Farrell: Dollars to Doubloons—Currency Wars

Back in the days when Art Cashinand I might have taken Economics 101, we didn't talk about dollar depreciation because we used doubloons at the time.

But there was a truism then that holds true today and that is: no country has ever devalued its way to prosperity. Secretary Geithner even mentioned it the other day. The temptations of more robust exports with a weaker currency are tantalizing, but momentary. Not every country can grow its way out of a slump via exports. Unless world growth were so strong the tide lifted all ships. But to hope for that is naive, and countries know that. So the rush is on to put the pedal to the floor in the export car and criticize everyone else for manipulating their currency.

Right now the US should export more and rely less on internal consumer spending. China should export less and encourage consumer spending. For those two things to happen, the dollar has to fall. No US official will say it, but it's true. David Wessel says in the Thursday edition of the Wall Street Journal that, "The logic, drawn from the textbooks, is that a decline in the dollar (or doubloon) will make US exports cheaper for foreign customers, so they will buy more, and make Asian exports more expensive, so the world will buy less."


Tim Geithner is going to use the coming weekend meeting of the G-20to advance efforts to "rebalance" the world economy so it is less reliant on the US consumer.

The only way to rebalance trade is for the dollar to weaken, and the Brazilians have already screamed about the "currency war" they see raging.

With another dose of Quantitative Easing on tap, the increased supply of dollars will weaken the dollar, and the thought of every country trying to devalue its way to heaven brings an image of the trade war that triggered the worldwide depression of the 1930's.

Bernanke's Fed has the dual role of maximizing employment along with maintaining stable prices. It is not his job to worry about the dollar. Terrific Timmy has that job, and the G-20 is the forum. His negotiating advantage is the dollar is the world's business currency. But China has more of those dollars than anyone else. A middle ground is hard to find. That's why it is called a war, and in war you have to fight for your side. So, Tim, if you want an opinion, don't go for a fast answer despite the demands of the equity markets wanting everything now. A slowly evolving strategy encouraging gradual growth with a back-and-forth of relative advantage, but no big winner (or loser) might be frustrating, but it's not devastating. And push Ben to do a smaller, more gradual QE II, if he has to do any at all.

It seems to be the consensus view that "paperwork" was mishandled in the latest mortgage flap, but those evicted indeed didn't pay their loans and merited eviction. But critics of the big banks argue that even deadbeats are entitled to due process. Rebel Cole (gotta love the name), a finance and real estate professor at DePaul University, says "banks have essentially side-stepped 400 years of property law in the United States." Banks apparently failed to record each link in the document chain demonstrating proper ownership of a note as we discussed just yesterday. "Hey, no big deal" doesn't seem to be cutting it, and it looks like a feeding frenzy for lawyers. Maybe just pay off the debt with doubloons.

Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.