Tuesday, November 09, 2010

We've Lost Control of the Environment, Is the Global Economy Next?

You hear rumours of protectionism and currency wars.   They pop up every few days and then they subside.   Washington wants China to revalue its currency, the Yuan.  It wants its major trading partners to limit their trade surpluses with the U.S.   Then Washington announces plans to print 600-billion dollars worth of magical money to buy back government debt.   Nations are getting angry and they're all quick to point fingers.

German finance minister, Wolfgang Schauble, isn't pulling any punches:  "The German export successes are not the result of some sort of currency manipulation, but of the increased competitiveness of companies. The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. There are many reasons for America's problems, but they don't include German export surpluses."

Herr Schauble is right, the U.S. has lived on borrowed money, trillions of dollars of money borrowed from foreign lenders, since Reagan ushered in America's Age of Ruin.   America turned its back on manufacturing, opting instead for an insane, short term, high-yield FIRE (finance/insurance/real estate) economy that was bound to undermine its economic strength and stability.   Vast wealth accrued to America's top 10% while the remaining 90% worked ever harder to simply tread water or fall behind.

Now America is going out and simply printing 600-billion dollars worth of non-existent wealth and that's alarming the world.   But America has a rich, recent history of forays into non-existent or fictitious wealth.   The Savings & Loan scam was non-existent wealth, the Dot.Com bubble was mainly non-existent wealth, Enron and Worldcom too, and most recently it was the housing bubble and trillions of dollars of credit default swaps backed by completely non-existent wealth.   This time, instead of Wall Street or American banks pulling the non-existent wealth scam on the American people, it's Washington giving its foreign lenders a taste of the same medicine.

America, the great believer in free trade and free market economies, is now yelling "uncle" - "Uncle Sam" that is.

No one knows how this one is going to play out.  Inventing $600-billion dollars is a gutsy move, especially when you know what it could mean to your economy in the long term if your foreign benefactors dump the greenback as the world's reserve currency.   This is one to keep an eye on.


no_blah_blah_blah said...

It looks like the U.S. is choosing an amount to print in the hopes of avoiding hyperinflation ($0.6 trillion added to a supposed ten trillion-dollar economy) while "paying off" their debt. However, considering how much of the economy is based on confidence in the U.S. dollar, printing money is such an unnecessarily risky move that I don't know what they could possibly be thinking.

This is especially true given the large number of historical examples that led to economic chaos... such case involving the aforementioned Germans. No one in Washington remembers their history classes about the Weimar Republic?

no_blah_blah_blah said...

Sorry, the last paragraph had a section that should have said "... such as one case involving...".

The Mound of Sound said...

Of course Weimar wasn't the "world's largest economy" (a title that actually belongs to the EU). This clearly has Germany, China and Japan worried but it's an issue that curiously don't seem to have found any traction in Canada. We're more dependent on the stability of the American economy than anyone else. I only hope Obama, Bernanke know what they're doing.

Anonymous said...

The US and South Korea have been haggling over a Free Trade Agreement for a long time now. America is trying to force South Korea to accept their gas guzzling vehicles while South Korea has gone huge on electric vehicles which will be used to ferry around delegets for the G20. Now where is the mind of the US? South Korea has a plan to be gas free by 2012. Why in hell's name would they want to sign an agreement importing gas vehicles into the counrty? There is now in the past few days a lot of commentary regarding the 600 billion fake money the US is going to print. It's not pretty. Germany is dead on as well as France and South Korea. And then there is Canada with its limp leg. Anyong