Thursday, November 15, 2007

After Bush - The Deluge?

As In 'World Economic Collapse'?

This morning, I woke up to the BBC as I do every morning. But this morning I was jolted upright before dawn by a riveting interview of Richard Duncan.

I remember shittola from my college and graduate courses in economics. (Maybe the reason might be disclosed in looking up my transcripts.) But this interview scared any residue of shittola out of me.

Personal experience has taught me that the best way to dispel the lingering effects of a nightmare, a nightmarish day dream (or even a cold) is to disperse it by sharing it with all others in earshot.

In the interview, yet to be posted on the 'Net, Duncan updated his conclusions of his earlier book, The Dollar Crisis. In the interview, he spotlighted the recent crash in sub-prime mortgages. We are poised on the precipice of a world wide deflationary crash.

As I said, I can't find the BBC interview yet, but Duncan wrote this last September:

Global credit markets are caught up in the worst systemic crisis in living memory. A meaningful portion of all outstanding financial instruments are significantly impaired. The solvency of some of the largest financial institutions in the world is in question and trust in the interbank market has evaporated. Central banks have been forced to inject hundreds of billions of dollars into money markets to prevent a world-wide financial sector meltdown. It is imperative to understand this credit crisis is only one part of a much more far reaching crisis within the global economy. A world-wide credit bubble has arisen as a result of the United States’ $800 billion a year current account deficit. Flaws in the post-Bretton Woods international monetary system are to blame.

The chances of a global recession are high. The severity and length of the downturn will be determined by how policy makers respond now that the global credit bubble has begun to deflate. A wise policy response could result in some good emerging from this disaster. A foolish policy response could have catastrophic consequences. This article will consider the origins of this crisis. It will also offer advice to policy makers, who need to act quickly to prevent the Great Credit Crisis of 2007 from becoming an economic depression.

Flaws in The Dollar Standard

The Dollar Standard is the most appropriate name for the international monetary system that evolved following the collapse of the Bretton Woods System in the early 1970s. The principal flaw in The Dollar Standard is that it has no mechanism to prevent large and persistent trade imbalances between countries. Consequently, the deterioration in the United States’ current account deficit has gone unchecked, recently reaching nearly 7% of US GDP. The countries with a trade surplus with the United States have been blown into economic bubbles. Japan in the 1980s, the Asia Crisis countries in the 1990s, and China today are examples. Moreover, as the central banks of the United States’ trading partners have reinvested their dollar surpluses back into US dollar assets, the United States itself has also been blown into a bubble. In short, the US current account deficit has destabilized the global economy. That was the theme of my book, The Dollar Crisis: Causes, Consequences, Cures (John Wiley & Sons, 2003, updated 2005).

Before the breakdown of the Bretton Woods International Monetary System, international trade balanced. Subsequently, however, the gap between what the United States bought from the rest of the world and what the rest of the world bought from the United States began to steadily expand.

Under a Gold Standard, or the quasi gold standard Bretton Woods system, such large trade deficits would not have been sustainable since the US would have had to pay for its deficits out of its limited supply of gold reserves. However, the willingness of the United States’ trading partners to accept payment in dollars instead of gold meant there were effectively no limits as to how large the US trade deficits could become. This vendor financing arrangement allowed much more rapid economic growth around the world than would have been possible otherwise. The larger the US current account deficit became, the more the United States’ trading partners benefited.

When the foreign companies selling product in the United States took their dollar earnings home and converted them into their own currencies, it put upward pressure on those currencies. The central banks of those countries intervened to prevent their currencies from appreciating so as to preserve their trade advantage. They intervened by creating money and buying the dollars entering their countries. In this way, the exporters were able to keep their export earnings in their domestic currency and the central banks accumulated large foreign exchange reserves.

As the US current account deficit grew larger, central banks created more and more money and intervened on a greater and greater scale each year. In fact, total foreign exchange reserves have doubled over the past four years. In other words, during the course of the last four years, foreign exchange reserves have increased by as much (US$ 2.8 trillion) as in all prior centuries combined. The reinvestment of those dollar reserves into US dollar assets fuelled the credit excesses in the United States that culminated in an unsustainable property bubble there.

As in the case of Keynsian theory resolving the 1928 crash, Duncan sees the problem as the inability of millions of people not being able to purchase the current unprecedented surplus production of goods and services provided by our global economy. One of his long-term solutions posed in the BBC interview was the institution of a world-wide minimum wage to be increased annually.

Well, now. That feels better now that I got that off my chest. . .

5 Moderated Comments:

Blogger Kentucky Rain said...

I suspect it is a little early for the Chicken Little Scenario Vigil, but this was an eye opening read. I am certain al Qaeda, whose long range plan is to hit us and hit us hard when we are at our economic weakest, will be following the financial news very closely.

11/15/2007 04:29:00 PM  
Blogger Sapo said...

I know next to nothing about economics buy I said the word "stagflation" to myself on the way to work while listening to a story on NPR about the current inflation in gas and food prices.

11/15/2007 06:19:00 PM  
Blogger E said...

I look at it this way: If a no-brainer like supermodel Gisele Bundchen won't take payment in dollars then we really are in trouble.

11/16/2007 07:28:00 AM  
Blogger Stella by Starlight said...

Vigilante, this is an amazing article. Yes, madmike's right. The article resonates with some of Skip's comments.

How did this administration expect to spend $2.5 trillion plus endless more on an unnecessary war to pad the pockets of the have mores and military contractors and keep the country going? They don't care because they're all investing in Euros.

Exactly right, e. More and more countries (and bimbos) require payment in Euros. See the 07/05/06 Counterpunch story entitled "Is Cheney Betting On Economic Collapse?" Kiplinger Magazine ran an article based on Cheney's financial disclosure statement and, sure enough, found out that the VP is lying to the American people for the umpteenth time. Deficits do matter and Cheney has invested his money accordingly in Euros.

I know. Sounds like a conspiracy theory. I'm not so sure. INI has not one but two disturbing essays about the deflating dollar in the world market from 2005.

There is information out there that the PNAC crowd wanted to wage war on Iraq because the country intended to shift from dollars to euros. Good reason for a war, huh?

I don't have vigilante's economic aptitude. Like M.D., I know next to nothing about economics, but I'd welcome lessons.

11/16/2007 03:38:00 PM  
Blogger Jolly Roger said...

Some years ago, a couple of Chinese military officers wrote up a plan for destabilizing the US economy. I wish I could find that article again, because what we see happening now is in lockstep with what they wrote.

They basically advocated lending us money while gutting our commons at the same time, until they had our production base and we had a bunch of worthless dollars. They (with a powerful assist from Mao-Mart) have done just that.

"Free" traders are idiots on two fronts. (1.) there can be no free trade between a country with environmental and worker protections and a country that has little or no worker/environmental protection, and (2.) it is utter insanity to allow your commons to be gutted. If the insanity of wingtard economics dies once and for all, the crash will have achieved something good, however painful the lesson may be.

11/16/2007 10:38:00 PM  

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