In the late 1980s, national football power and frequent Rose Bowl participant Washington fell on hard times. While the Huskies had not infrequently finished seasons in the early ‘80s with 10 wins or more, suddenly 6, 7 and 8 win campaigns became more common.
Looking inward, legendary head coach Don James could see that his players weren’t fast enough. One of James’s solutions was to send his recruiters out on the road with their own stopwatches. No longer would they accept as truth the 40-yard dash times reported to them by others. They would see for themselves, with their ownstopwatches, if potential scholarship recipients had the speed to play for the Huskies.
No doubt James made other changes too, but the focus on verified 40 times resulted in better, faster athletes according to the coach, and more wins. In his last three seasons at UW, the late James’s Huskies went to three straight Rose Bowls, and won two of them. After winning the 1992 Rose Bowl, the Huskies were voted national champions in the coaches’ poll.
That James no longer trusted the 40 times of players not clocked by his own coaches is a useful historical anecdote in consideration of all the currency hand wringing between countries that’s taking place at the moment. James felt the measurements of others suspect. The reported 40-yard times of some of his recruits didn’t always result in fast players. The measurements were flawed, so James acted.
The anecdote is useful when we remember that President Trump, Democrats like Sen. Chuck Schumer, along with countless other politicians, economists and pundits, believe that Chinese producers have gained a trade advantage by keeping the value of their currency (the yuan) artificially low. Supposedly this makes them more competitive. So if we ignore that the yuan has actually risen a fair amount against the dollar since 2005, it’s easy to see why the accusations against the Chinese don’t hold any water. They don’t because money is a veil. It can’t change the real price of anything anymore than an abnormally lengthy second that shrinks 40-yard times could make a player fast. Reality always intrudes.
With currencies it’s easy to see why. Assuming a cheap or devalued yuan, such a currency would logically command less in the marketplace. This rates repeated mention in this column because Chinese producers, like all producers, require voluminous imported inputs in order to manufacture the goods they aim to sell. If the Chinese are devaluing, any presumed competitive advantage gained by them is eroded by increased production costs. That journalists like Matt Phillipps (“A weaker currency makes a country’s exports cheaper”) at the New York Timesignore this is one of life’s enduring mysteries. Importantly, that’s not all that they ignore.
Phillipps et al also fail to acknowledge the certain truth that investment is what really enhances a company's competitiveness. That this statement of the obvious needs to be said over and over again amounts to another one of life’s enduring mysteries. It does because Phillipps wholly glosses over the basic truth that devaluation erodes investor returns. And without investment, companies quite simply cannot compete globally simply because they’ll lack the funds necessary to continually improve.
All of this is a long way of making the basic point that tainted money will not hide the truth, or trick people. If the money is bad, or in the process of being devalued, production costs for companies will go up in concert with a gradual drying up of investment. No gains are had. Competitive advantage is lost when a currency is devalued.
Which leads to the bigger supposition about China. Not only is it naively asserted by the uninformed that the Chinese keep the value of the yuan artificially low, it’s also said that they “manipulate” their currency. In truth, China does what just about every country in the world does: it strives to maintain a tight relationship between the yuan and the dollar.
The why behind the above is simple: the dollar is the world’s currency. Since it is, the dollar factors into just about every global transaction. Though not stable enough as a measure of value (this will soon be addressed), the dollar’s global role as settler of exchange among producers is a reminder of the basic truth that producers are always and everywhere trading products for products. The dollar is used in most transactions (if anyone doubts this, they need only travel to Iran, North Korea and Venezuela where they’ll see that the dollar liquefies most trade even in "enemy" countries) precisely because producers know they can get reasonable value in return for goods brought to market if they get dollars in return for what they bring to market.
And since the dollar is broadly trusted as a reasonable measure of value, it’s only logical that countries would do as China does and peg their currencies to a U.S. dollar that referees nearly every global transaction. For China to not peg the yuan to the dollar, or to not at least seek to “manipulate” a very tight relationship with the greenback would be economically ruinous. We produce in order to exchange, money is what facilitates exchange, so it’s entirely logical that China would do what nearly every country in the world does, either implicitly or explicitly.
Thinking about how the world’s monetary authorities benchmark their currencies to dollars to varying degrees, the only currency party that requires criticism in this arrangement is the U.S. Treasury. Its failure to maintain a stable dollar for countries to peg to is the main source of global instability, not the Chinese decision to do as nearly every country in the world does.
Bringing all of this back to the allegedly “cheap” yuan, the yuan supposedly “cheap” thanks to “currency manipulation,” such a view isn’t serious when it’s remembered that China doesn’t have a yuan policy. More realistically it imports U.S. dollar policy. That’s what a currency peg is. What it means in practice is that when the dollar is weak so is the yuan. When the dollar is strong so is the yuan. Given the mostly tight dollar/yuan relationship, movements in the yuan are a consequence of dollar movements.
Which leads us to the market turmoil related to currency policy. That markets are in the midst of tumult shouldn’t surprise anyone with a clue. When the U.S. devalues the dollar, the tight relationship between the world’s currencies and the dollar means that a devaluation stateside is generally a global event. Applied to President Trump, presidents mostly get the dollar they want, and Trump has been busy of late communicating to the markets his desire for a weaker dollar. This has revealed itself through a soaring gold price. Unsettling about all this is that it could get worse. Talking to reporters recently about further devaluation, Trump made plain that “I could do that in two seconds if I wanted to.”
Ok, but a weak dollar is tantamount to a weakening of currencies around the world. Because it is, it’s no surprise that global markets are convulsing. When investors invest, they’re buying future returns that will come back to them in currencies. But if “money” around the world is losing value, so will the real value of returns decline. Devaluation is a tax on investors. Period.
So while University of Washington coaches could mitigate 40-yard mischief back in the day through the use of their own stopwatches, investors aren’t as advantaged. Hedging the direction of currencies can be expensive, plus it’s never exact in the way that a stopwatch is. With his talking down of the dollar President Trump is introducing corrupted, faked returns and contracts into the world that producers can't fully protect themselves from, and the markets are responding. Devalued money is bad for investors, which means it’s bad for growth.
A version of this appeared in Forbes