Image: REUTERS/Gary Cameron
I finally got around to binge watching Season 3 of the Crown and it was every bit as indulgent and salacious as I was hoping. One of the things I always found intriguing is just how much Queen Elizabeth must know. She has, after all, held weekly meetings with every sitting Prime Minister since 1952. That is 15 Prime Ministers, including Winston Churchill, Margaret Thatcher and Tony Blair. That’s one hell of a backstage pass to have. One of the best lines in the show occurred in the first episode of the series with the Queen, played by Olivia Coleman, asking newly elected Prime Minister, Harold Wilson, played by Jason Watkins “What will you do about the balance of payments? Will you Devalue?” To which he responds “No, ma’am, a Labour government devalued the pound before with little success and my party cannot risk being seen as the party of devaluation.” He goes on to say “It is also a matter of national pride. This is a great country and the pound is a great symbol.”
This got me thinking about the state of international currencies and the current march, nay, race towards devaluation. If Quantatative Easing and Zero Interest Rate Policy were the buzz words of the last decade, Negative Interest Rates seem to be all the rage going forward. Negative Interest Rates. Wrap your head around that for a minute. Imagine if you were to actually pay your friend for the privilege of lending them money. No difference.
President Donald Trump has been demanding that the Federal Reserve slash its benchmark rate to below zero. The Federal Reserve has never used this policy before and, in an unusual attitude shift, is pushing back against it saying that this would carry “risks of introducing significant complexity or distortions to the financial system.”
I suppose I can understand Trump’s view in a way. The European Central Bank has been using this method, albeit unsuccessfully, since 2014 as a way of staving off financial slowdown. If the US wants to remain competitive in this environment than I guess it has no choice than to slash prices, WalMart style. “Remember we are actively competing with nations who openly cut interest rates,” Trump said in a speech to the Economic Club of New York on November 12. And in a world of Fiat currency, where currency value is built less on the supply and demand of the underlying asset, and more on the whims of policy makers, we may not have a choice.
Let’s not also forget that Trump is a real estate developer, who built his empire off the back of debt. Low interest rates are his friend. And while debt is a brilliant way to build wealth when used correctly, such as leverage buyouts and real estate developments, is it really a strategy for the long term wealth building of a nation? Debt is only a good thing when you know exactly how and when you will pay it back. The U.S. has almost a trillion dollar deficit and no good way of paying it back.
When I was a child, it seemed like a coming of age moment was when my father sat me down and explained the power of compounding interest. That if I continued to save my money, I would earn interest and that would compound every year until I amassed a veritable fortune and can retire on a beach somewhere. I felt like I had been given a secret weapon. Albert Einstein called compound interest the “greatest mathematical discovery of all time.” However, in 2004 when I got to an age where I could actually start implementing it, it became a pipedream…an elusive unicorn. The Federal Reserve had lowered interest rates to 1% as a way quick fix way of bouncing back from the dot com crash and the real estate boom had just begun. Buying stuff you couldn’t afford with no docs and no principal payments was the name of the game.
And now we find that the past decade and a half of low interest rates has had long and far reaching consequences we haven’t even begun to feel yet. Baby Boomers are finding it harder to retire as they are living longer and haven’t earned enough in CDs and Bonds to support it and Millenials are buckling under all kinds of debt from student loans to credit cards. For the average Joe, working 9-5 for a salary and a pension, building long term wealth by saving is fool’s gold.
You can start to see why there are is so much demand for alternative currencies like Bitcoin and Libra and why we are so desperate for these currencies not be touched and tampered with by regulators. Screw national pride. People want to get the f$^^ out of fiat currency. Ever since the Federal Reserve was created in 1913 and the Gold Standard was abandoned in 1933, regulators have been known to use the currency as sort of a super secret backdoor tax to pay for things government wants to pay for. If you don’t want to raise taxes you can always print more money and devalue the currency.
This is nothing new. During the 200 years of the Roman Empire, the Denarius (Rome’s coinage at the time) was massively debased. It went from containing 95% silver to containing .02% silver and we all know how that turned out. And Zimbabwe. Oh Zimbabwe. I still think of the image of the smiling child with a wheel barrel full of Zimbabwe Dollars. Imagine if we were all walking around with trillion dollar notes. I think Elizabeth Warren’s head would explode.
So is currency really a source of national pride? It seems like we are more proud in how quickly we can devalue it than by its solidity. I, personally, think there are better ways to compete for foreign investment on the international stage than following in the footsteps of Europe and Japan, which have both stagnated under negative interest rates. Let’s see, creating a favourable business environment with lower taxes and regulations for one. Having a currency that is a safe haven and not a ticking time bomb for another. Sorting out our deficit. These are just a few things that spring to mind. In the matter of devaluation, Trump seems to think otherwise, “many are actually getting paid when they pay off their loan Whoever heard of such a thing? Give me some of that. Give me some of that money. I want some of that money.” Come on, Jerry McGuire, show the man some money.