Gastkommentar. Weakening the all mighty US dollar

Samstag, 7. Juli 2018

''Even if economically this system is sustainable, probably politically not, mainly if there is political opposition to foreign trade deficit and political need for millitarily adventurous US foreign policy''

1. Continued trade deficit degrades the US merchandise production capacity, and what’s most important, its population will become instead of matterial merchandise product producers to service suppliers. Even if most of the employees in both, merchandise and service industries are rather low wage, low educated workers, the mentality difference between these two is immense. While the merchandise producers at the low level occupation are usually part of the production process, that needs cooperation, and are unionised, the service employee, usually acts individually, be it a shopper, banker or even post office clerk. While the merchandise producer’s attention is concentrated on the product, the service provider on the final consumer. These differences are psychologically deep. Service provider has to be always positively oriented to clients, even if in bad mood, merchandise producer, doesn’t. It makes a good service supplier a natural faker, while the merchandise producers can hold his integrity and pride of belonging to the producers community.

2. As to US trade deficit, it is result of US global position as world power, giving to the world after WWII, Pax Americana, with which came also the all mighty US dollar, leaning on US military dominance, and US democratic political system, unchanged since its independence, protecting free competitive market economy and unchallenged right for private property and wealth. But this caused trade deficit as explained in triffin dilemma.

3. All mighty dollar is not result of US merchandise industries producers competitivness and contribution of merchandise products to foreign countries, but attractiveness of US as world power, with stable political system, protecting individual property rights.

After WWII, the West European countries, devastated by war, still threatened by despotic Soviet, millitarily aggressive regime, had very little choice, but accepting the US dictate for new post war economic order, based on free trade, (dismantling the mercantilism in colonies) and US dollar as reserve currency for International trade and anchor of currency exchange. These brought too strong dollar, that until early seventies was also supported by US merchandise production capacity, that had no competitors.

Since the seventies, Germany and Japan, recovered from WWII, took over the position of world industrial producers. From the late eighties China and other East Assian countries joined them and became the major merchandise producing economies, while the US provided for the system huge market to absorb all the overproduction capacity, and also an economic platform for reinvestment of US dollars accumulated in the merchandise exporting countries.

4. Also US, due to it’s open emigration policy, attractive universities, and world dominance of English language, succeeded to become almost a sole leader country, introducing new technologies, new popular culture, and global service consumption chains and brands. It drew not only many skilled young people to US, but also capital investments. Yet, the leading US corporation, acting on the global scale, are incorporated mostly in tax shelter countries, and it reducas the tax basis for US government spending, that creates public deficit in US budget, causing US debt to Asian merchandise exporting countries.

5. The US global corporations, even if incorporated in tax shelter countries, they reinvest their profits mainly back in US. So eventually enable the whole global economic system to continue to exist. But these “foreign ” investments of US based global companies causes also huge inequality in income, when concentrating on one hand the wealth in global corporation managers and owners, and on other hand causing degradation of the local merchandise production capacities.

6. Even if economically this system is sustainable, probably politically not, mainly if there is political opposition to foreign trade deficit and political need for millitarily adventurous US foreign policy. The result is elections, that brought to power politicians with short term populist agenda. Such a policy can’t be sustainable on the long run. Even if the popular masses many times find short term solutions attractive, when the pay day comes, they tend to be revolutionised and are looking for the scapegoat to sacrifice it. We are still in the process of disastrous choices of the majority in the USA and in G.B. The masses still didn’t get it, that the consequences of drastic change in economic policy to wrong direction, (that still didn’t happen in acts, just in proclamations), will appear not less than in two years from the policy shift, unless the business community will panic and bring to collapse the whole system, that may happen in any moment. Such a collapse is unpredictable, and its cure is not always obvious, since it is in fields of psychology and sociology, and not economy, and these fields of science are even less equipped to bring solution than economics.

7. Still it is understandable that politically majority of the people in the US and GB want to bring back the merchandise producers capacity, and with it this industry occupation. So how to do it? Definitely not by economic policy of segregation and anti global trade policy. This can only bring to reduction of global wealth, with all its consequences. The solution has to come in new world wide currency order, where the anchor currency will not be a national currency, not of US, not of EU or China, but some global currency solving the Triffen dilemma problem.

But any such solution needs an US President of very different skills and vision than the last Presidents of US, nominated since the presidency of R. Nixon, who was with the courage to disconnect the US dollar from the gold standard and prevented by this act the world monetary system from potential collapse that existed at the time.

Let me try one prediction in this blog, if the world economic powers, with strong reserve potential currency and China will not create such a currency,  the cryptocurrency community will create it.

Why necessarily reserve currency creates trade deficit?

Reserve currency means, that the currency is saved in other countries, than country of its origin. It can be done by private or public entities, or even private people, who prefer to hold the reserve currency, as media of savings, because of the trust in it, compared to the local currency. By doing so, they create demand for the money itself, as if it would be commodity or item of value by itself. And the truth is the reserve currency is an item of value, because of the trust people all over the world put in it. This trust is result of long history of reserve currency origin country’s military dominance, democratic political system, free competitive market economy and unchallenged right for private property and wealth. China, even with its size of economy, (bigger economy than that of US, not in nominal but real terms) doesn’t have a reserve currency, because it couldn’t create the trust in its sincerity in most of the above mentioned issues. Europe succeeded only partly in making the Euro a reserve currency, because of its history of world wars it initiated, and their economic consequences on Europe. Even 70 years of peace was not enough to create enough trust in Europe, to make from its currency a reserve currency comparable to US dollar, that has history of continuous respect for these values mentioned above, since its declaration of independence.

The need for reserve currency exists, to create trust in local currencies, based on these reserves. Just as in the past precious metal reserves, like gold or silver, made the currencies trustworthy, today holding of US dollars makes local currencies trustworthy.

But then if there is demand for reserve currency, not as media of exchange, but as value holding item, its price, or exchange value will be influenced by this demand, without the question if exists enough additional production capacity to satisfy the value of potential demand that reserve currency promises. But then the relative prices in the country of origin of reserve currency, have to be higher than in countries who accumulate the reserve currency, that has to create surplus in trade with reserve currency origin country, to be capable to accumulate these reserves. Such a surplus can be created only if the local currency value is undervalued compared to the reserve currency. Then the other side of this surplus has to be the deficit of the reserve currency origin country.

And here comes my warning, such a trust can be easily destroyed by irresponsible acts of politicians, who make big mistakes like, 

  1. making wars destructive to economy, 
  2. b. budget deficits creating debts, that are not invested into the increase of potential of production capacity, 
  3. c. Not fulfilling the obligation given to the holder of the reserve currency, to supply against the reserve currency the promised value in form of products, whenever demand to its fulfilment will come, 
  4. d. many more issues, known and unknown, that the reserve currency promise represents in the eyes of the reserve currency holder.

Irresponsible president, who acts out of urge of the moment, without understanding or without caring of the possible consequences of his acts, and proving that after all, the legal -political system of reserve currency origin country has no instruments to stop such a policy of one man, can be a very good reason to undermine the trust in the reserve currency.

Von Eugen Roden

Bilder: @depositphotos


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