Friday, July 29, 2011

US debt crisis, devaluation and the looming shadow of war VERSUS reviving the US economy

A meeting of The Performance Theatre about 3 years ago was the first time I spoke about this, and I recollect that everyone pooh-poohed me then.

I have never minded being pooh-poohed because I have always considered that part of one's life if one wants to live with anything like intellectual honesty and integrity.

What one does when one is pooh-poohed is to check one's facts again.

And the facts are that whenever there is overproduction, there can only be "Creative destruction" and there are only three alternative ways of doing this: (a) limitation of production by some arbitrary means such as quotas or interest rate increase, (b) competitive devaluation of currency, and (c) war.

The first is one of a standard means of "cooling" an economy (i.e. deliberately trying to reduce production).

The second was tried when the Americans tried to get the Chinese to restrain the growth of their economy (e.g. by revaluing their currency - which, having failed to do, the US has been busy deliberately lowering the value of their currency).

If there is indeed a crisis in the USA over the debt ceiling, that is the last weapon in the armory of the US in terms of what it can do short of officially devaluing the US dollar.

So we will have what amounts to a de facto devaluation of the dollar.

IN response to that, then, we should expect moves by other countries to try every method to devalue their currencies.

If those games result in no solution satisfactory to the various key national interests, then war is not very far away.

That is what I said at The Performance Theatre (since then repeated at several places).

And I am repeating that now.

However, I hope that the US will still be sensible and, instead of setting the world on the road to war, will raise its debt ceiling.

If it does so, there will be a worldwide sigh of relief, though it will last only a short while, because the question which follows immediately is: what does the US need to do to stimulate its economy, create jobs, and so on.

The solution being mooted is Quantitative Easing III (that is, a third great burst of printing money).

If the US does proceed with QEIII, as I very much hope it will, that will also create a sigh of relief, and that sigh of relief will last a little longer than the relief produced by the raising of the debt ceiling.

In the longer term, there is no solution to the US's problems apart from revising the global rules of the game in a sensible way, as I have argued earlier = specifically revisiting the rules of the WTO and iether withdrawing from the WTO or embedding sensible rules regarding health, safety, minimum living standards, environmental care, and so on.

The moment that is done, the US economy will start reviving.

Not otherwise.

ENDS Sphere: Related Content

1 comment:

Dan said...

Fascinating analysis.

I'm not sure I understand your thinking on the last prediction -- that the US needs to reevaluate/redesign rules with the WTO (or pull out, ecc.)

Can you fill in the gaps on how you see this raising U.S. competitiveness?