The fraying of the U.S. global currency reserve system
lynalden.com
lynalden.com
To me, this is the money shot. I hadn't seen this expressed before and it makes perfect sense. I'm baffled that we (the US) caused this to happen to the US. I'm (unhappily) registered Republican but I argued vociferously to a Dem friend in 2000 that our inability to manufacture critical components was going to kill us. Kind of literally: AFAIK, the last LCD panel manufacturer in the US closed around then and we could no longer manufacture LCD for our military vehicles... (Even if this anecdote is untrue, the point remains valid...) I argued that, even in the presence of free trade, a country should have the ability to tariff imports to the extent that that country could maintain a 25% (or something) domestic market share.
They spent years training the Chinese side-by-side in the US.
In the end they still haven’t exactly caught up to the quality we had in the US. However, they now have 5x the tool & die makers in China.
To compete, you really do have to cut minimum wage. You have to loosen regulations, and importantly, you have to do massive tariffs / sanctions on China for the next decade.
There are enough people still here to teach and expand the Industry. However, if you don’t start now. Like today. We won’t ever recover. Once enough manufacturing is gone, it’ll be impossible to come back - we are almost there.
You are competing against a foreign power who uses slaves. You either let free people work for what ever wage they can achieve or we risk becoming slaves ourselves.
Part of the problem here is that the existence of some kind of universal "more regulations / less regulations" slider is an illusion. It allows the problem to be cast in partisan terms when that isn't the problem at all, because the problem isn't more or less lines of regulatory code but rather higher or lower regulatory efficiency.
Some regulations save a thousand lives at a 0.02% increase in costs. Repealing those is bad. Enacting them is good. Some regulations save two lives at a 5000% increase in cost, which could equally be saved by some less expensive regulation. Enacting those is bad. Repealing them is good.
The real problem is that politicians lack the qualifications and incentives to do this well. If good rules don't exist, then someone gets hurt and there is a call for "more rules" rather than "better rules". Politicians who don't know what they're doing pass bad rules. The bad rules cause costs to exceed what they are in China, so manufacturing moves to China. Then the local lobby for improving the rules evaporates because there are no longer local manufacturers to propose or lobby for more efficient rules, and the continued existence of those rules on the books causes no more to form.
We clearly need to throw away the existing rules -- they're not working -- the question is, how do we actually get better ones?
This is something that eludes most people, especially among progressives.
Not to get political but this reminded me of covid-19. Masks and social distancing are an obvious 0.02% increase in costs that save a thousand lives. Lockdowns and extended stay-at-home orders and shutting down businesses so that we start needing to send out trillions upon trillions of stimulus cash to keep companies and people afloat start to cross into "save 2 lives at a 5000% increase in cost" territory
Taiwan is an example of a country that managed to eliminate covid-19 without lockdowns, so it is possible, but part of their success is likely due to the fact that the authorities acted very early to impose strict quarantine rules and contact tracing (when there were fewer than 10 new cases per day!) AFAIK every other country that has managed to eliminate community transmission has done so via lockdowns.
'The observed temporary excess mortality likely arises because people in vulnerable groups die weeks or months earlier than they would otherwise, due to the timing and severity of the unusual external event.' https://www.medrxiv.org/content/10.1101/2020.11.11.20229708v...
As I understand it, the US status as a global reserve currency requires us to maintain a perpetual trade deficit - other countries need dollars and we must give it to them. This is done by buying goods from overseas which has eroded our manufacturing base, as the foreign demand for the dollar is greater than the local demand (which means there is a cheaper manufacturing market).
I'm not sure what regulation you could enact here that wouldn't severely depresses other sectors as they exist today.
Fused with Graeber and @dredmorbius phrasing where "deregulation" means "pro-monopoly" and "anti-competitive".
I'd like to learn more about "regulatory efficiency".
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Law (et al) is much like source code. Technical debt, path dependencies, tooling stack, managing complexity and risk. You get the idea.
So of course there's evergreen debates about refactoring, rewrites, paradigms.
Germany still has a strong industrial base, without a race to the bottom and with strong unions. So it is possible :)
A lot, and I mean a LOT, of German industrial base is now located abroad, in Poland, Czechia, Slovakia, Hungary, Romania. These countries are rather close, but because they belonged to the Soviet Bloc, their economic development was retarded so much that local wages are 20-30 % of wages in Bavaria, but the workforce is qualified and the infrastructure adequate. This is a historic anomaly you do not have in the U.S.
Come here (I am in Czechia) and look around, the countryside around cities is absolutely dotted with German-owned factories that mostly produce parts. Those parts are then moved by trucks to Germany where the final product is assembled - and so the miracle of higher "work productivity" in BRD is created. Of course you have nominally higher productivity if you finalize products.
This is, by the way, how Viktor Orbán gets his political way. Hungary is absolutely vital part of German industrial base and German industry gets premium conditions on the ground. So for all the shouting about values and rule of law, German CDU/CSU and Orbán always find a way to coexist.
And as for race to the bottom, look to former East Germany. There, people want German wages from German bosses. They do not get them, most of the industry moved abroad where cheaper workforce is. Former GDR is an economic periphery where anti-system parties command majority of the vote.
Wages in the US are artificially high because of the dollar's position, but the US needs to either a) match the wages of the countries producing similar stuff or b) increase productivity and value to the levels of countries like Germany.
Since b) requires decades in factories, supply chains, trade agreements and most importantly training in actually producing things which means science and engineering, exactly the occupations an increasingly large portion of the US population has been taught to abhor, it is very unlikely to happen. The US has spent the last decades destroying all those things, so the only real option is to sadly let wages fall to levels markets are willing to pay for. It will bring a lot of suffering but is the consequence of decades of mismanagement and complacency, and it is unavoidable so it will either happen by will or by force. And we know it won't happen by will.
Of course there is always c) keep forcing the rest of the world to pay for the US standard of living while they themselves live beneath their means, but that is the actual problem now so how much longer can it last?
If you’re going to make US manufactured goods cost competitive with foreign goods, much of it has to come out of that 95% operating revenue that is operating expenses, most of which will be employee wages. There’s no way around this.
Factories will need to adjust their prices, now you take that as you will, and if one is naive one can think it means executives will take a pay cut while workers do not, but in the end it mean less wealth for everyone, less money for taxes, less money for shareholders, less money for executives, and of course less money for workers. That is less wealth for the nation.
So yes, owners will take smaller profits, along with everyone else.
Our entire society is built on this, though. Silicon Valley wouldn't exist if electronics couldn't be produced for comparatively cheaper overseas. You bring up an interesting moral point, but if you're serious about that there's a lot of reckoning society will have to deal with. It's not just going to affect minimum wage lol. It'll affect wages across the board. You're really talking about totally reforming the economy
Silicon Valley literally exists because it was an electronics manufacturing center.
So I guess not?
Asian or "factory" countries (not necessarily from Asia but for illustration) have an "artificially" held minimum wage, which indirectly subsidizes the US minimum wage. This is happening to all wages not just minimum wages mind you, so the market needs rebalancing. Wages need rebalancing, taxes need rebalancing, but most wages, including the minimum wage need to come down (in real terms not necessarily in fiat terms).
Of course, all things aren't always equal, but if you're going to argue its going to be different this time around, i think there is some onus to argue why the present would be different from the past.
It's because they build the machines to build the product the Chinese manufacture. The Germans have forced themselves to be at the top of the Manufacturing Food Chain (engineering, etc) while letting the Chinese/Rest of the world build the crap we buy.
I don't think we could get there manufacturing the "Trinkets" the Chinese mostly manufacture, that is a a race to the bottom where either automation or cheap labor win.
Chinese manufacturing is now at a very high level, to the point where many western brands have effectively become "fabless", leveraging the fact that Chinese brands still struggle with poor reputation even domestically. In this symbiotic relationship, the fact that Germany is literally "the land of virtue" in Chinese might play a role.
Chinese labor has now too become relatively expensive, its economy is moving to become a service economy, and manufacturing gets outsourced from China to even cheaper countries.
The thought that comes to mind is when American railways tried to import German locomotives in the 1960s. They were appealing because they offered higher horsepower ratings than anything domestic, but they required too much babying and maintenance to keep healthy and were quickly scrapped. I hear strikingly similar things from people buying German cars today-- everything tends to be expensive to keep running after the warranty expires.
I wonder if American manufacturing needs to develop its own meme. I'd suggest the old line about GM products-- they'll run poorly for a lot longer competing products run at all. That could be a compelling argument when you're selling to a manufacturing sector that's rolling out in low-development countries with unstable infrastructure, poor environmental conditions, and low-training staff.
That gives us a niche we can target and use as a base to re-bootstrap ourselves into competitiveness. We need to be decidedly better than bottom-bit Chinese (etc.) tooling, which is probably still within our abilities, and if we overdeliver there, we can begin to position American-made as a premium choice.
I agree with you that trying to compete on low-cost, low-margin is a race to the bottom. We could conceivably bring manufacturing of iPhones back to America. I would also imagine that manufacturing of silicon is largely automated, so the US could try to build the best fabs.
You discuss tool and die makers, a very highly skilled profession; one that I would argue takes many years of training and labor to master. I would further argue that in the manufacturing world, when it comes to hands on work, tool and die guys are near the very top.
Yet at the same time, you talk about cutting the minimum wage. Tool and die makers (of any sort) aren't going to be working for minimum wage.
While I don't disagree with the importance of American manufacturing, I think your prescription is wrong. We don't need lower wages, we need better education, more apprenticeships, more buy in from industry to spend money on training their employees. Because sooner than people think, China will have labor cost parity with the US, and we'll find that labor cost isn't solely the reason they are a manufacturing power house.
Instead companies who manufacture in China should be taxed at much higher rates to account for the negative externalities they benefit from otherwise.
As for bringing back manufacturing home, you need to find two things to make that work. First massive subsidies and tariffs to drive up the cost of foreign imports, imposing huge costs on tax payers and consumers; and tens of millions of people willing to work in factories. The US long term unemployment rate in 2019 was about a third of a percent. Where are you going to find the money, and where are you going to find the people?
I don't mean wages, I mean safety, overtime, etc. Labor needs to be valued at home and abroad.
The article points out other ways to reduce the cost of domestic labor: namely, shifting away from high payroll taxes and severing the link between health insurance and employment.
That’s not what Germany has done but there’s little doubt that Germany’s manufacturing ability is held in a higher regard globally.
So i challenge the “have to”. It’s the unproven talk of a particular tribe but i stress unproven since economics is a social science. That means there’s lots of science but is fundamentally stories we tell each other and not akin to, for example, the unassailable truth of gravitational pull.
You're not going to defeat China by cutting wages unless you address the societal issues that cause US wages to be high. We already haven't raised the federal minimum wage in decades.
We should work for slave-like wages voluntarily or have it forced upon us?
This is a poorly thought out argument. Cost of living, housing, etc. is obviously different in US, you might end up with less income than is necessary for survival. What makes you think you will be able to find any workers at all, let alone those trained to the necessary standard and skill?
It should be obvious that appropriate responce to a crime (slave labour) being committed is not to commit the same crime yourself.
Any products with stolen materials, stolen labour, or stolen taxes should not be allowed on the market at all.
Manufacturing is still moving to SE Asian countries (Viet Nam in particular), but even there producers are increasingly moving production in India and East Africa because of rising costs (e.g., wages).
I agree with you on the tariffs. China should not be able to outcompete us because they pollute and use slave labor. Force them to compete on fair terms.
There are quite a few European countries with very robust manufacturing bases who are far more regulated (both from a labor and capital perspective). So, minimum wages, labor unions etc have little to do with the US' manufacturing base. In fact, one could argue that weaker unions, if anything, have contributed to the decimation of the manufacturing base.
Not so, import taxes and one avenue that should be explored is true carbon costs/impact factored in. Why should something made locally be more expensive than something made the other side of the World and shipped all that distance. Clearly some impact costs not being factored and the whole carbon aspect should be utilised for many benefits - balancing out imports for one.
Only difference is that the wealthy in the US will carry more of the burden instead of the working class.
And that’s why we don’t have many advocates for it even though it will solve the manufacturing problem almost overnight
Moving inflation to 6% will create millions of working class jobs in the US due to both a weaker dollar and cheaper money supply for value creation.
The losers in all of this are wealthy Americans. They will see their assets depreciate and buying power diminish. And that’s why we don’t do it.
But I guess since what you want is inflation that is one way to get it, tho it will not be 6% but closer to 30%.
Yield curve control has not worked for anyone, it is a death spiral that results in zombie economies, at best.
Minimum wage already isn't really a living wage in much of the country. Rolling back regulations is jumping headfirst into slavery, whereas.. I'm very critical of China but don't see the connection between their expanding industry and slavery. Businesses are diversifying their supply chain in the face of this pandemic.
Arrogance, this is one of the factors that killed US manufacturing.
Minimum wage workers do not think they are making too much money, also there are a lot more of them then you.
He didn’t do anything that actually slowed the loss of our manufacturing base while president.
Come on now. Say what you will about the effect of the tax changes on inequality, they're clearly designed to make it more attractive to do business in the US, e.g. lower corporate rates and allowing capital expenditures to be deducted immediately rather than amortized over a period of years. It's hard to argue that tariffs on goods from China don't make it less attractive to buy goods from China.
It's true that tariffs will make buying goods from China less appealing, but if you look at the outcome, it's not really a win. Consumers are paying more for the same goods, companies are scrambling to move their production to India and Malaysia, and there's not a significant increase in US manufacturing.
A properly executed initiative to increase US-based manufacturing would address all of the factors necessary to restart manufacturing:
- Not only tax cuts, but subsidies and investment aimed at increasing manufacturing in specific industries
- A concerted program to identify labor and skills shortages, and address them
- A program to identify the missing parts of manufacturing ecosystems and address them. One reason why electronics are made in China is not only cheap labor, but access to a whole ecosystem of suppliers and other manufacturers. Need one million PCBs assembled, plastic casings made, half a million cardboard boxes printed, instruction manuals printed and bound, well, there's a whole ecosystem of partners ready to get all of these things done with the capacity to have a relatively short turnaround time.
- A clear bipartisan commitment that this is something that won't get deprioritized or axed one or two administrations later, but something that is of national interest and that both parties agree to push forward
- A national focus on a key differentiator from other countries' manufacturing. China has cheap, Japan, Switzerland, and Germany have good, the US has big and sturdy maybe?
- Tariffs to protect newly formed manufacturing businesses, but only in conjunction with all of the above
This is what a solid plan for restarting US manufacturing would look like.
Disagree. I think this is small minded. So you add a tariff on chinese goods. If they are not the cheapest, then you buy from elsewhere... which still isn't the USA.
And then China does the same thing: retaliating with tariffs, and then buying goods from elsewhere, which isn't the USA either.
So in this game, tariffs probably hurt businesses in both countries.
And, anecdotally: I still buy products from china. More today than 4 years ago. The products for sale on Amazon are often just chinese imports that have been marked up or re-branded. I think it's the exception, rather than the rule, that tariffs did anything positive for someone.
To be fair, Trump has been saying that since the 80s... Of course that didn't stop him from manufacturing in china himself. The guy talks the talk but rarely walks the walk.
> He didn’t do anything that actually slowed the loss of our manufacturing base while president.
And that's why he lost. But boy did he make israel safe. How many arab states did he force into recognizing israel? 4 or 5?
Trump's achievements were making israel great again and forcing mexico to extend intellectual property rights by a few years so that he can selling his "Trump" name in mexico for a few more years? Not that things are going to get any better with biden.
But then again, it's naive to think the president hold any true power. The power are held by those behind the scenes. Politicians nowadays are entertainers to keep the populace distracted. Presidents come and go, but the powerful remain.
I guess we will know for sure - if they slow or reverse (especially in India) under Beijing Biden that will be confirmation Trump was successful at least at moving manufacturing away from China. It was a start. I don't expect it to continue with the establishment Democrats and Republicans back in charge. Yippie.
Increased production in India and Brazil don't do anything for the loss of U.S. manufacturing.
Pretty depressing.
"I sincerely believe with you, that banking establishments are more dangerous than standing armies; & that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale" - Thomas Jefferson
"I have two great enemies, the southern army in front of me and the financial institutions in the rear. Of the two, the one in the rear is the greatest enemy" - Abraham Lincoln
In reality they just want to help themselves in the easiest way they can.
And funny enough our gov't (I'll let you guess which political party) struck a deal with Foxconn to produce LCDs in Wisconsin. It has failed miserably: https://www.theverge.com/2020/4/12/21217060/foxconn-wisconsi...
At what point did I ever say Republicans were dumb for wanting it? I'm mocking the idea that Republicans actively denounced corporate welfare (saying it's a Democratic thing), yet just do it themselves (and then fail at actually make the change for that matter).
Take your triggered self over to Reddit.
On the other end, how do you compete with slave labor in the Chinese factories?
https://www.washingtonpost.com/investigations/in-the-early-d...
> "In the end, the government did not take Bowen up on his offer. Even today[May 9, 2020], production lines that could be making more than 7 million masks a month sit dormant."
That article was published in May 9. Even on May 9, the production lines were dormant. How could this happen? It is unfathomable. The country probably had masks shortage since March. It is so hard to believe some of the things that happened this year.
There are plenty of countries with worse working conditions yet but people seem to stick with china.
Trading blocs that ensure minimum working conditions. Companies which pay the worker a decent wage should get favorable tax treatment and procurement.
So China will just ship the goods to another country and change the Made in label. Some middle man will make money and nothing will change.
As for mass produced surgical masks? Yeah we don't have the manufacturing base for that sort of thing anymore unfortunately.
And honestly, by about April this year when China started having the virus under control and reopened their manufacturing sector at full capacity, it’s a good thing they were equipped to manufacture so many essential items. The US started running into capacity problems with some of the industries we do have like meat processing plants, if we relied more heavily on domestic manufacturing we actually would have been worse off over that period.
I'm sure that after you adjust for cost of living, the numbers more or less look equal. However, keep in mind that manufacturing is leaving Shenzhen because of rising wages.
Sources:
Shenzhen Annual Salaries: http://www.sz.gov.cn/en_szgov/news/latest/content/post_78894...
US Annual Salaries: https://www.bls.gov/oes/current/oes519199.htm
Shenzhen Manufacturing (it's a news story, but you can find a ton of them with the same theme): https://www.scmp.com/economy/china-economy/article/3108207/c...
Have as your "goal" less the desire to "win" the global competition for corporate profits & corporate headquartering of multinationals in your nation simply on grounds of labor/profit competitiveness, and take a more nationalist view of, where necessary, having state run enterprises or "free market" competition within your borders but not complete free trade in a global sense.
In other words, do no necessarily pursue as your goal to structure economy either to have most profitable companies that reduce costs by moving labor around the world to find cheapest workers, or those which try to export the most. Have as your goal at least to produce domestically as much as possible to satisfy domestic consumption demands, as well as having some minimal threshold of employed domestic workers.
As it stands, US has a massive trade deficit, and a decades long decline in working age male population, especially in "flyover" US regions where manufacturing has declined the most while not being replaced by equivalent jobs. These regions also have declining population, rising suicide & opiate death rates, declining family formation / birthrates.
The "telos" of our society should not put as its "end" an economy, especially one which pursues profit above all.
The economy should be a tool in service to outcomes we actually desire.
Like software built to do a job, not simply designed for the production of specific features.
This is where global financial capitalism (as the US has a giant capital surplus which balances its trade deficit) needs to be called into question.
Internal free markets is one thing. But not having a national industrial policy which prioritizes the well being of domestic workers and their families over well being of multinational corporations and banks makes our system quite degenerate over time.
People should really take a few minutes and watch these 2 videos explaining the current account[0] and capital account[1] relationship, and understand that how we operate now is a political choice, which has massive consequences on who benefits of this system accrue to, and who pays the costs of this system.
This system is maintained by having the reserve currency and the state using strong efforts over many years to not only maintain this GRC but strengthen it, not allowing the natural devaluation of the $ that would close these 2 imbalances and more closely balance capital and labor.
Also, it is not a requirement to have a well developed economy and run massive trade deficits or not have a thriving industrial sector. Germany and Japan are 2 examples that do not run giant trade deficits like the US [3]
https://youtu.be/dirBYVjDk7A [0]
https://youtu.be/AimYG1jYD0A [1]
https://www.conradbastable.com/essays/the-germany-shock-the-... [3]
The blind pursuit of efficiency optimizes for the macro numbers at the expense of gutting the structure of the labor market and lived experience of people.
It’s far better to have a lower per capita GDP with a more equitable distribution of resources (such as a higher household income across quantiles)
It seems clear that some level of tariffs, caps on FDI, etc are “good inefficiencies” if done correctly.
In the countries with low GDPs and highly equitable distribution of resources -- North Korea, East Germany, Cuba, the Soviet Union, for example -- the border guards' job is to prevent people from escaping.
I wouldn’t say globalisation is dead more that it’s going to be more balanced going forward with local concerns.
There should be more machining and making in the US; everyone would like to have solid US-made hardware, but success in small-business machining and manufacturing, and scaling to large scale without off-shoring, requires a discipline and commitment to self-improvement that is difficult to cultivate.
[1] https://voxeu.org/article/industry-anatomy-transatlantic-pro...
Shifting manufacturing to China makes absolute sense when you look and care about the the quarterly/yearly performance. And if you decide not to do it well tough luck because your competitor is and will have better results than you.
If you look at it with a 20/30 years perspective then it becomes obvious that outsourcing is completely the wrong move. You basically get rid of your local expertise, train your replacements, slim down your middle class (the folks buying the products!). Then your manufacturing partner starts vertically integrating and designing it's own competing products and you are pretty much left out of the equation. It's almost as if, thanks to support from the party, Chinese businesses can plan for 20 years ahead but western companies can't because they HAVE to maximize the quarterly results!
> I argued that, even in the presence of free trade, a country should have the ability to tariff imports to the extent that that country could maintain a 25% (or something) domestic market share.
Tariffs and trade wars seem completely useless to me when done between G7 countries because we're all in the same situation regarding China. To achieve any sort of paradigm shift we'd need to stop each having a 1:1 relationship with China and start negotiating as a block.
Think of the supply chain of something immensely complex like the Boeing 787, which has, quite literally, millions of parts (including LCD screens). Many if not most of those parts are imported. If there are tariffs on imports, either:
1. Boeing will pay tariffs, increasing the cost of each plane. Great for Airbus, bad for Boeing.
2. The parts are sourced locally instead. These parts will invariably be more expensive, as if there were cheaper local options, they would have been sourced locally before. Again, Boeing planes get more expensive, great for airbus, bad for Boeing.
3. Boeing, to avoid raising prices and giving market share to airbus, decides to move manufacturing outside the US.
What applies here for Boeing, is also going to apply to Tesla, Caterpillar, and hundreds of other companies. Tariffs create incentives to source locally, but they simultaneously create incentives to manufacture abroad. It is a very thin tightrope to walk and I haven't seen any evidence that Washington can.
On the topic of national security: “When goods don’t cross borders, soldiers will.”
I'm far less concerned about a war breaking out between two countries with healthy trade relations and cultural exchange. Do we want China to be our enemy? Why?
It has enough military for safely making this again and again for tens of years at least.
PPE shortages in hospitals were because of unprecedented demand levels, not because China didn't continue to export it. A country is actually a lot more likely to have problems handling that kind of short term demand shock if it relies entirely on domestic manufacturing
If not - the politics is involved in selling decision making - then the US starts a sanctions war, as China example shows. It sells in the end, but after being economically punished.
1) USD reserves allow us to import more value than we export so it offers a better standard of life for the consumer than otherwise.
2) It allows us to have a bigger consumer market than we would otherwise have and incentive for countries to partner with us to sell their stuff to. If you've lived outside the US you know every business wants to sell their stuff here either as #1 or just after their home market.
Under those purposes it seems to have worked very well. Of course theres the risks of crashes along with it too.
1. Regulations. Both the OSHA and EPA had a measurable negative impact on manufacturing productivity growth. [1] I suspect the most harmful regulations are those that constrain contract freedom by requiring employers to give unions a negotiating monopoly, aka collective bargaining, over any work unit where they emerge. This would devastate any of the bright spots in American industry today, whether it's Tesla, or Amazon, or Google. The threat of unionization also discourages these firms from expanding into areas that require employing high concentrations of less-skilled workers in immobile capital intensive projects, as these are the most susceptible to unionization.
2. The massive rise in social welfare spending [2], diverting capital from productive uses to unproductive ones.
[1] https://www.jstor.org/stable/1810223?seq=1
[2] https://fivethirtyeight.com/features/what-is-driving-growth-...
Why not just a direct subsidy to US manufacturing under the usual tax code?
I mean, I guess the point remains valid in that everyone can see that a lot of manufacturing has left the US in the past, I dunno, fifty years. But if you don't even know whether the anecdote you mention is true, why bring it up? Why comment at all?
In which sense?
Being a cynic, I've studied many aspects of this system for some time. I have to say I'm shocked how obvious the PR has been for some of this stuff.
A favorite example is the Iraq war. Clearly a mafioso protection racket type of move. Nice country you got here, quit using Dollars and see what happens...
The 1970s in can be almost explained in the sense of a 1930s style run on the bank, except this time it's allies and foreign countries after their gold. The Saudi benefit from attacking Iraq probably even mirrored what France thought it was getting in "French Indonesia and French Vietnam". You can almost imagine a scene playing out between French and U.S. diplomats where the French ask for their gold and the U.S. goes, "well... here's the thing about your gold, tell you what let us call it even and we will spend a decade or more at war for you? Deal?"
The entire thing is absolutely crazy and the way it is taught to average people is complete bullshit.
This is the article’s key insight. Dollar hegemony no longer works for anyone.
The Fed needs to support international payments in multiple currencies and build its non-dollar reserves. Congress should prioritise domestic manufacturing and wage growth.
No regulation changes bring manufacturing back with this strong of a dollar.
That "structural deficit" means allowing manufacturing to move overseas.
The trade war is a distraction. Trade imbalances with the rest of the world could be solved very quickly by making it clear the the dollar is going down in flames and that policies will be put in place to make that happen:
1. massive federal budget deficit spending
2. purchase of all the debt by the Federal Reserve (yield curve control)
Holders of bonds would be absolutely wrecked. That's a lot of institutions and wealthy individuals.
The only question is whether the political will to do this can be mustered. So far it hasn't.
That's a lot of institutions and wealthy individuals. That's also a lot of people with 401k's, college savings for their kids, pension funds, and non-profit endowments.
I have a feeling that most wealthy individuals and institutions will be just fine, it's the little guy and middle class families that will feel the pain, as usual.
(And the answer is, some are and some aren't, but it's not a clearly good idea.)
Not only institutions, but those who are in power (government) who have risk-tolerant positions in the market with nothing to gain but their own discomfort and retirement.
The world has moved beyond tying the value of our currencies to material goods. Digital "coins" aren't any better, and the same group of fringe types who push the gold standard have taken that over as well.
Addition: Every historical case of a government switching to fiat currency has resulted in runnaway inflation. The reason that gold and silver are the only constitutional money is it forces the government to do the right thing. No gold standard permits those in power to manipulate the currency for whatever reason they wish. The rules should force the wrong people to do the right thing. Relying on people in power to do the "right" thing will always fail.
Moreover your historical argument is weak. By analogy, we should also not have government, because every society that has formed a government has failed to keep it: Every government falls, eventually, be it Rome or the Aztecs.
Defaulting would screw a lot of institutional pension investors, while a lot of the super-wealthy could just dodge into less vulnerable assets, potentially worsening wealth inequality.
If the money arrives on the consumer side first then asset inflation will follow but only after consumer inflation has caught up. All the asset inflation that happens will be caused by productive growth. Encouraging the wealthy to get rich off the backs of rich workers is exactly the situation that we want to achieve. Right now they have no need for domestic workers because the central bank tap is wide open and workers in China manufacture all the widgets (such as iPhones) they need.
This seems opposite of reality. During inflation, prices of assets rise, as the currency with which to procure them becomes devalued; those who possess assets are in a much safer position than those who exchange their labor for currency, since inflation will happen far more rapidly to the necessities of life (food, shelter, etc.) than to wages.
Cf. the price of houses, cars, etc., in the U.S. and worldwide vs. the corresponding increases in wages.
Stocks will rise in response to inflation, but that will result in additional taxation since the initial investment is uninflated.
This is the opposite of true. In practice, inflation is wealth transfer to the upper class. Inflation benefits debt holders, the people who are most levereged (with debt) into inflation proof assets are those who are rich.
It may be counter intuitive (it actually isn't, it's perfectly logical) but inflation is merely what happens when demand exceeds supply. This means if you constantly increase demand for labor you will get to see consumer inflation. Since there is barely any consumer inflation there is very little demand for labor. This isn't surprising because a lot of the jobs are now abroad and domestic training opportunities are poor (companies don't provide them) or inaccessible (college is expensive and time consuming). If you could somehow make every American highly educated so that they can work in the highly profitable sectors of the economy that remained (there is no shortage of those) you would still get to see decent economic growth (2% YOY) in developed countries. The reality is that not everyone can get such a job and some need a secondary career after they lost their first. Since there are not many low skilled jobs that can't be done abroad there is little demand for these workers. If you can increase consumer inflation you will directly increase the wages of those unneeded workers because the consumer inflation is excess demand for (low skilled) jobs.
> the people who are most levereged (with debt) into inflation proof assets are those who are rich.
Yeah but here comes the trick. If there is consumer inflation the only way you can make your assets inflation proof is by productively employing workers. If you are owning real estate then the value of your assets will grow but only insofar that workers can afford to pay rent.
The rich won't make money off of sitting on assets, they will make money off of using those assets productively by renting them out. In our current twisted reality you can often make more money off of just letting the property sit empty so that you can have a quick sale 5 years down the line. The idea of unused real estate growing in value is insane but it only happens because there is asset inflation and mismanagement by the central bank.
As such, inflation gives an economic advantage to those who receive the new money sooner, and the consequent higher prices harm those further down the flow.
In short, and contrary to the implication of the above comment, inflation benefits banks and corporations (and by extension, the wealthy and powerful), and harms workers and those on fixed incomes.
Yes but going by central bank policy that money isn't supposed to end up in their hands first. The goal of the central bank is to increase consumer inflation. Of course the actions of the central bank don't match their stated goals but this is primarily a policy failure. The rest of the government is supposed to use the cheap money to increase demand for labor through public spending. It's completely failing to do so.
If we inflate via UBI, those on fixed incomes wouldn't be hurt unless it was a fat fixed income, in which case it's disingenuous to refer to them that way since they're basically just independently wealthy, and most people think of fixed income means pension/disability.
I think you misunderstand ...
Generally speaking inflation can be managed and avoided by asset holders and business owners. They can adjust their rents and prices to match the inflation in a way that wage earners and renters cannot.
Generally speaking it is deflation that hurts asset holders and business owners. We have made desperate attempts since the financial crisis to stave off deflation and even then we're barely treading water. Financial assets and real property (and also silly things like paintings) have benefited but look at the price of oil ... look at the price of other basic commodities and services like shipping.
Our 21st century landscape is deflationary and elites are frantically doing everything possible to avoid it.
If there is consumer inflation you can't manage inflation in a way that doesn't productively employ workers. If there is asset inflation you can have an unproductive business and still grow without doing anything of value. The latter is what many people object to. The former would benefit workers far more than it would benefit the rich. If your wages increase by 10% but Bill Gates' net worth merely catches up with inflation who gives a damn? If you can somehow double the income of the poorest members of society then you effectively cut the relative wealth of Bill Gates' in half. He has more to lose from expensive workers that demand reasonable salaries than he can gain from catching up with consumer inflation.
>Generally speaking it is deflation that hurts asset holders and business owners. We have made desperate attempts since the financial crisis to stave off deflation and even then we're barely treading water. Financial assets and real property (and also silly things like paintings) have benefited but look at the price of oil ... look at the price of other basic commodities and services like shipping.
That would be true if there was no central bank intervention. But the central bank is intervening in a way that gives the rich what they want without giving anything to the poor. Deflation on the asset side basically doesn't exist.
So inflation is irrelevant for the little guy, and easily dodged by the rich, leaving the middle-class to get shafted.
It doesn't work that way. If you want to protect yourself from inflation you have to deploy that capital productively or alternatively be close to the source of the inflation (the central bank). If you are actually doing productive work then workers will see their incomes grow and if workers are underpaid relative to assets then wage growth will continue until both assets and incomes are roughly on par. After that assets will keep up with inflation. The benefits to workers massively outweigh the benefits to asset holders.
When you consider that the central bank is just blindly handing out money to public companies it's basically the opposite. It's actually perverting and distorting the economy because the money isn't going where it is truly needed. If you are rich this is what you want. You want to have lots of money and a workforce that works for peanuts to make your relative wealth even bigger.
Inflation can be managed.
If you have a non-austerity solution that doesn't assume infinite exponential economic expansion I'm all ears.
Do you plan on shifting your investment strategy?
I currently have the majority of my portfolio in stocks in Australia, Sweden, Japan, Switzerland; in residential real estate, and in puts on overvalued tech stocks and TLT.
Consider that the "proof of work" of fiat currencies is taxation + inflation (which wipes 1/2 of all your productivity), and you'll quickly realize that Bitcoin's PoW is considerably more efficient.
Also, Gold, Silver and other precious metals are more expensive to mine than Bitcoin, when measured on a store of value basis.
Imagine a world where etheruem has enough market cap where it's volatility decreases, smart contracts for services are wide spread, everyone works free-lance giving the economy a inherent conflict of interest problem that rockets innovation forward while at the same time of having the effect of directly capturing some of the wealth you create by charging on a 'free-lance' model.
No need for the dollar, but it does change the inventives built into the system and will have radical effects on globalism.
I'm not sure whether the volatility of ETH price matters much when stablecoins are readily available.
Generally: I'll switch to ethereum for daily spending when I can spend through a proxy that allows revert an erroneous transaction (e.g. a overcharge or wrong recipient), perhaps necessarily arbitrated by a 3rd party. It's just a little too stressful sending >$100-500 frequently w/ ethereum right now.
This week, I bought a little airbnb pre-ipo, then sold post-ipo through Ethereum->FTX exchange.
Also bought some 24 hr traded synthetic tesla stock on eth.mirror.finance. (completely anonymously)
Wild times. Hard to go back once you have a taste of financial freedom.
But tbh your whole second blurb goes over my head.
I agree, it's great of contractual/conditional speding.
But I think it'll be used for daily spending in the next 5 yrs.
My business receives payments via stripe where they take 2.7% fee. then i have to wait 2-3 business days to receive it in my account. I hate this & already offer a 2% discount when buyers pay my business in crypto. And a surprising # of my employees (~35%) would prefer to get paid in crypto.
In fact, if anything, it complicates taxes because it is just one more thing to track. I opted not to do this, despite being heavily pro-crypto. In fact, my company is in the crypto space.
I'm curious what your employee reasons are. Maybe if you aren't in the US, it could make more sense, but I'm not seeing it. Insight welcome.
3-5 years isn't really saying much especially given that the US dollar does not have much movement, and that this is effectively the same as being bullish on the Euro and Pound and Yen, which are the biggest competing currencies. I do not see any reason why those currencies will see a sudden inflow. That last time that happened was in 2002-2008, but that was when there are much more interest in foreign assets , whereas today foreign assets are shunned in favor of domestic assets and tech. Pensions, hedge funds seek safe US assets such as investment-grade corporates bonds and treasury bonds, not riskier foreign assets.
I do not expect any sort of fraying of the US dollar as the global reserve currency system though.
Some of the conclusions the author draws are wrong or dubious, such as the purported inverse relationship between the US dollar and corporates profits. The dollar surged in 2014 but corporates profits did not fall.
https://www.marketwatch.com/investing/index/dxy
Example: the Swiss franc, but you see the same with GBP, EUR, and JPY:
https://finance.yahoo.com/quote/CHF=X?p=CHF=X&.tsrc=fin-srch
The problem is there is no alternative. The Euro has it's own structural issues and as we saw in March when folks got scared they sold alternatives like Bitcoin down hard. In short, there is no alternative without international cooperation to make a change which doesn't appear likely any time soonish.
> On the other hand, a structural change could happen with a shock and stepwise change, like the end of the Bretton Woods system. This can happen in a few ways, but becomes more probable if the United States decides to actively promote a change rather than defend the status quo.
The larger shift is out of Treasury bonds into different reserve assets, such as commodities (oil, gold, alternative currencies). That one is very real.
Can't the increased M2 money supply be interpreted as a move to stabilize the value of the dollar? Maybe the crisis made that increase necessary to maintain the value?
Rats leaving the sinking ship that is the US dollar and all fiat currency seems to be happening very quickly. I hear almost everyone talking about it now, it isn't the loonies anymore. Money that isn't tied to whatever stupid policies your government has implemented will always be attractive. No one asked me if I wanted to prop up the stock market by printing ~25% of all US dollars that have ever been printed, in 2020.
People who appreciated the technology initially but changed their minds seeing it being driven by what people often consider a toxic community who hides behind the pretense of technology to make money.
People who think Bitcoin itself, despite the technology, is no good for it's stated initial purpose of being a peer to peer electronic cash system. Whether that's true even with additional layers like lightning remains to be seen perhaps.
People who either missed out on the rise, sold early or lost money trading it in the past. Frustrated or bitter perhaps, wanting to be right about Bitcoin so much that they've shut out any possibility that it will succeed.
And I guess people who don't quite understand the technology, purpose or possibilities Bitcoin and other cryptocurrencies bring to the table.
And obviously all the "tether scam" people.
There is positive and negative to cryptocurrencies, same as there is with the internet itself. Do we wish for the internet to fail (if somehow that were even possible) because it enabled mass manipulation of people through social media? Well maybe some people do but I think the vast majority take the good with the bad and some are working to try and solve these problems.
Will Bitcoin fail? I don't think it can at this point to be honest. Genie is out of the bottle, interest is there and it's getting more legitimized every day, whether it's through the direct actions taken by individuals, companies or institutions to further the entire space or through the inaction of governments who don't want to stifle innovation or possibly don't see it as the threat to the monetary system it could (potentially)_be.
Time will tell!
1) Price of the energy when you pay for it only grows over time. Short disruptions are possible but overall trend persists.
2) More energy also correlates to more goods produced so unless artificially manipulated the ratio should stay more or less the same.
3) All major currencies undergo inflation so even if energy becomes more plentiful there is nothing really new here
But if the world energy production doubles, do you think that scarce resources cost the same? Prices of e.g. concert tickets or art pieces will adjust.
If you do not like it you're always free to by gold or whatever resource does not depreciate long term.
> Subsequent down years have reduced the fund's assets under management to $681 million as of December 2010.[4] Clarium Capital Management was reported to have had big losses in 2010.[14] The firm has continued to struggle with bets that it made on inflation and the US dollar.
It's not a universally accepted opinion but I take Martin Felix's view, articulated in "Money," that credit predates coinage.
It's turned me off the article and as a consequence I can't read any more.
It's also interesting to see how step by step some myths are disappearing. For instance, the article recognize the importance of taxes as a main drive of giving value to a fiat currency.
I did read the rest of the piece and found it very informative and enlightening, I highly recommend reading it, especially if you are interested in the nature of money.
https://www.google.com/amp/s/www.wsj.com/amp/articles/edward...
From basic supply and demand:
1. a downward pressure on wages emerges from workers competing with workers (competition among suppliers of labor)
2. an upward pressure on wages emerges from employers competing with employers (competition among consumers of labor)
And, ceteris paribus, some equilibrium wages emerge.
The minimum wage ostensibly exists to interfere with #1 (though usually framed as protecting workers from employers), assuming the minimum wage is set above the would-be equilibrium wage.
But what if the minimum wage is set below the would-be equilibrium wage? Perhaps the minimum wage instead serves to interfere with #2 by allowing a point of collusion among employers, and thereby keep wages artificially low.
Is anyone aware of any research on this?
https://i.redd.it/wjxa2s4dbr461.jpg
2 billion usd I presume. This money could build many megafactories but again, kickbacks
However the author lost me a bit when he started talking about bitcoin. I get why bitcoin might be appealing to a country like Iran with cheap energy and sanctions preventing them from participating in the world economy. I also get why it would be appealing to individuals in developing countries with unstable local currencies, and perhaps limited access to harder assets. I don't get what the benefit would be to national reserve banks and finance between countries in the general case, where special circumstances (like Iran) don't apply.
"As of this year, the US Federal Reserve (blue line) now owns more Treasuries than all foreign central banks combined [..]"
So, if your debt is to the Federal Reserve, how much debt can you accumulate before it's too much? Does the question even makes sense?
I think the US Dollar is going to crash.
You can't say this in polite society, or silicon valley, but you can say to invest in Bitcoin because it's a superior ponzi scheme to all the rest.
Total treasury supply has nearly doubled this year, and yet foreign owned treasuries is only up 2% - meaning The Fed has bought close to 98% of it [1].
There is no treasury market. There is only The Fed. Considering that this market is about 30% of the size of the entire US economy, this should probably concern people. That's a large part of the US economy to be price fixed. Especially when you consider this essentially fixes prices for the housing market.
[1] https://seekingalpha.com/article/4379154-fed-is-almost-out-o...
No wonder Facebook continues to fight hard for their Libra / Diem project
> The COVID-19 pandemic hit in early 2020, which halted global trade and contributed (along with a structural oil oversupply issue) to a collapse in oil prices. The dollar quickly spiked, foreigners began outright selling Treasuries and other US assets to get dollars
Earlier on the article explains that in the petrodollar system, foreigners need dollars to buy oil. If they can now buy oil for less dollars, then why do they want to get more dollars?
So when things go bad, and the price of dollars goes up, everyone who's "short" dollars (via having liabilities priced in dollars vs local currency assets) sees the value of their debt appreciate, and it's painful.
All the people who have dollars or bonds will be happy to see their money evaporate. And no one will be concerned if the US defaults, because they have nothing of value anyway worth liquidating or foreclosing.
And we could never have another global war. We are completely passed that now of course. All of the recent wars have been totally isolated incidents, mainly caused by evil dictators.
/s
Skim reading this, I provisionally label Lyn Adlen as an advocate of monetary policy.
As every one knows, abandoning the gold standard, adopting fiscal policy, makes monitarians anxious.
Over time, I'm leaning towards a refreshed Keynesian view: empire means huge military means deficits. Both trade and federal.
I'm not a classical Liberal or a Neo-Liberal. I'm just saying Keynesian and MMT notions seems like useful metaphors for understanding the current world.
--
Lyn Adlen does mention petrodollars. But doesn't provide a clue to what comes next.
Rare earth dollars? Gigawatt hours dollars? Some kind of PoW (and therefore measure of energy) crypto coin?
Does it even matter? Are petrodollars just a shibboleth for monetarians that can't accept there's "no there there" when money became fiat?
Petrodollars are backed by the ability to apply force.
At equilibrium, a weaker or stronger dollar doesn't affect exports, it's just an exchange rate. What can affect exports is a weakening dollar.
In an inflationary disequilibrium, exports increase only insofar as foreign consumers are able to purchase domestic goods before those goods' prices have adjusted to inflation. In other words, exporters are unwittingly selling their goods for a lower price.
Absent inflation, exporters could have chosen to increase exports by intentionally lowering their prices. That they didn't suggests something about their marginal costs.
With inflation, the exporter has a similar benefit over its suppliers as the foreign consumer has over the exporter, namely buying goods with new money before prices have adjusted. As such, the exporter's suppliers are also unwittingly selling their goods for a lower price.
Whether this is beneficial depends on where one is positioned as new money propagates through the economy. Banks get it first, then to their borrowers, other financial institutions, and so on. The losers are those at the tail-end, who face higher costs but have not yet had their own prices bid up with new money: wage workers, those on a fixed income, etc.
The net effect of all this price manipulation is a wealth transfer from those who receive the new money later to those who receive it earlier.
> currency manipulation, is equivalent to a tariff or an export subsidy
While an export subsidy can also increase the quantity of exports, the larger economic impact of intentionally weakening the currency through inflation is very different.
Germany is a weird corner case where the entire reason for the Euro is to allow them to keep their currency artificially weak by using the rest of Europe's economy as a place to dilute their export power. The DM was getting relentlessly stronger against the USD and Sterling and when the conversion to Euros happened, major holders of DMs got absolutely hosed.
You can spend them, I suppose. The article mention they doing it now with the Belt and Road program.
You are right about the Euro. It's not the reason of the existence but it's the result.
US consumers will get fucked with a weaker dollar. Imagine having to pay $7 a gallon for oil instead of $3.
There is another consequence. A lot of other countries will become "rich" all of a sudden. Which means they won't use US dollar as a medium of exchange and America would have to "earn" by exporting. Which means people will have to work a lot more to produce more for exports without consuming ourselves.
If USD devalues too much (but is still reserve currency), other countries will become richer aka, they can buy more dollars for fewer of their own fiats. Which means they can import more oil by converting more and more of their fiat to dollars. Which means demand for oil internationally will go up while supply remains about the same, causing price of oil to go up, regardless of where it is produced.
If USD devalues and other countries decide to abandon the dollar for trade in favor of say Oil-coin, US will lose access to international oil until it "earns" oil-coin somehow. How does America earn oil-coin? By exporting something. Since America can produce so much oil, the producers will try to export oil for oil-coin. Which means increased global demand and thus rising prices again.
US could shut down all exports of oil and only use it domestically and shun oil-coin entirely. But this means that
a. US can't import other things because of lack of oil-coin. So we will suddenly have severe shortages. Oh a bad disease in one year caused all potatoes in America to die? Tough luck sustaining all the food processing and chips companies. They can't do a stop gap import potatoes since we don't have any oil-coin. You can expand this experiment to all kinds of things such as stent-valves, rubber for tires, coffee. Our rich lives are truly there because other countries are working for it.
b. US energy supplies will be limited by domestic production and domestic supply and demand characteristics. Oh, we have such a great economic boom that increased oil demand but a few oil wells are down for repairs a few quarters? Boom, spike in oil prices again despite being self-sufficient. Another recession beckons since industries can't function with such high oil prices.
This globalization thing is not very simple. It may have caused a lot of grief, but it's also a very good distributed system that's preventing us from going back to shortages like medieval times. We're not dying just because there's a 2-3 year span of famine any longer because there's always somewhere else to get it from.
In the oil price example, drop in value of USD could cause prices of oil to increase (by how much? We don't know. There are entire commodities industries who hire quants to figure this out every day).
Assuming price of oil increases by 10%, price of chicken feed would increase by a%, causing an increase in price of chicken by b%, causing an increase in price of shipping chicken from farm to factory by 10%+a%+b%, the factory whose workers need higher wages now (by a total of c%) because of higher cost of living, factory will now have to sell their chicken for 10%+a%+b%+c% to a shipper who will need to pay another 10% who will pass this cost on to McDonalds who will have to pay 10+a+b+c+10 to get a chicken patty.
The dollar menu suddenly become a $5 menu.
As contrived as this example may sound, this is the reality in many "emerging" markets and smaller developed markets. We are so oblivious to real inflation and price fluctuations simply because we are used to getting stuff for cheap from whereever it is available because we can import any time. No shortages for any industry or any consumers here.
While I agree that having healthy domestic manufacturing is good, we need to be careful what we wish for because losing the reserve currency status is the last option of them all. It's truly devastating and you only need ask United Kingdom and how they lived for decades with rationing in order to pay debts and earn foreign reserves.
I mean, labor prices won't move quickly, and existing capital equipment was purchased with stronger dollars, but eventually new equipment will be needed at higher cost, and people will demand higher wages to meet their previous spending power, and anyway, american manufacturing tries to reduce labor as far as possible.
Especially since Trump's election, I have always wondered about the future of America, not just socially but also economically. Trump's excessive use of sanctions and bullying comes at a major loss for future generations. And this line from the article elucidates it:
"However, when major powers like China, Russia, and India begin pricing things outside of the dollar-based system and using their currencies for trade, including for energy in some cases, the US can’t realistically intervene militarily, and instead can only intervene with sanctions or trade disputes and other forms of geopolitical pressure."
and
"Chinese officials have said on numerous occasions that their reliance on the dollar system is a security risk for them. Having surpassed the United States as the world’s largest trading partner and world’s biggest importer of commodities, China increasingly has an interest in being able to acquire commodities and perform global trade without dollars, which as we see with trading partners like Russia, or with China’s yuan-based oil futures contract, they’re increasingly able to do with small steps at a time."
The bullying is the last straw. A lot of countries are very independent and are only trading in dollars because of oil. Take that away with sanctions and the demand for dollars drops rapidly. Thus, US dollar doesn't need to be a major reserve currency, holding US dollars might even be a risk.
Had bitcoin not been deflationary, bitcoin could have filled this gap. More likely though is that the declining faith in American politics will force other countries to go back to a multicurrency system and thus, US will no longer remain the top dog.
History repeats.
By letting go of reserve status, we don't need to go to wars, we'll get some manufacturing back domestically and less shipping from across the world.
Sure, we'll have to reduce our quality of life with smaller houses, smaller cars, denser towns and lesser "stuff" in general but that's not a bad thing necessarily.
So what if gas costs $7/gallon, we just need to reduce our consumption.
Question answered.
Welcome back!
Can you provide any context regarding why this article made the cut, when nothing did for 7 years?
Sorry if it's a bit off topic; it's just an interesting circumstance, and I'm curious.