10 January 2009

The US Dollar system, its moral hazard and your personal economic survival

The strength of the US after WW2 made politically possible the institutions that enabled the US dollar, then backed by gold, to become the world's reserve currency. Even after the US abandoned the gold standard in 1971, the dollar remained key, supported by habit and agreements with the gulf states, led by Saudi Arabia that the oil trade be denominated in dollars. With everyone clamouring for dollars, all the US has to do is create dollars via new bond issues and other countries accept them in payment for their exports.

As the centre of the dollar system is US treasuries, dollars exported via the US trade deficit just flow back into the US to be invested in Treasury Bonds and similar instruments and by the miracle of fractional reserve banking, these deposits enabled new credit creation.

As long as the US trade deficit kept expanding to supply new dollar credits and the illusion that returns on past dollar instruments were real and sustainable this bubble; whereby the more the US spent, the more they had to spend, was sustained.

The world's appetite for dollars mispriced upward US domestic production and slowly undermined all but financial exports, hence the hollowing out and complete domination of the economy by malls, suburbia and consumption, of petroleum above all else.

The geopolitical clout of the dollar system allowed the US to address domestic political problems within an hegemonic context, food surpluses could be given away to the third world which depressed local food production investment and made recipent countries more dependant on dollars. Economic development in the third world became defined, not as the improvement of the lives of the poor, but as dollar earning export industry development, after all, the loans would need to be payed back in dollars and not surprisingly, dollar finance was available for nothing else.

Hence the orthodoxy of the IMF and World Bank development strategy and the instinctive understanding of the poor outside the dollar system that it was nothing else but a mechanism to facilitate the privatisation of national asset usefull to the hegmon.

This will not level out, unwind for a time and then resume, it is the end of dollar hegemony, which will die in fits and starts. Liquidity crises will be followed by free money, stagflation followed by price controls, promises of reform before another crisis, rinse and repeat.

This dollar system, whatever its initial merits, created a moral hazard of such magnitude it is at the verge of destroying the assumptions that backstop the mixed economy. Insiders with access to dollar credit elsewhere in the west who enjoyed this free ride now expect bailouts to preserve a institutional framework soon to be obselete.

The destruction of the dollar will reverse globalisation; if, for example, you represent a government that sold a local asset for now worthless dollar rents it will be impossible to resist the political pressure to appropriate it back.

This will be met with military force and the Pax Americana will complete its morph from global leader to protection racket run by standover men.

Capitalism and the moral virtue of free men engaged in free trade is not being discredited here, it is a once in history folly where the world accepted the proposition that the denomination of all value in the obligations of a particular nation state was a good idea. That the freedom to hold value could be conditional. That conditionality, will, in the end, destroy the victors as effectively as they once destroyed the vanguished. Only when the freedom to store value is as universal as any other human right will virtue return.

For the average joe, therefore, the only way to preserve the purchasing power of ones savings until a new economic system emerges is to swap personal dollar assets for a financial asset without counterparty or geopolitical risk before everyone else realises that the US proposes to escape its debt crisis by way of quantitative easing.

Presciently an Australian saw the dangers clearly and expressed them forcefully..

"I am convinced that the agreement [Bretton Woods] will enthrone a world dictatorship of private finance more complete and terrible than any Hitlerite dream. It offers no solution of world problems, but quite blatantly sets up controls which will reduce the smaller nations to vassal states and make every government the mouthpiece and tool of International Finance. It will undermine and destroy the democratic institutions of this country - in fact as effectively as ever the Fascist forces could have done - pervert and paganise our Christian ideals; and will undoubtedly present a new menace, endangering world peace. World collaboration of private financial interests can only mean mass unemployment, slavery, misery, degredation and financial destruction.

As freedom loving Australians we should reject this infamous proposal.

Labor Minister of Australia, Eddie Ward, during the inception of the World Bank and Bretton Woods.

1 comment:

Anonymous said...

Great stuff Kevin.

I am sure we all will look back at the past few decades in utter disbelief that so many people would have accepted certificates of consumption (or in other words, US T. Bonds) as an asset, let alone the basis for foreign reserves of the world's central banks.
Cheers and applause to you
aka SCB