Off With Her Head: President Trump Fires the Chief Scorekeeper
Ever since money was invented, people have been looking for ways to cheat the system. Archeologists working in what is now Israel recently discovered silver objects manufactured in Egypt around 1,200 BCE. Designed for use in trade, and valued by weight, they were found to be mostly copper, which was much less valuable, covered by a thin layer of silver. The deception was quite sophisticated, showing both an expertise in metallurgy and in international fraud.
Around 800 years later in Greece, Archimedes was tasked with finding a method for detecting gold objects that had been adulterated with silver. At the time, gold was about 10 times more valuable than silver. You probably remember the story of him lowering himself into his bathtub and observing that his body was displacing water. His discovery that unsubmerged objects displace water according to their weight solved the problem, since gold is twice as heavy as silver.
Once paper money was invented in China about 1,500 years after that, the problem became counterfeiting. As paper money became widespread in Europe in the 17th and 18th centuries, more sophisticated printing and use of special papers mostly solved that problem.
In the modern era, most problems with money have not been caused by its users, but instead, by its issuers. In the past 100 years or so the world has seen a number of examples of hyper-inflation. For example, in Zimbabwe in the early 21st century paper money lost about half its value every day. Eventually a 1 trillion Zimbabwean dollar bill was enough to pay for bus fare. One way.
More recently we have seen hyper-inflation in Argentina, with the peso losing more than half its value in a year, and in Turkey where inflation was recently above 80%.
Hyper-inflation has many causes, and economists argue about exactly what they are, but there are a few pre-conditions that are always present in countries that experience a rapid devaluation of their currency. These are;
- A rapid increase in the printing of cash money by central banks
- A simultaneous increase in government spending and accumulated debt
- Deception by the central bank in collusion with the government to avoid disclosure of the true state of financial and monetary affairs
- Significant corruption at high levels in government.
- A widespread loss of faith in the value of the currency, and particularly its future value, both by citizens of the issuing country, and by its trading partners.
People who worry about this kind of thing are alarmed by what they are seeing in the United States. Specifically, President Trump has been trying hard to fire Jerome Powell, who leads the Federal Reserve Bank, the most important central bank in the world. He wants to put in place a chairperson loyal only to him. On Friday, one of the bank’s 12 Governors resigned due to this pressure and will without doubt be replaced by a Trump loyalist. Should Trump gain unfettered control of the central bank there is no doubt he will lower interest rates, which economists believe will lead to a rise in inflation. Whether he will order the printing presses to run 24/7 is unknown, and because of another Trump action, may be unknowable.
On August 1st President Trump fired the head of the Bureau of Labor Statistics, the agency that keeps track of the American economy. It does not just measure employment, but also inflation and many other important economic indicators. The new Chair of this crucial body will, again without doubt, be a Trumpian. Nobody knows if the data issued by the Bureau will be reliable, since, after all, the outgoing Chair was fired for publishing numbers that Trump has described as “rigged”.
The Big Beautiful Bill that Congress recently passed at Trump’s behest will, in the estimation of almost all economists, raise both the US debt and deficit by billions of dollars. The debt must be financed somehow.
Should the Federal Reserve Bank and the Bureau of Labour Statistics both lose their independence, two of the vital pieces will be in place for uncontrolled and unmeasurable government issuance of currency. The world has taken note. This year, even before the most recent events, the U.S. dollar has fallen against all major currencies and against currency proxies such as gold and bitcoin. Following the announcements noted above on Friday, the dollar fell even further.
To be clear, I am not predicting Argentinian style hyper-inflation in the United States. However, it is evident that the conditions may soon be in place for an unprecedented debasement of the most important currency in the world. One can only hope that Congress will use whatever powers and determination it has left to ensure that this does not happen.
As always, we will remain vigilant and ready to act as circumstances change. So far, the change in value of the Canadian dollar against the U.S. dollar has not been very large, and this may well remain the case, depending on the outcome of the current trade talks and other factors.
David Baskin
Chairman
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