at risk. Plus the dollar’s unique role as global currency creates a moral hazard because successive U.S. administration can always print money to get out of trouble increasing debt and mortgaging our future, according to Mr. Whalen.
For Mr. Whalen our tendency to consume more than we produce is at the heart of our current low growth and weak economic situation. We enjoyed higher investment and growth when we saved more and spent less. But according to Mr. Whalen successive administrations have poured debt on top of debt and we are still paying for WWII.
Mr. Whalen tells the story of how our addiction to debt has a long history in which successive U.S. administrations have played their part. As a result, he argues, that by dollarizing the world for our own security we have only placed ourselves in greater financial jeopardy.
So what’s the answer? Mr. Whalen advocates a tri-currency system in which the dollar, the euro and the yen share the role of global reserve currencies. He also suggests a managed devaluation of the U.S. dollar to bring the U.S. back to surplus and solvency.
The problem with this approach is that we can’t all be in surplus at the same time. One country’s surplus is another countries deficit. If we all managed our national income accounts so that all surpluses and deficits were minimal perhaps this might work. Ironically the U.S. deficit has helped financed the rest of the world’s growth.
But this process has now come to a grinding halt.
Mr. Whalen is right in one sense. We need a new approach.
The Gold Standard, Bretton Woods, the dollar based system served our needs at the time but never offered a complete solution to the problem of how to provide a liquidity solution to our need for need for growth, full employment and economic stability.
The question still remains how do we achieve this?
[i] “Inflated: How Money and Debt Built the American Dream” by R. Christopher Whalen with an introduction by Nouriel Roubini