Business Cycles And Government Decisions (Part II)

Economic conditions tend to run in cycles. Pressures build, official efforts are made to contain any perceived bad effects, and at some point, the pressures overwhelm all opposition. The cave-in frequently, but not always, sets pressures in motion in the opposite direction.

Some of these cycles can be very long, while others are short. At the birth of the US, our leaders were cash strapped but had soldiers to pay to fight the Brittish. They resorted to issuing a paper currency – the Continental – not backed by anything but the promise to pay.

Alas, promises sometimes are broken, and the paper money lost value – eventually all its value. The phrase “Not worth a Continental” came into use, meaning worth less than zero.

Gold and Silver were used as money in the US, and throughout most of the world, through the 1800s, except for a minor excursion into a 2^nd paper US currency during the US Civil War – the Greenback – which also became worthless.

Today, we have a 3^rd paper currency, the Federal Reserve Note – also called the Dollar – which has lost around 98% of its purchasing power since it was introduced 100+ years ago.

On a somewhat shorter timescale, our Dollar goes up and down in international foreign exchange markets against the paper currencies of other countries. Since the Euro was created in 1999, the Dollar has risen, fallen, and now is rising once again.

Some countries leaders have done a better job than others, and their currencies and citizens’ standards of living have had positive trends relative to the US, as for example the Germans and the Swiss.

The Swiss Franc, for example was around $0.26 in the 1960s, while today it is almost $1.10. The Swiss have suffered through price increases (lower than the US has), even as the stronger Franc has kept cheapening import prices. Although their wages increase more slowly than in the US, Swiss real earning power goes up, while it has fallen for a decade in the US.

Here in the US, over the last 6-8 months, the FOREX exchange rate for the Dollar has gone up dramatically compared to other world currencies. The price of oil has fallen by more than half, and other commodities – both homegrown and imported – also are down considerably in price.

US businesses are being challenged to adjust to both lower costs and greater foreign competition. Some will gain and some will lose – some new jobs will be created and some will be lost.

We can’t know how long the strong Dollar and weak commodity prices will last, but for now the lower prices are a big boost for all Americans, even though the business environment is unsettled.

That’s why I find two recent initiatives by the geniuses in Washington to be perplexing. While low crude oil – and gasoline – prices are a boon to Americans’ standard of living and a stimulus to American businesses, there is a move in Washington to raise the gasoline tax, perhaps by as much as $1.00 a gallon. These people are lunatics! If you’re Representative or Senator supports this move – remember and vote for anybody else in next year’s elections.

A second initiative is to raise the Minimum Wage. This is a bad idea at any time, but today, as a stronger Dollar and stronger foreign competition likely will bankrupt many employers, a higher Minimum Wage will cause an even larger number of job losses. Americans can enjoy the higher standard of living from lower oil and commodity prices only if they still have jobs. (Please re-read what I said above about lunatics.)

Times change. The business cycle moves on. A strong Dollar and lower commodity prices will give way to a weaker Dollar and higher commodity prices. There will be different challenges for Americans – and American businesses – to face in a few years. Facing those challenges to come will be easier if we don’t allow Washington to hobble us with their stupid choices today.