Smoot Krugman II

‘ . . .given our economy’s desperate need for more jobs, a weaker dollar is very much in our national interest — and we can and should take action against countries that are keeping their currencies undervalued, and thereby standing in the way of a much-needed decline in our trade deficit. That, above all, means China. And none of the arguments against holding China accountable can stand serious scrutiny. Some observers question whether we really know that China’s currency is undervalued. But they’re kidding, right?’

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That’s from the latest column from Paul Krugman of the New York Times. He is writing in support of the protectionist measure now moving through the Senate. When a year ago he issued a column like that, we ran out an editorial under the headline “Smoot Krugman,” a reference to the protectionist Republican of Utah who, along with Congressman William Hawley of Oregon, gave their names to the tariff bill that precipitated America into the Great Depression.

We also ran, courtesy of Kitco, a chart showing the American dollar and the communist Chinese yuan and gold. It showed then what an update herewith shows today — namely, that America has already been running a weak dollar policy against both gold and the yuan. And it’s been doing so during the last five years. China’s been running a weak yuan policy, too. But we’ve been more aggressively weak than the communist Chinese.

As Sarah Palin might say, how’s that weaky dollar thingy working out? Our unemployment rate is high, our output is stalled, well more than a trillion dollars of the profits of our greatest corporations are parked overseas, the president’s declaring himself an underdog, the Senate his party controls won’t pass his jobs bill, the states are in turmoil, and people are predicting that the housing market will remain depressed for years.

It happens that we agree with Mr. Krugman that weak currency policies are protectionist. But we don’t buy into the argument that the answer to these weak currency regimes overseas is to weaken our currency further. The fact is that the collapse in the value of the dollar has been staggering in recent years, to below a 1,600^th of an ounce of gold (it fell below a 1,900^th of an ounce at one pint), and it hasn’t gotten us a consarned thing.

“Ask yourself,” Mr. Krugman writes. “Why is it so hard to restore full employment? It’s true that the housing bubble has popped, and consumers are saving more than they did a few years ago. But once upon a time America was able to achieve full employment without a housing bubble and with savings rates even higher than we have now. What changed? The answer is that we used to run much smaller trade deficits.”

But is that the only thing that’s changed since the halcyon days when we could achieve full employment without a housing bubble? Why, no, it’s not. The big change has been America’s entry into the era of fiat money, when the American dollar is not defined in law and the idea of what used to be called “lawful money” is a phrase that is lost. It’s an era in which the head of our central bank can be called before Congress and announce he is baffled by the price of gold.

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Right now the move toward protection against China is hanging in the balance in the Senate, and, incredibly, is getting Republican support from Governor Romney and little opposition even from free market members of the GOP, a point well-marked in the a leading editorial running in tomorrow’s Wall Street Journal under the headline “The Obama-Romney Tariff.” It’s being pushed by the notorious duo Smoot Schumer and Hawley Graham, on whom we first bestowed their nicknames in 2005 in an editorial called “Blundering on China.” The best thing the Senate could do is focus on how the dollar and the communist Chinese currency have been performing against the one true measure of value. It will guide them as to the real source of the malaise that has come over the American economy.