Nigeria Is the Latest Victim of Treasury's Floating Dollar
It wasn't too many years ago that op-eds were being written about Africa and its economic renaissance. In admittedly flawed GDP terms, the continent could claim some of the fastest growing country economies in the world.
As the Wall Street Journal recently described the boom that was in places like Lagos, Nigeria, "Cineplexes, car dealerships and a fast food arms race - KFC and Domino's, among others, opened here - spoke to the aspirations of the continent's largest city." The Journal went on to report that continued growth would have placed Nigeria among the twenty largest country economies in the world.
What most didn't pick up on, however, was that the prosperity, much like that experienced at the same time in other commodity-rich locales like Brazil, Canada and North Dakota, was somewhat of a mirage. A floating dollar that had been weak for much of the 2000s created an illusion of commodity scarcity. Commodities are priced in dollars, so a weak dollar gave the impression of surging natural resource prices that lured investment to places like Nigeria where oil is plentiful. From an historical perspective, the 2000s were an unfortunate, slow-growth sequel to the 1970s when the U.S. Treasury similarly pursued weak dollar policies.
Similarly interesting about all this is that the weak dollar that was so good for commodity-abundant parts of the world (near and far), was bad for most Americans. Figure that Americans take paychecks in dollars that were that were buying less as gasoline prices cruelly indicated. Let's also not forget that investment is the source of companies and jobs, yet a weak dollar repelled the very investment necessary for stateside growth. Just as the decade of the 1970s is remembered as one of slow economic growth, so will history books properly describe the ‘2000s as malaise-ridden.
But since August of 2011 the dollar's decline has partially reversed itself. And with the dollar stronger, the raging commodity party that lured investment into the uprooting of the prosaic wealth of the earth has stalled globally. Economies reliant on extraction of resources no longer propped up by money illusion are suffering, while the knowledge economy based on investment in the creation of future wealth has been achieving lift-off.
Thinking about Silicon Valley, it shouldn't surprise anyone that a revived greenback has coincided with increased investment in the region's start-ups. A weak dollar makes investment in wealth that is tangible (housing), that already exists (art, rare stamps), and that there's already a market for (think oil, gold, copper, etc.) a safe move, while periods of good money allow investors to direct capital toward the stock and bond income streams representing wealth that not only doesn't yet exist, but may never at all. Quality money quite simply reduces investment risk on the way to a more aggressive pursuit of the unkown. Good money always and everywhere coincides with growth.
Conversely, since investors are buying future currency income streams when they put money to work, floating money naturally causes investment risk to soar. Why invest if any returns will come back in currencies of uncertain value? This is particularly true when money is declining in value. All this explains why low-risk assets do well during periods of a cheap dollar, not to mention commodities priced in dollars. Not only do commodities rise when the dollar sinks, but there's always a global market for oil and other forms of earth wealth. Oil is safe, but powerful economic booms aren't built on what's safe.
Nigeria once again benefited economically from this cheap dollar illusion, as did Russia, Saudi Arabia, Venezuela, Equatorial Guinea, and other parts of the world richest in mineral wealth that springs from the earth as opposed to being created by the mind. While Nigeria could claim growth rates of 7 percent amid the weak dollar illusion that lured lots of investment into the country, today dollars, food and even gasoline are scarce in the African nation.
The sad story unfolding in Nigeria is yet another reminder that when the U.S. Treasury shirks its domestic duties that require it to issue a stable currency, it's not just the U.S. that suffers. Indeed, it can't be repeated enough that with the dollar very much the world's currency, the commodities most sensitive to its movements are going to be affected by its instability. A strong greenback correlates with falling commodities, a weak one with soaring commodity prices, and with economies in many parts of the world still commodity based (North Dakota is part of this commodity world), floating money correlates with global boom and bust.
Some may respond that it's not Treasury's job to concern itself with global cycles authored by dollar uncertainty, but let's not forget how much Americans have suffered an economy performing in sub-optimal fashion in the 45 years since the U.S. could last claim a dollar that held its value. Unknown is how many investments and subsequent technological advances never saw the light of day as floating money not only rendered investment overly careful, but that also lured abundant talent away from productive economic activity (cancer cures, software innovations, transportation advances, etc.), and into currency trading. Americans lose big when the dollar floats without definition, and so do unsuspecting people around the world. After that, Americans can't have it both ways. If the dollar is to be the world's reserve currency, the least Treasury could do would be to pursue dollar-price stability.
What makes all of this even more sad is how simple it would be to fix what is a money problem. Were Treasury and Congress (per the U.S. Constitution) to once again define the dollar in terms of a precious metal like gold, floating money would be a thing of the past, as would the volatile scenarios that presently have economies like Nigeria's in so much trouble. As the above chart makes plain, when the dollar was last stable as a measure representing 1/35th of an ounce of gold (1947-71), so were commodities like oil stable.
Even better, what is a monetary problem could be even more easily solved if government were to simply get out of money altogether. Just as profit-motivated market actors provide us with shoes, computers and televisions in abundance, so could they very easily create the quality money that would faciliate trade and investment. American Express dollars, anyone?
None of this means that economies won't grow and recess. Figure that recessions are a healthy aspect of economic evolution whereby economies are cleansed of labor mis-matches, investment errors, and lousy businesses. What would disappear are the illusory booms rooted in money lacking definition, and that author so much waste.
The monetary fix that would cause U.S. economic growth to skyrocket is very simple. What's unknown is if either political party will address a floating money problem that's the source of so much domestic and global misery. Until they do subpar U.S. growth will be the norm, along with needless economic crack-ups in countries like Nigeria. It's time for the political class to wake up to a floating dollar truth that can claim victims well beyond these fifty states.
