Not Your Grandfather's Dollar
Fiscal and monetary policy disasters
When the Soviet Union did its mass-industrialization in the 1930s through central-planning, it of course forcibly took the nation's resources and put them in sectors that the leadership thought relevant. In order to pay for this, the ruble took a dive. It wasn't wealth that was created, sure there were factories built and cars made and electrifikatzia electrified the countryside, but all this was paid for by a ruble that steadily lost its value in the international currency market. In other words, the 'workers' were paid in a currency that bought less and less, and bought things that were of a lousy quality because the supply wasn't demand-driven but centrally-planned.
This is, unfortunately, not too different from what is happening back in the USA. When we have, due to the finance, banking, insurance and automobile bailouts (not much different really than the Soviet situation, both being centrally-planned), our dollar money supply doubling in a year, and our national debt going from $1 to $3 trillion in about the same amount of time, the dollar can just be expected to lose value. This is common sense borne-out by history.
So it is no surprise that the countries that hold our debt are seeking alternatives to the dollar as a reserve currency (the China central bank is already holding Euros in addition to dollars as 'hard' currency reserves).
So we get calls from the BRIC countries (Brazil, Russia, India and China) to the IMF for the creation of a "more diversified monetary system". Of course the governments of these countries are missing the boat so to speak because it is not governments which create tractable policy, it is the market. Just like gold-backed money was invented to facilitate trade, traders will trade in whatever medium is most tractable, governments can just try to catch-up and pretend to "regulate" (really grant special favors to those that provide the 'regulators' information). When traders trade oil, wheat, gold and other commodities they make the deals in the reserve currency, currently the US dollar. The deals are made in dollars and dollars exchange hands when the deal is cleared. Until this changes, no matter what the IMF says or does, it will be the dollar that is golden.
However, as can be expected, this is indeed changing. The Shanghai Cooperation Association has agreed to Russia's proposal that member countries (Russia, China and the 'stans: Kazakhstan, Kyrgystan, Uzbekistan and Tajikistan) clear international trades in their own currencies, not in the international reserve currency. Of course it remains to be seen if this is actually done. Has the dollar really reached that depth ?!
One item further of note is the U.S. government's debt rating. There has been talk that the rating might be reduced from investment grade. Workers believes that this won't happen by US rating agencies, because these rating agencies are given a monopoly by the self-same government they are rating (and this too accounts for the rating agencies missing the boat on the Fannie Mae and Freddie Mac guaranteed CDOs which turned to junk quickly due to the moral hazards of non-trading, again due to the expected central bank bailouts).
However, non-US rating agencies will no doubt reduce the risk-rating (one has already, perhaps a Latin American rating agency but Workers misplaced the info) of the US government-issued bonds. There is not a default risk (the Fed can just print more and more dollars and make them available to the Treasury so the Treasury can pay its debts) but there is the risk of devaluation relative to other issuers and to international commodities themselves. The solution of course is to stop the bailouts and reduce government spending (same thing really), but this has been the solution since the beginning of the rise and fall of great powers, but this lesson is rarely if ever learned.
When the Soviet Union did its mass-industrialization in the 1930s through central-planning, it of course forcibly took the nation's resources and put them in sectors that the leadership thought relevant. In order to pay for this, the ruble took a dive. It wasn't wealth that was created, sure there were factories built and cars made and electrifikatzia electrified the countryside, but all this was paid for by a ruble that steadily lost its value in the international currency market. In other words, the 'workers' were paid in a currency that bought less and less, and bought things that were of a lousy quality because the supply wasn't demand-driven but centrally-planned.
This is, unfortunately, not too different from what is happening back in the USA. When we have, due to the finance, banking, insurance and automobile bailouts (not much different really than the Soviet situation, both being centrally-planned), our dollar money supply doubling in a year, and our national debt going from $1 to $3 trillion in about the same amount of time, the dollar can just be expected to lose value. This is common sense borne-out by history.
So it is no surprise that the countries that hold our debt are seeking alternatives to the dollar as a reserve currency (the China central bank is already holding Euros in addition to dollars as 'hard' currency reserves).
So we get calls from the BRIC countries (Brazil, Russia, India and China) to the IMF for the creation of a "more diversified monetary system". Of course the governments of these countries are missing the boat so to speak because it is not governments which create tractable policy, it is the market. Just like gold-backed money was invented to facilitate trade, traders will trade in whatever medium is most tractable, governments can just try to catch-up and pretend to "regulate" (really grant special favors to those that provide the 'regulators' information). When traders trade oil, wheat, gold and other commodities they make the deals in the reserve currency, currently the US dollar. The deals are made in dollars and dollars exchange hands when the deal is cleared. Until this changes, no matter what the IMF says or does, it will be the dollar that is golden.
However, as can be expected, this is indeed changing. The Shanghai Cooperation Association has agreed to Russia's proposal that member countries (Russia, China and the 'stans: Kazakhstan, Kyrgystan, Uzbekistan and Tajikistan) clear international trades in their own currencies, not in the international reserve currency. Of course it remains to be seen if this is actually done. Has the dollar really reached that depth ?!
One item further of note is the U.S. government's debt rating. There has been talk that the rating might be reduced from investment grade. Workers believes that this won't happen by US rating agencies, because these rating agencies are given a monopoly by the self-same government they are rating (and this too accounts for the rating agencies missing the boat on the Fannie Mae and Freddie Mac guaranteed CDOs which turned to junk quickly due to the moral hazards of non-trading, again due to the expected central bank bailouts).
However, non-US rating agencies will no doubt reduce the risk-rating (one has already, perhaps a Latin American rating agency but Workers misplaced the info) of the US government-issued bonds. There is not a default risk (the Fed can just print more and more dollars and make them available to the Treasury so the Treasury can pay its debts) but there is the risk of devaluation relative to other issuers and to international commodities themselves. The solution of course is to stop the bailouts and reduce government spending (same thing really), but this has been the solution since the beginning of the rise and fall of great powers, but this lesson is rarely if ever learned.
posted by Cameron Weber at 3:29 PM
