Guideposts: Trump Part Deux: A Triumph for Free Trade? | | by George Gilder and Richard Vigilante
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Learn the names of all 10 stocks here. FREE. | | | As we approach my annual COSM Technology Summit Oct. 31-Nov. 1, we wonder whether Donald Trump can be truly cosmic. (There is still time to join us—at a 30% discount—by clicking on the link at the postscript of this Gilder's Guideposts! Hurry, the offer ends on Oct. 23).
This year's conference offers a COSMic exploration of pro-technology, pro-abundance, and pro-Israel policies. We gather at the Hyatt Regency in Bellevue, Washington, to contemplate the future with world-leading experts such as Bob Metcalfe of Metcalfe's Law, Carver Mead of Moore's Law, and Jonathan Medved, Israel's leading venture capitalist at Our Crowd, leading a luminous panel on Israel's world-leading technologies.
So far, Trump avoids the emergency socialist pit of Democratic economic policy. But still, he is short of cosmic.
After all, on Wednesday, defying an economic consensus of centuries, he told the august Economic Club of Chicago, "To me, the most beautiful word in the dictionary is tariff. It's my favorite word, the most beautiful word."
Give him some slack, perhaps, as building up clout for beautiful trade deals, but no other politician in the world would dare make such a gaffe in front of a roomful of preening economists. Weigh his threats over the years about an array of "border taxes," his dubbing China a "currency manipulator," his denunciation of the North American Free Trade Agreement (NAFTA) and the omnibus Pacific Trade Treaty (PTT), as well as his condemnation of China's acceptance in the World Trade Organization (WTO). You have to concede that fear of a trade war is a plausible anxiety. It is held even more fervently by Republicans, libertarians, and conservatives than by the economically obtuse Democrats, liberals, and socialists.
As free-trading supply siders, we long shared these fears. Unmentioned, however, in the anti-Trump torrent is that the trade wars are an artifact of a broken global-financial system. The current regime prioritizes trade in volatile currencies—called "floating" but pitching like a dinghy in a hurricane—over trade in goods and services. World trade has stopped expanding for a reason, and Trump has put his finger on it: the crazy quilt of trade pacts disguising wild-and-wooly monetary manipulation.
When individuals and companies in different countries trade with each other, the buyer of a good or service must first acquire the currency of the seller, which the buyer can purchase in international currency markets. This business is dominated by large banks and governments and is called foreign exchange trading, otherwise known as the "forex" market. Only a very small portion of currency trading is devoted to enabling trade in goods and services. More than 95% of it consists of speculative bets on the changing values of currencies. | | Have You Seen This $11 Trillion 'Tech Strip?' While many folks today are wondering what to do with their money… a revolutionary "sheet" of new technology has quietly sparked an $11 trillion tech revolution.
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World trade in goods and services has been reduced to a relatively tiny and shrinking pretext for a gigantic manipulative carnival of currency trading. Total world trade in goods and services is less than 2% of trade in currencies. According to the most recent figures from the Bank of International Settlements in Basel, Switzerland, foreign exchange trading is now some $7.5 trillion dollars a day—more than 25 times global GDP. Yet all this oceanic shuffling of monies produces currency values far more volatile and capricious than the transactions it is supposed to measure.
Dominated by 10 international banks that do 77% of the exchanges, currency trading is a speculative orgy that fails to correspond at all with relative productivities of workers, or comparative advantages between countries, or purchasing power parities between different markets. A few years ago, the Japanese yen-U.S. dollar exchange rate, for example, went from 80 yen to the dollar to some 300 yen and back without any remotely comparable change in the two economies. The euro rose and fell more than 20% eight times over an eight-year period. Such currency shifts overwhelm the effects of changes in business or labor performance. A worker who lost a job via currency speculation might as well have been hit by lightning. No rhyme or reason explained it. What we call a crisis of trade is really a scandal of money.
Consider NAFTA, repeatedly denounced as a "horrible deal" by candidate Trump. He was right. The problem was not its specific terms, however, but the preposterous movements of monetary values that rendered the entire agreement a capricious charade. In the years after NAFTA went into effect in January 1994, the Mexican peso lost 87% of its value, dropping in dollar terms from nearly 35 cents to under a nickel. An abrupt decline came in December 1994 when the Mexican Central Bank devalued the peso by some 15%, and then in January 1995, when the peso was allowed to float. But amid the general downward trend, major shifts continued to occur over subsequent years, up and down. Meanwhile, under NAFTA, Mexican exports rose apace with the drop of the peso. While the peso dropped 5.8-fold, Mexican exports rose 6.6-fold.
No entrepreneurial creativity or worker efficiency or technological virtuosity could dent the overwhelming impact of the drastic relentless change in the unit of account. It emitted—as Ross Perot once put it—a "giant sucking sound" symbolizing a major reorganization of North American manufacturing—mostly an effect of monetary speculation.
One Executive Order Away
As long as central banks can change currency values virtually at will, free trade cannot be either fair or efficient. As Friedrich Hayek put it, "the root and source of all monetary evil is the government's monopoly on money." With the stroke of a pen, Trump could break that monopoly and allow real currency competition: not a choice between manipulated floating currencies, but a choice between fiat money and the real thing.
The chief alternative to floating currencies historically has been currencies fixed to gold.
A key early measure of a new Trump Administration should be an executive order, not mandating a gold standard but requiring equal treatment of gold, silver, and dollars as money as the Constitution provides. This does not mean replacing the dollar or ending the Federal Reserve's venerable role as a lender of last resort. It means that government agencies would give equal treatment to statements of account or payments--whether expressed in dollars, or ounces of gold or silver. Tax authorities could no longer punitively treat transactions in gold or digital currencies as capital gains events. The executive order could open a new constitutional path for innovation in finance.
Free choice between precious metals and manipulated paper would be a barrier against future monetary manipulation. Also advanced would be innovations in digital money and blockchains that link to gold. The internet is a global network that operates across borders as a matter of course; its software stack needs a transactions layer based on a global currency. Taxing the use of internet currencies artificially disables them. The Trump administration should remove the obstacles to the establishment of money beyond the control of central banks.
This short-term restoration of the rules of constitutional money should be combined with a strategic plan for monetary reform throughout the world economy. Trump's stance against arbitrary currency manipulation and Byzantine trade deals could provide an opportunity for a new strategic initiative to put the world economy back on track. | | Will 'Electionomics' Affect Your Trades? It's election season and some stocks are about to absolutely shock Wall Street.
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Rather than conducting a trade war with China, Russia, Japan, and Europe, the United States could lead them all into negotiating a new monetary regime. Modeled on the Bretton Woods Agreement in 1944 for a post-war dollar standard disciplined by a tie to gold, such a new initiative could rescue the global environment from a trend toward economic conflict to a path toward monetary cooperation and reconciliation.
Bretton Woods remained in effect from 1946 to 1971 and provided for the best 25-year period of global economic growth in history, 2.5 percent a year. The chief of the Chinese Central Bank has already called for global money linked to gold. Russia, as a source of gold, is also amenable to movement toward a new gold standard.
This agreement would forestall one of the most serious perils faced by the U.S. economy, as Trump rightly lowers tax rates and removes regulations that deter companies from repatriating as much as $2 trillion of foreign profits. Any such massive movement of money in from overseas, however, would necessarily raise the value of the dollar. That deflation would increase the trade deficit and exacerbate the woes of U.S. manufacturers.
A link to gold could solve the problem. A fixed currency equally prevents inflation and deflation. A global agreement to tie currencies to gold in the spirit of Bretton Woods is the way to do that.
As George demonstrates in his book "The Israel Test" (Encounter, 2024), Israel is America's most crucial technological ally and trading partner. China's foreign minister's call last week for "paying attention to Israel's reasonable security concerns" suggests an opportunity for outreach beyond the recent belligerent bombast from U.S. politicians of all hues. As a man of business, Trump grasps that war with China– even a trade war– will not be propitious either for his administration or for the middle-class constituencies he is targeting with anti-China rhetoric.
Recognition that free trade and floating currencies are incompatible will not come easily to an economic profession that sees foreign exchange as an expression of virtually perfect competition. The Trump administration should test this economic dogma by making this $7.5 trillion dollar a day industry face competition from the stable currencies that throughout history have fostered eras of most impressive economic progress and prosperity.
P.S. COSM Technology Summit, Oct. 31-Nov. 1, Bellevue Hyatt, Seattle, Washington: This conference is sponsored by the Discovery Institute and me. I'll be one of the speakers and will address the latest technology trends, including the rapid rollout of artificial intelligence and the huge opportunities that will be provided by graphene. To register, go to https://cosm.tech/. Use Promotion Code EAGLE-GG to save $200.
P.P.S. Orlando MoneyShow, Oct. 17-19, Championship Gate Resort: Join George along with Mark Skousen, David Phillips, Todd Phillips, Rick Durfee, Keith Fitz-Gerald, Steve Moore, Charles Payne, Louie Navallier, Kelly Wright, Peter Schiff, Ahren Stephens, Adrian Day, Brien Lundin and Ed Yardini. To learn more and register, go to https://www.orlandomoneyshow.com/registration/. Sign up soon before the $149 registration price rises. Use promo code 063626 for a discount. Rest assured; the Florida-based event is taking place as scheduled. Join us!
Sincerely,
George Gilder, Richard Vigilante, Steve Waite, and John Schroeter
Editors, Gilder's Guideposts, Technology Report, Technology Report Pro, Moonshots, and Private Reserve | | About George Gilder:
 George Gilder is the most knowledgeable man in America when it comes to the future of technology and its impact on our lives. He’s an established investor, bestselling author, and economist with an uncanny ability to foresee how new breakthroughs will play out, years in advance. George and his team are the editors of Gilder Technology Report, Gilder Technology Report Pro, Moonshots and Private Reserve. | | | | | |
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