11 replies to this topic

[Anonymouse]

Pax Dollarum

by Bill Bonner

What a wonderful world. The sun is shining neither in London nor in Paris, but it must be shining somewhere this morning. Still, it is springtime in both cities. Birds sing in the trees. Lovers stroll in one another's arms.

The dollar is up. Stocks are up. Houses are up. Americans still spend more than they can afford. But their friendly suppliers in Asia keep extending credit. As reported here last week, Japan printed up an additional 35 trillion yen between 2003 and the first quarter of 2004, just so it could trade them for dollars...and lend it back to the United States. This dollar-buying/lending spree helped keep interest rates low in the United States...which helped expand a bubble in house prices...which gave Americans something to borrow against in order to continue spending!

In New York, an analyst describes Wall Street's upbeat mood: "People are beginning to realize, 'You know what, this economy does have some legs to it,' and companies continue to benefit...Where in the world do you continue to find good growth these days? Increasingly, it's here in the U.S."

Meanwhile, the U.S. military keeps a vigilant eye...making sure that no sparrow falls anywhere in the world that might upset the spread of globalized commerce in the Pax Dollarum era.

America's system of imperial finance may have no flaws, but its perfections are devastating.

The "growth" that investors so admire is not a growth in productivity...or in productive capacity...nor in profit-making capacity...nor in wage-earnings. The growth is a growth in consumer spending; and since there are neither savings, nor earnings, with which to pay for more spending, it is a growth in debt.

No one bothers to explain how a person can "consume" wealth...and end up with more of it than he had before. It is just one of those many mysteries that must be left to the gods. It is the oddest kind of growth, a perverse kind of growth in which the grower gets smaller with each day.

Nor is there any explanation for how the entire American economy could owe its Asian suppliers more and more money and yet still be a model of "good growth." But it was not good growth at all, but bad growth. It is the kind of growth you achieve just before you go bankrupt...or the fun you have just before you go to Hell. Imagine a church treasurer who runs off with the choir mistress and the new steeple fund; he sends back a postcard from Las Vegas: "Enjoying much personal growth. Have taken up smoking...drinking is fun too. Gotta run...gotta hit the slots while I still have some money left."

Spending money you don't have is not disagreeable. The disagreeable part comes later.

For the moment, Americans salute their imperial standards. They gratefully paste the flag to their car windows, their jackets, their hats, their beer mugs, their shirts and even their underwear. Americans are proud of their empire – and should be. Without it, they could never have gotten so far in debt. What central banker would fill his vault with Argentine pesos or Zimbabwe dollars? What drug dealer or arms seller would want Polish zlotys in payment? What insurance company would want to buy Bolivian or Kyrgistan bonds to cover its long-dated liabilities?

The dollar has not been convertible into gold for 34 years. Yet, people still take it as though it were as good as the yellow metal – only better. Ultimately, lending money to a foreign government is a bet that the government will put the squeeze on its own citizens to make sure you get paid. The United States doesn't even have to squeeze. When one foreign loan comes due...other foreigners practically line up to refinance it; it is as if they were bringing pastries to an extremely fat man...just to gawk and wonder when he might explode.

• Charlie Munger: "The present era has no comparable reference in the past history of capitalism. We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper and promoting trading activity than in any past era. A lot of what I see now reminds me of Sodom and Gomorrah."

We didn't know Charlie was that old.

• Liberation, the French leftist newspaper, is worked up this morning by "The Specter of Social Dumping." What it means is that workers from Eastern Europe are coming to France and taking jobs from French people at lower rates of pay. Polish plumbers, Portuguese masons, Czech truck drivers..."foreign" workers are all over France. And no wonder. Wage rates are lower in the East. So companies from Eastern Europe are able to underbid their French competitors for the same jobs.

We have some personal experience of this. We can't resist a money pit of old stones, and we found a deep one in Normandy; we bought the old house in January. Now, we are fixing it up. We were prepared for over-runs...we thought the renovation might cost twice as much as we estimated. Instead, it is turning out to be nearly four times as much. Naturally, we look for the artisans and contractors who can give us the best prices. In one instance, we found a company from the Czech Republic that would replace the windows at half the price of the French company.

All over the world, dear reader, globalized competition is driving down labor rates. No doubt, this very minute, there is some poor sod in Mumbai or Calcutta preparing to write this column for a quarter of our own measly stipend.

http://www.lewrockwe.../bonner102.html

[Armen]

I think US will shift investments fomr Asia to Latin America. That's is the US reserve option, while there is a conflict somewhere in Asia or Eurasia. And war has always helped US economy to become productive once again. That's why US has signed NAFTA and tries to promote it further south. But this is just one scenario.

[Anonymouse]

I think US will shift investments fomr Asia to Latin America. That's is the US reserve option, while there is a conflict somewhere in Asia or Eurasia. And war has always helped US economy to become productive once again. That's why US has signed NAFTA and tries to promote it further south. But this is just one scenario.

I would have to disagree that war stimulates the economy. War is always destructive to economic growth. While providing a temporary and artificial boom, it is doomed to failure as it contributes an increase to non-productive and destructive activities. War also goes hand in hand with government control of the economy. The more war, the tighter and tighter the grip of the central planners becomes. In short, war generates an illusion of economic prosperity.

[Armen]

I would have to disagree that war stimulates the economy. War is always destructive to economic growth. While providing a temporary and artificial boom, it is doomed to failure as it contributes an increase to non-productive and destructive activities. War also goes hand in hand with government control of the economy. The more war, the tighter and tighter the grip of the central planners becomes. In short, war generates an illusion of economic prosperity.

Why do you call it artificial? Aren't the defense industries well off?

[Anileve]

If anyone is interested check out these startling figures of US Arms sales to the rest of the world. If wars do not stimulate the economy the "tools of war" certainly do. Apparently the most profitable industry in the world (next to oil?). Saudi Arabia, Egypt and Israel are the biggest consumers apparently (we're talking billions every year or so). I doubt there was a surprise there.

www.fas.org/man/crs/RL32689.pdf

[Anonymouse]

If anyone is interested check out these startling figures of US Arms sales to the rest of the world. If wars do not stimulate the economy the "tools of war" certainly do. Apparently the most profitable industry in the world (next to oil?). Saudi Arabia, Egypt and Israel are the biggest consumers apparently (we're talking billions every year or so). I doubt there was a surprise  there.

www.fas.org/man/crs/RL32689.pdf

Which is why most of the Middle East hates America, for supporting Israel and the corrupt puppet regimes such as Saudi Arabia and Egypt.

[Anileve]

Which is why most of the Middle East hates America, for supporting Israel and the corrupt puppet regimes such as Saudi Arabia and Egypt.

US is hated in more places than I have ever imagined for various reasons. They have earned their robber baron title well. I know that the US has incredibly close ties to SA, but I am not certain about the economy of the country. As far as I am concerned it's pretty much millionaire central there, but that's only the tiny percentage of the ruling class.

Does anyone know about "Burj al-Arab" in United Arab Emirates? I think it's the world's most luxurious and most expensive hotel. I have to admit, the sail boat architecture is absolutely amazing, and the decor of the suits can leave a poor soul like mine speechless. Take a look at the photos if you get a chance.

http://www.burj-al-arab.com/

[Anonymouse]

If anyone is interested check out these startling figures of US Arms sales to the rest of the world. If wars do not stimulate the economy the "tools of war" certainly do. Apparently the most profitable industry in the world (next to oil?). Saudi Arabia, Egypt and Israel are the biggest consumers apparently (we're talking billions every year or so). I doubt there was a surprise  there.

www.fas.org/man/crs/RL32689.pdf

Ludwig von Mises described "the essence of so-called war prosperity; it enriches some by what it takes from others. It is not rising wealth but a shifting of wealth and income."

I suggest this chapter from Nation, State, and Economy, to see why war does not lead to economic productivity, but an illusion of it.

http://www.mises.org/nsande/pt2ch4.asp

[Armen]

Ludwig von Mises described "the essence of so-called war prosperity; it enriches some by what it takes from others. It is not rising wealth but a shifting of wealth and income."

I suggest this chapter from Nation, State, and Economy, to see why war does not lead to economic productivity, but an illusion of it.

http://www.mises.org/nsande/pt2ch4.asp

As far as I understand the article uses the criteria of Parreto efficiency in welfare state to judge if the growth is artificial and illusiory or not. I mighty be slighty wrong but that's his train of thought.

One might argue that taxing for social security programs is already a shift of income distribution from wealthy to poor. Although many say it is done for moral reasons, preventing social unrest is a big part of it. In this sense he is right.

However, taxing base can always be changed if necessary. If defense corporations and the whole sector of economy gaining from it start making more money a relevant bill taxing them more than others can be introdused. And the revenues from this taxes can be utilized for expenditure or social security programs for those who were affected by the shift of income distribution as a result of war.

Actually, I did not say that it is always profitable for US economy if a war is going on. I said there can be such a scenario, when war becomes a more appealing scenario. What could be that scenario?

Clearly if it starts it is not going to be on US soil or anywhere near to it. US has total contol over Western Hemisphere in this sense. If anywhere, it could potentially start in Eurasian heartland (Central Asia - Uzbekistan, Kirgizstan, Tajikistan, Afghanistan, Pakistan, probably some parts of Kazakhstan). Other affected major powerhouse (in terms of infrastructure, trade roots etc.) countires will be China, India, Iran and Russia.

The article you posted first implied somehow that US is loosing is finacial grip (with subsequent decline in it geo-strategic power). Are the US going to let it go easily if this remain a prevailing trend or are they going to do something about it? Are there different scenarios at hand? Yes there are. For example a resturcturing of world economy. But this has always been very difficult to achieve. This is why war is a likely scenario and it is not going to hurt US economy too much.

Eve provided a good report on US arms sales. If we find some data on how much share does US defense industry have in total US economy it would be helpfull. However, it would still not provide a good picture on how exactly economy as a whole is chnaging in case of war. The suppiers of defense industry come from virtually every sector of economy. And it would not only be the defense conractors exporting airplanes. It can be anything from including medicine and hamburgers.

Edited by Armen, 25 May 2005 - 05:29 PM.

[Armen]

What Really Ails Europe (and America): The Doubling of the Global Workforce
By Richard Freeman | Friday, June 03, 2005

http://www.theglobal...px?StoryId=4542

[Armen]

U.S. Economy: We're All Living on Borrowed Time
Los Angeles Times, June 1, 2005

William G. Gale, Senior Fellow, Economic Studies
Peter R. Orszag, Senior Fellow, Economic Studies

http://www.brookings...1galeorszag.htm

[Armen]

February 21, 2001
America's Record Trade Deficit: A Symbol of Strength

by Daniel T. Griswold

http://www.cato.org/...s/02-21-01.html