Thursday, October 07, 2004

The Economic Failure of Globalization,

I wish to proffer a simple thesis which I hope to defend: that the Iraq war was the first (and last) war waged to sustain a failing Globalization, that its failure dooms Globalization, and that the fact that it "had to be waged" in the first place to sustain Globalization is strong evidence of the failure of Globalization as a sustainable economic and trading system.

I would like to thank Abby for giving me this idea with her thread and crystalizing a lot of disparate data I have been looking at.

As Stirling points out in his new article, ultimately wars are often about control or access to resources. Ultimately, this is what all wars come down to. War is highly expensive, and the only justification is either to defend oneself from attack or to use it to secure access to resources that are necessary to national economy.

What we invaded Panama for was to protect our access to the Panama canal, and to ensure the Atlantic-Pacific shipping way. I argued at the time that the risk of losing access did not justify the war, but I was on the losing side of that argument.

A primordial conservative truth is that war is ugly and expensive and tragic and generally we use it to secure access for ourselves. Economies only truly grow as they either secure more resources or more efficiently use the ones they have.

This war was the first war of globalization. It was a test case about whether it was possible to unilaterally secure resources by brute force in order to continue the present trade system. It was been a dismal failure and so globalization is failing. Why failing I say?

When the United States contracts its aggregate demand because it cannot grow it by borrowing any more, there will be a demand shock throughout the world. The trade system and international financial markets will be reconfigured and realigned along a radically new basis.

Asian countries will no longer be able to grow by exporting to us. Europe will no longer be able to afford subsidies that allow their socialized economies to tread water. Third world countries will find it harder to sell their commodities because of a lack of hard currency. (To understand why, remember that a third world country often trades its commodities as exports for hard currency which is then used to buy thigns the country cannot produce. If the US demand for commodities collapses, then either the Third world countries will have to sell less for the same money or more for less money - until someone new comes along to increase demand who also has hard currency. Uruguyans selling to Russians helps neither of them much, simply because neither of their currencies is very hard. Not all currencies are equal and commodity trade flows are heavily dependent upon bringing in hard currency as a motivator because of their superior purchasing power.) The entire world financial system will be disaligned, a lot of money will flee the US equity market and when it does it will bloat other markets.

Some of this will be beneficial. Some of it will be disasterous.

But globalization as we know it will be over, as the monetary basis that underpins the artificial trade flows that create globalization come crashing down. Fragmentation, spin-off, inflation, hyperinflation, trade barriers, etc. are all words that will become household terms.

The sad truth is that while Saddam had no WMD it is highly unlikely that a Gore Administration would have allowed him to remain in power in Iraq. Economic pressures would have eventually led Gore to commit to the same course of action, albeit probably with a global coalition and perhaps a more competent technocratic approach.

If you read Barry's analysis you will realize that the frame work he is talking about is party netural, and dependent only upon the globalized trade system as the common denominator. His main focus is on the predictability of the absent WMD programmes but read the following:

Thinking like a Strategic Analyst / Defense Planner
Which leads to our exercise in strategic “reverse engineering:” What conceivable threat scenarios could persuade an immediate U.S. military response? Our analysis generates three regional situations, any of which would be unacceptable to the United States for economic, political or military reasons:

• The political collapse of a major Oil producing nation (i.e., Saudi Arabia), with a subsequent fundamentalist extremist group taking control of the country and its oil reserves;

• The political collapse of a nuclear power (i.e., Pakistan), with a subsequent fundamentalist extremist group taking control of the country of its nuclear weaponry; A secondary threat would be provocation by terrorist groups of nuclear war between India and Pakistan;

• A bio/chemical terrorist attack on Israeli population center, producing casualties orders of magnitude (10,000-100,000 civilian deaths) than the present suicide attacks. In the event of such a catastrophic event, an Israeli nuclear response is a considered possibility.

Any one of the above described scenarios would have global consequences. Further, it would be imprudent to describe these events as “unlikely.” If foment in the region continues unimpeded, the evolution of these scenarios must be considered possible, even probable. Indeed, strategic planners may believe that a high probability exists (i.e., approaching 100%) that one of these three scenarios will occur over the next 10 years.

Why Iraq?
There are numerous geographical, political and strategic reasons for choosing Iraq as the nexus for US activity in the Middle East.

Geography: Iraq is centrally located in the Middle East (see map, below). The Persian Gulf, Red Sea, Arabian Sea and the Mediterranean Sea are within easy flight distance for attack sorties. Turkey to the North, Saudi Arabia to the Southwest, and Kuwait to the South all offer advantageous initial staging areas. Moving “men and materiel” into the combat theatre is logistically viable.

Political: There is no other country in the Mid-East which the United States could conceivably invade without causing a full blown diplomatic crisis. The vociferous opposition from some quarters to even invading Iraq and deposing Saddam is considerable. Consider what sort of response the US would engender if we invaded Saudi Arabia or Iran. Even amongst the rest of the Middle East, Saddam is feared and despised, though you won’t hear it discussed publicly. Politically, only Iraq makes any sense as an invasion target.

Strategic: Iraq’s entire Eastern border is contiguous with Iran; Pakistan and Afghanistan lay to the East of the Iranians, a mere 1000 miles away from Iraq. To the West, Israel is less than 300 miles away (on the other side of Syria and Jordan). Saudi Arabia, and Kuwait share borders with Iraq. As a staging area, Iraq is ideally located to support U.S. interventions in other countries, covert or otherwise.

Deposing Saddam and destroying Iraq’s WMD turn out to be a fortuitous justification; It would allow the deployment of a significant military presence in the region. Once established, Iraq then becomes a tactical staging area for missions to interdict and prevent the above (or other) scenarios from progressing.

The problem with Iraq is that Saddam was successfully evading the sanctions. Stirling has argued that the elites did not trust Saddam not to reconstitute a WMD program if sanctions were lifted, but this is still not a sufficient explanation. Qadaffi was if anything further along in some respects and had a history of interfering in other countries and his country has natural resources and he also supported terrorism - yet he was rehabilitated when convenient and Saddam was not. The key factor was that if allowed to economically reconstitute his war machine he could again dominate the Gulf region even with conventional arms. Removing him on the other hand provided the opportunity to become a dominating power in the region and to reshape it to an activist American political agenda.

Already the globalized world economic trade system is beginning to sputter. As the price of oil spirals it will begin to come apart at the seams. Third world countries are trading cheap labor for oil to industrialize their economies. The US is trading its future and intellectual assets for oil to maintain its current economic structure. The higher price of oil is not dangerous because it will "cause a recession".

It is dangerous because it makes the globalized trade arrangements increasingly untenable as positive return transactions. India and China need to export to the USA to get dollars to transform their economies. When the price of oil doubles, they get half the industrialization and economic growth for their effort. Similarly when the price of oil doubles, the US must sell off twice as much of its future to afford living at its present lifestyle.

Everything else- the agricultural subsidies, the intellectual property rights rent system, the third world industrialization program - it all comes to a screeching halt as oil marches steadily upward.

And ironically the more the price of oil increases, the more unstable the system becomes. The higher the price of oil, the more volatile the market and thinner the buffer has become. The more volatile the market and thin the buffer between supply and demand and the more political leverage anyone who can interrupt even a small portion of the supply has.

This is why Nigerian oil workers are striking. They know that now is the moment to squeeze their negotiations for maximally profitable terms. This is why the US oil markets quiver every time Chavez starts yelling. And it is also why he yells. This is why Russia wants us to fail in Iraq. Not because they hate us, but because they profit immensely from their own oil sales when it happens - and also why they're jerking the chain of Yukos.

The neoliberal globalized era represented low inflation brought about by increasing consumer gods produced by cheap labor in exchange for globalization, while the market and trading system through currency levers helped keep the price of oil low. The neoconservative concept was to perpetuate this system by monopolozing and dominating oil supply in the middle-east after the market and trade mechanisms failed to contain the growth of industrialization to the extent that it wouldn't overheat the oil demand side.

As Brad Delong explains trenchantly:
But as everyone who has ever taken the first three weeks of introductory economics--in any form, left or right, up or down, above or below, libertarian or Marxist, Friedmanite or Keynesian, Austrian or Swedish--knows, there is a unique virtue to inflation adjustment. When we measure people's incomes, we are interested not in how many little pieces of paper with pictures of George Washington on them people get each month, but in what things people can buy with their incomes. Suppose the government prints a whole extra bunch of dollar bills, doubles the quantity of money, and in response all wages and prices double. Do we want a measure of nominal income--not adjusted for inflation--that tells us that everyone's income is twice as big and that the economy is twice as prosperous as it was? Or do we want a measure of real income--adjusted for inflation--that tells us that even though everybody's monthly pay packet contains twice as many little pieces of paper with George Washington's picture on them, everybody can buy only the same set of commodities they could buy before the inflation and so their real incomes are unchanged?

The clear answer--given by all economists, left or right, up or down, above or below, libertarian or Marxist, Friedmanite or Keynesian, Austrian or Swedish--is that we are interested in the second, inflation-adjusted, real income number. We use money as a measuring rod, yes. But we do not want to confuse changes in the size of the measuring rod with changes in the real economic quantities that we are measuring.


If the neoconservatives hadn't have done it, eventually the neoliberals would have come to the same conclusion.

If we look at the underlying data, we can see that the BLS is lying through its teeth about job numbers. The BLS is set to release a jobs report that will report that 150k+ jobs were created last month.

The data I'm looking at - refinery shutdowns in the Gulf, millions at least temporarily out of work in Florida, stalled industrial output in August, only modest retailer gains, sharply up reported corporate layoffs - doesn't agree with this picture. That lefty rag known as Investors Business Dauily has this to say about the trend of retail sales.
Retail index ends lower after soft September reports
By Jennifer Waters
Last Updated: 10/7/2004 5:04:35 PM


CHICAGO (CBS.MW) -- The retail index fell flat Thursday as investors absorbed the mix of September sales results from the nation's largest chain stores.

The S&P Retail Index ($RLX) lost an earlier ride higher to finish at 414.48 as decliners took over from advancers..

September sales at stores open longer than a year -- an important industry measure -- climbed 2.4 percent, according to a final tally of the nation's largest chain stores compiled by the International Council of Shopping Centers. That's well below last year's 5.6 percent increase and is the fourth straight month of a slowdown in the growth rate of consumer spending.

It is true that construction is high, but that's only because of the incredible stimulus still chugging its way through the system that Greenspan provided.

Furthermore we're hitting the limits of artificial productivity gains from working less people harder, and it's starting to show in the statistics.

Workers feel overworked, overwhelmed
Nearly two out of three say workload has increased this year

By Martin Wolk
Chief economics correspondent
MSNBC
Updated: 4:35 p.m. ET Sept. 1, 2004


... and ...

Workers’ productivity increased at an annual rate of 2.5 percent in the spring, the smallest gain since late 2002, reflecting the economy’s slowdown.

Even though some of these items are one time items, it's clear that the BLS jobs numbers have been corrupt. There's no way that they can be true. The factories aren't hiring, the corporations aren't hiring, the retailers aren't hiring - who the heck is hiring? The construction industry is saturated and may even be shedding jobs in anticipation of a downturn from what I've heard on the ground ... The BLS unfortunately has just become another arm of the BC04 relection campaign. It's ugly because it means we have little idea what is actually going on out there.

This is why I've been working on the GDP hedonics and readjustment issue. I believe that now is the time to roll it out, because as a fudged statistic it has a somewhat abstract issue. However what was at stake was not merely a fuzzy measure of economic growth. The fudging was masking the fundamental economic failure - a failure measured in simple and brutal dollar signs - of the present trading and regulatory system we call Globalization.

I am not willing to speculate that if the Iraq war had been successful that it would be have successfully sustained globalization, but I am willing to say that now that it has all but failed that Globalization will surely share the same fate. Clearly he BC'04 campaign and the entire modern Republican movement is in denial about the true state of affairs both economic and military, and they are willing to manufacture evidence in order to mask their failure. However the neoliberal Globalization experiment that rested upon a four corner trade of:

  • paper representing intellectural property assets being sold for:
  • oil for transferring industrial eocnomic growth from America to Asia
  • in exchange for selling cheap consumer goods to America made possible by
  • countries exporting to America buying its paper debt and reinvesting that paper back into American equities to capture intellectual property asset values...

    (with attendent protectionist commodity producer sudsidies in order to buy off politically important constituencies)

    This all is about to end. This is not something that Clinton could have prevented, and his Administration had the virtue of better masking their failure toward the end and making less obvious blunders. The final nail in the coffin is the examination of the American GDP numbers, which when teased apart make it clear that the trade was a losing exchange and that aggregate demand could not be sustained much less grown in this system.

    What the Bush43 Administration has accomplished is by bungling the Iraqi hostile takeover a shock to both the supply side of oil and the supply side for American paper. As these ripple through the system various actors magnify this resonance because their specific self interest is to profit from more volatility and price increases in the major modern energy commodity effected. This in return creates more incentive for other actors to gain political levereage by destabilizing the commodity supply, magnifying the supply shock. Meanwhile the poor conduct of the war and the economy is sending a supply side glut of American paper at precisely the time when supplies ought to be tightened to maintain long term demand.

    As these play off each other and increase in their ripples in a sort of vicious circle of perversity, the system which underpins the maitainence of aggregate global demand called Globalization begins to become unwound. As it unwinds aggregate demand must fall at least until new trade alignments are reconfigured by the global financial markets. This will result in a fragmented, increasingly complex bilateral trade aggrements, and inconsistent trade barrier filters as governments attempt to dampen the supply and demand shocks rippling through the commodity and financial systems through regulation in order to maintain political stability. It will be the death kneel for Globalization when increasingly it becomes untenable for individual countries to opt out and continue to refuse to cut deals advantageous for themselves on the side.

    And that's what it's all about.

  • 79 Comments:

    At October 8, 2004 at 12:41 AM, Blogger J Thomas said...

    Usually I find your posts make clear sense. This time there's a spot that I'm not getting, that maybe could use some firming up.

    You point out that all the nations need hard currency. And you say that as the US dollar softens and melts, there won't be enough hard currency to meet the need.

    What I'm wondering is how does a currency become hard? Is there a way for another currency to become hard enough to meet global demand? If so, how long would it take?

    I've been fascinated by the various claims I've heard for years now, that the various nations depend on american demand to keep their economies going. Americans create debt, we give dollars to other nations for our imports, there is no particular reason to think we can ever pay off the debts. But because we're willing to sign off on worthless debt people in other countries have jobs. They work hard to make stuff for us and somebody pays them in local soft currency and winds up with our debt-dollars which.... Why couldn't somebody else issue money that perhaps has no intrinsic worth but that people work for? Why is it only the USA that can create debt we will never repay and get foreigners to give us real luxury goods in exchange for holding our debt?

    I'm not saying you're in any way wrong. I'm saying there's something here that isn't clear to me, and part of your argument depends on this thing that people keep saying that doesn't make any sense the way they say it.

     
    At October 8, 2004 at 9:41 AM, Anonymous Anonymous said...

    The thing that makes the dollar a hard currency is that you can buy oil in dollars. OPEC (read the Saudis) will only sell their oil in US Dollars. Since oil is the single most important commodity to industrialization, the ability to purchase oil is essential to the type of industrialization that China and India (among others) are attempting. If you can only buy oil in dollars, you need a constant supply of dollars. This means positive trade balances and currency pegged to the dollar at an artificially low rate.

    So long as countries that want to buy oil on the global markets must do so in dollars the current international economic system continues. I agree with the Oldman that this round of globalization is on its last leg. Even if the Bush plan of controlling all of the ME oil reserves were to have worked out flawlessly, global oil production is scheduled to peak in the next 5-10 years (optimistically, some argue that global oil production has already peaked and we just haven't noticed). Since this era of globalization (just like the previous coal powered era of globalization in the 19th century) is built around cheap energy (shipping good thousands of miles prior to consumption, the energy intensive green revolution in agriculture, and the growth of megacities and sprawl) the end of cheap energy is the end of this round of globalization.

     
    At October 8, 2004 at 11:00 AM, Blogger Oldman said...

    Thanks anon for your succint clarificatin of the role of the dollar-oil standard in determining hard currency. The reason why the oil producing countries issue their oil in dollars to wrap up the discussion, is that the US has since the end of WWII guarenteed their security and stability by our military force. This is the real reason why we acted against Saddam in the Gulf War I. The entire world economic system depended upon the US-dollar buying oil and guarenteed the stability of that production through military force. It's also the reason why we were involved with Iran and the Shah.

    As for the previous anon's question, the attempt by the EU to issue the Euro is an attempt to create a hard currency.

    There are three factors in creating a hard currency:
    1) Liquidity
    2) Purchasing Power
    3) Can be used to purchase crucial commodities

    These conditions are made possible by our military force. The EU may find a different way - trade agreements. This is of course the real reason why oil's price is going so high. It's not just the disruption of Iraqi supply. The world is begnning to doubt our ability to guarentee the stability of oil production using military force, and so it's charging a premium for the increasing uncertainty and risk involved in trading oil in a currency that may no longer be backed sufficiently by force of arms.

     
    At October 8, 2004 at 3:24 PM, Anonymous Anonymous said...

    I've asked this question in a dailykos dairy before, which unfortunately has disappeared, but this jist of it goes like this:

    Given rising, or at least volitile, energy rates, where is the threshold where energy costs outweigh labor savings in globalized markets? For finished goods to make it from factories to market, raw materials must be transported to the factories, these materials transformed to goods, and then the goods shipped. All of this requires energy. However, shipping materials and goods shipping halfway around the world - back and forth - to gain entry to market is only sustainable as long as the labor differential between local-to-market workers and third world labor is cheaper than the energy costs associated with transport.

    So, what is that threshold whereby energy rates rise beyond the labor savings of globalization? Can this be calculated?

    --Maynard

     
    At October 8, 2004 at 11:45 PM, Anonymous Anonymous said...

    I'll take a stab at the last poster's question.

    The tipping point where exporting goods becomes unfeasible will probably very by industry and even product to some extent.

    Then you have to factor in what will happen to the disposable income of the American consumer say when oil hits $70 bbl. Figure that all services that depend on oil will rise in accordance to the price they pay for fuel. This is passed on to the consumer. The consumer now is faced with a ever shrinking pie of money on which to spend on non-essential items. Like consumer electronics, toys, gifts for family, etc.

    Eventually the consumer will be so hard pressed just to keep the lights and gas working along with other basics like food. That the market for many imported goods will just dry up, especially anything dealing with entertainment. BTW food is gonna skyrocket since a lot of it is now trucked in 1500-3000 miles cross country or even from south America. Wait until you hear the screaming this is going to cause.

    Companies to watch: Frys, Best Buy, HomeDepot, Wal-Mart. All big importers, especially WallyMart. Keep an eye on their inventories, when they slow or stop moving merchandise, the first wave will be here.

    Then come the layoffs.

    FWIW
    Rodger

     
    At October 9, 2004 at 1:57 AM, Blogger J Thomas said...

    Thank you severally for the explanation what a hard currency is.

    Suppose that the american economy continues its collapse until american dollars are not a credible hard currency. What is to keep the saudis etc from accepting some other currency in its place? When they do, that currency will not be connected to a nation that can ensure by military force that the oil keeps flowing. If the USA can't do that, nobody can. But it would still be the currency needed to buy oil, and it would be the hard currency as long as the oil kept flowing without a military force that kept it flowing.

    The story still doesn't quite make sense to me, though I can imagine ways it could make sense. Why would the world have to keep selling their resources etc to the USA for dollars they could pay to oil producers? Why not sell to oil producers to get the dollars to buy oil?

    And I can imagine that once upon a time the oil producers were selling far more oil than they needed for their imports. And rather than find ways ti increse their imports to match their sales, they took the dollars and handed them back to the USA by buying bonds, and maybe stocks, and occasionally privately-held companies or land etc. But the latter had legal restrictions.

    So foreigners had to come to the USA to get dollars they could trade to oil producers, who competed to sell more oil than they needed to sell so they could "invest" the extra dollars in the USA.

    The saudis particularly might have done that because after king Saud was killed by his nephew who had been studying in the USA, they believed the CIA could use mind-control or whatever other magic to kill them any time and it was more important to live than to husband their oil reserves. (Also they could come up with justifications like the harm to the third world if oil prices went up.)

    This makes it sound like the whole debt thing is a sham. We have forced oil producers to sell lots of oil at low prices. The whole oil-consuming world benefits from that, so no one would think to challenge us on it even if we didn't have the PGMs on our side. Officially they have been taking our debt, but unofficially they have been paying us for a service.

    If we demonstrate we can no longer force the price of oil low, oil producers can sell oil at high prices (in euros, say) and buy whatever they can find to diversify their own economies. The more they can make for themselves, the less they need to sell oil to pay for. No hard currency to pay for oil translates into lower oil sails (at higher prices) because no one can force them to sell low. World economies languish because they can't get oil. Searches for alternative energy turn intensive. Oil producers don't care, why not sell high-value petrochemical stocks for centuries instead of cheap heating oil for years?

    When the United States contracts its aggregate demand because it cannot grow it by borrowing any more, there will be a demand shock throughout the world. The trade system and international financial markets will be reconfigured and realigned along a radically new basis.

    Asian countries will no longer be able to grow by exporting to us. Europe will no longer be able to afford subsidies that allow their socialized economies to tread water. Third world countries will find it harder to sell their commodities because of a lack of hard currency.
    This doesn't quite make sense in my context. If the saudis are selling so much they keep the price down to keep us from killing them, and buying our "debt" with any surplus money, why would they stop? If the rest of the world is subsidising us so we'll keep the price of oil down, why should they stop either? Unless we become unable to make the saudis pump that much oil.

    We could lose that ability if there just isn't enough oil to pump. Or if the saudis get overthrown and replaced by a fanatical islamic government that we couldn't coerce. As soon as we stop delivering on cheap oil, then china will stop delivering on cheap US consumer goods. There's no direct relationship between low oil prices and US debt, but maybe the indirect relationship is the importnat one.

    Am I on the right track or have I missed it completely?

     
    At October 9, 2004 at 6:50 PM, Blogger Oldman said...

    US military weapons, training, paramilitary mercenaries and the general guarentee of the US government to support the monarchy against its own people is what is significant. The elites in Saudi Arabia consent because we help them profit from oppressing their own people. They in turn for being supporting us oppress their own people and incorrectly price their own market products - because what they care about is not maximizing a national resource but getting their own cut.

    You are viewing "Arabians" as "Saudis" which is a common conceptual error, one purposely promoted by the ruling family of Saudi Arabia. As a matter of fact, the USA does not want democracies in charge of oil bearing resources. A democracy would be pressured to act in order to maximize returns from the national resource and be less tolerant of the profiteering that allows individuals to be bribed.

     
    At October 10, 2004 at 3:31 PM, Anonymous Anonymous said...

    Hey, oldman! I didn't know until a few minutes ago that you had a blog of your own. Cool!

    - Robert E

     
    At October 10, 2004 at 4:29 PM, Blogger J Thomas said...

    Thank you, yes, I see that. So we protect the saudi monarchy from overthrow or conquest, and in return they keep oil prices low for everybody. One time they broke that agreement along with the Shah of iran, and let oil prices rice. Within a year the Shah was deposed and dead and the saudi king was dead also.

    Low oil prices benefit every economy that imports more oil than it exports, don't they? No, I'm letting the money confuse me. A local economy benefits when it imports oil and uses a fraction of the oil to produce exports, and then has the rest available for its internal needs -- and its best alternative without that oil doesn't meet those internal needs as well. The issue is how much oil gets sold and who gets it, and price is only one of the mechanisms to establish that.

    But the saudis aren't the ones who're propping up the dollar. They used to buy a lot of US bonds and such, but they don't have all that much money -- far less than if they sold less oil at a higher price.

    Sorry to interrupt the train of thought, but I just noticed something more important. The central thing here is that the US dollar has been the international *money*. The medium of exchange. When money was first invented in the west it resulted in giant profits. If you wanted to pay for things in gold nuggets it took expertise both to see how heavy they were and what quality. Vastly inconvenient. Lydian coins were a guaranteed value, and as a result they were worth *more* than the actual value. Hence the Midas touch. Soon the lydian government was rich as Croesus. Not least because they mostly didn't have to back up their guarantee. Their coins went everywhere. Pay for something with a coin that doesn't have its face amount of goid. The coin leaves the kingdom and never comes back, you don't have to accept taxes in it etc. Your profit is assured. And that's what we had with the reference currency. When dollars were the international money, the more international trade there was the more dollars we could issue for foreigners to trade with each other. We buy something from a foreigner and give him -- not even a piece of paper -- an adjustment in a computerised bank account. It's a promise by the US government that doesn't have to be paid off as long as foreigners use it to keep track of their own trades with each other.

    So the question of why the world would accept a particular currency as a reference currency is basicly the same as the question why a whole lot of people would accept a particular currency as money. There are practical parts of an answer, like there has to be enough of it and yet they must trust the issuer not to flood with it. But just like with money, any adequate currency is OK and which one gets used will depend on historical reasons with maybe a lot that can't be explained.

    What about Gresham's Law? If two currencies are pegged, the one that debtors will prefer to use is the weaker one. If they aren't pegged, doesn't it depend on the particular contract? You can accept payment in zlotys or rubles if you want to. Or not.

    It occurs to me that it wouldn't actually be necessary to use any currency at all. If you want to sell a hundred thousand automobiles to a foreign nation, you could accept in exchange a futures contract on steel, rubber, glass, aluminum, or whatever. They pay whatever the futures contract costs in whatever currency they choose. They buy the futures contract whenever they want, up to the deadline. Then whatever part of it you expect you won't need, sell anytime until expiration and buy a later futures contract. Accept shipment on the rest to make more automobiles.

    Your profits will vary as your raw materials costs vary, but they'd vary in the opposite direction anyway.

    People could trade with oil-future-dollars and steel-future-dollars and beef-future-dollars. Leave government out of it except for taxes and tariffs and laws regulating or forbidding trade, embargoes and blockades.

     
    At October 10, 2004 at 10:33 PM, Blogger Oldman said...

    Aha now we're getting somewhere. And you're absolutely right, the Saudis are not propping up the dollar - even though they have a lot of their money invested in US properties. No the key is that if you look at who is buying are debt it is Oil-importing Consumer-Goods-Exporting industrial countries that are propping up the dollar with debt purchases. The Bank of Japan, the central bank of China, Asian exporting countries' central banks, etc. So they buy our dollars so that we will keep oil cheap so that they can sell us goods and take the money and invest buy buying our securities.

    And let the good times roll - because then the electorate can elect ideologues because there are no hard choices to be made by pragmatics, and politicians can always borrow more to avoid being the "bad guy" telling people they have to have less, and people can live beyond their means. Every cheap consumer good we purchase is really bankrolled on debt. It's like buying on credit except that we're all buying on credit.

    And that's what America get's out of it. America doesn't have to solve her problems. She doesn't have to own up to her past. She doesn't have to undergo hard times to reach a better place in life or sacrifice now for good times later.

    It's kind of staggering when you think about it, that America got into this fix just because we didn't want to own up to facts and face the music. But then again now it's rubbing us in the face - we can't ignore the gap anymore between our fondest delusions of ourselves and the cruel reality. America is about to wake up and the desert of the real ain't gonna be pretty.

     
    At October 11, 2004 at 1:29 AM, Anonymous Anonymous said...

    [cm]

    Oldman: I suppose your "consumer gods" in the article are not a pun, are they? Great essay.

    But I disagree (in part) on the BLS -- alleged manipulation of the surveyed population sample aside, I believe they are doing an honest job, *based on the definition of employment* (and natural imprecisions of the seasonal adjustment model). Its the definition of employment and unemployment (which by the way are not complementary) that is "at fault" for the distortion.

    There is a large population, the "marginally attached" and "discouraged" workers and people driven into disability programs or early retirement by being effectively unable to secure or hold on to jobs, which do not fall into the narrow definition of the labor force (able to work and seeking work right now -- i.e. within the past 4 weeks).

    The U-6 rate includes the former, i.e. people who do want to work but are not currently looking because of lack of job prospects or inability to take jobs because of no viable transportation, childcare, etc. That rate is at 9.4% not 5.4%.

    Another issue is that any job is a job, the definition being essentially "ongoing or regularly performed labor by prior arrangement" without regard to compensation levels or work hours.

     
    At October 11, 2004 at 3:53 AM, Blogger Oldman said...

    Dear cm,

    I agree with you about the problematic issues in the definitions as proposed and your view on them. However I believe that the BLS is distorting its numbers recently even compared to its own historical treatment of unemployment and within the current given definitions of employment and labor participation. In other words, it's not that the accounting is slanted it's that they're fudging numbers even on top of that.

     
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