Don't Buy Into All the Talk About the Euro 'Losing Its Mojo'
The great monetary historian Nathan Lewis regularly points out in his excellent books what his fellow supply siders don’t always pick up on about so-called “money supply.” Soaring economies – as a consequence of their good health – always correlate with soaring money in circulation. Dollars circulated in the U.S. have skyrocketed from the late 18th century to the present. Despite this statement of the obvious, many supply-siders persist in their mistaken belief that the Reagan economic boom was partially an effect of “tight money” from “the Fed." No. Economic growth is a signal of more production and exchange, which is a certain signal that more money is circulating to lubricate the exchange of what's being produced.
The bigger error, one committed by seemingly all economic religions, is in the presumption that rising “money supply” is the instigator of economic growth. The latter puts the cart before the horse. The sole purpose of money is to facilitate the exchange of consumable goods (trade), or the exchange of economic resources now (investment) in return for eventual claims on consumable goods in the future. Money is an abundant consequence of production and investment, not a driver of it. Translated, investment bankers and financiers spend a lot more time in Palo Alto than they do East Palo Alto. There's lots of money to be made financing the exchange of what's produced in Silicon Valley, along with the finance of future production there.
Money is merely an agreement about value that accelerates the exchange of products for products. That’s why it’s abundant where production and investment is bountiful, and scarce where it isn’t. Stating what’s not obvious to most economic religions, the falsehood that is “easy money” is a non sequitur when it comes to economic growth, or lack thereof. Money is where there’s production, and it’s not where there isn’t. Period. Central banks, Treasuries, Exchequers and academics can’t engineer a new reality. Good money, money that’s credible in the eyes of producers, is always where there’s production happening. The more production, the more money circulating to expedite the exchange of same.
Crucial here is that good money, as in money that is viewed as a credible medium of exchange such that both sides in a transaction get equal value, isn’t solely the preserve of rich countries. Better yet, good money doesn’t get “better” or “stronger” when a country economy grows. Funny here is that some with faulty perceptions about money believe the opposite. They think that because the Chinese economy is much larger in 2019 relative to 1999 that the yuan should be much “stronger," or that it should "appreciate" to reflect China’s ascendance. No. That's not how money works, or how it should work.
Missed by monetary religionists is that if money’s good, it quite simply is. No one trades “money” as much as they once again exchange products for products. Money is the measuring stick that enables equal exchange among those with products to trade, or future production to trade. If it’s “money” its value logically doesn’t change.
Importantly, U.S. history supports what's logical about money. As Lewis likes to point out, the U.S. was on a gold standard for much of its existence, right up to 1971. Translated, the United States had a dollar that was as good as gold when it was a very poor new country, when it was an “emerging market” or “Tiger” country, and when it was the richest country in the world.
To presume, as some do, that the dollar’s value should have risen in concert with the U.S.'s economic fortunes is as lame-brained an assumption as one suggesting that the inch we use to measure 6’11” Kevin Durant should increase in length over time to reflect his evolution into one of the greatest basketball players of his time. No, an inch just is. It’s a standard measure of length. Just the same is that if a dollar is to be most useful as money, it should be a dollar throughout time. No wiggles, no volatility. An inch is an inch and a dollar should be a dollar.
All of this came to mind while reading yet another opinion piece suggesting that the euro’s days are numbered, and in this case, one that argued that the euro “has lost its mojo.” Really? How? Measures just are. They only lose their “mojo” insofar as they aren’t.
Some like to say that the euro can’t work because the economic policies of the euro countries are all so different. Which would mean what? Again, money is just an agreement about value. Implicit in what’s absurd is that a poor country would oversee a debased euro to fight its poverty and to compete with a rich euro country that would maintain a good euro? Such a view is as fork-in-the-eye stupid as an agent telling a short-in-stature college qb to shrink the inch so that he can be 6’5” in scouting reports. Except that no scout would be fooled by something so blatantly false, and no producer of consumable goods would be so dense as to readily exchange real goods for a wrecked, “weaker” currency.
Taking this further, the silly belief that the euro can’t work because of different country economic policies is the same as saying the dollar can’t work given the difference between West Virginia’s economy and California’s. No, money once again just is. Changes in its value can’t alter reality. If West Virginia issues a “West Virginia drachma” odds are its citizens will still earn dollars, and trade with them. Much the same, had the Greeks shed the euro in favor of the drachma in 2010, trade among its people would still likely be in euros. That is so because no one produces for “money” as much as they produce for what money can be exchanged for. In that case, few producers will accept what’s not accepted by other producers.
So has the euro lost “mojo”? In a sense, but not for reasons that the currency confused tell us. What the euro lacks in “mojo” is what the dollar and every other modern fiat currency lacks: stability as a measure. So if European monetary officials are really interested in making the euro great, there’s only one solution. With money, greatness is an effect of a currency holding its value throughout time. Nothing else.