Friday, December 12, 2008

Forbes Says Devalue Dollar

In undoubtedly the worst article I've ever read on (and there have been many candidates), writer Frank Beck suggests the world should instantaneously devalue all currencies by 30%, thereby increasing the dollar value of all assets. Debts then become manageable, and we all move forward with cleaner, leaner balance sheets. Right? Wrong!

Who in their right mind would ever lend money again? Knowing that in the next recession (yes, recessions will happen again) there is a high probability that the government will just devalue currencies, interest rates would permanently skyrocket: even the best businesses, of which are there many, would find it prohibitively expensive to expand, which hurts all of us.

Instead of focusing on business problems like improving productivity and improving value for the customer, businesses in the future will be chiefly concerned with expectations for inflation, which is what happens when future inflation rates are uncertain.

Beck calls himself "a national authority on retiree planning", but consider how this plan would affect retirees! Primarily reliant on fixed incomes, this group would see an instant, permanent skyrocketing of their costs, with no corresponding increase in income!

Even those who lent money with sound practices to good businesses would get burnt by this plan. Basically, it would reward those who speculated with risky loans and purchases of assets, while those who lent appropriately and those who saved cash for a rainy day would get burned. What a perverse incentive system...imagine the long-term repercussions!

I do agree with Beck on one point (you can read his article here, if you can find it between all the ads): we should not throw good money after bad businesses. The auto bailout talk should never have reached this far. The Fed needs to lower interest rates (as it's doing) so that businesses in general have lower costs, with the strongest of them being able to expand. Business taxes should be (if only temporarily) lowered, so that the most profitable businesses have incentives to keep their workers and grow, instead of taxing the most profitable businesses to give to the least productive.

These levers do take time to work themselves through the economy, however. But let's not go overboard by implementing a solution that's worse than the problem.

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