The Dollar’s Reserve Currency Role Is Drawing To An End By Paul Craig Roberts

[Joanne98]

It is difficult to know where Bush has accomplished the most destruction, the Iraqi economy or the US economy. In the current issue of Manufacturing & Technology News, Washington economist Charles McMillion observes that seven years of Bush has seen the federal debt increase by two-thirds while US household debt doubled.

This massive Keynesian stimulus produced pitiful economic results. Median real income has declined. The labor force participation rate has declined. Job growth has been pathetic, with 28% of the new jobs being in the government sector. All the new private sector jobs are accounted for by private education and health care bureaucracies, bars and restaurants. Three and a quarter million manufacturing jobs and a half million supervisory jobs were lost. The number of manufacturing jobs has fallen to the level of 65 years ago.

This is the profile of a Third World economy.

The “new economy” has been running a trade deficit in advanced technology products since 2002. The US trade deficit in manufactured goods dwarfs the US trade deficit in oil. The US does not earn enough to pay its import bill, and it doesn’t save enough to finance the government’s budget deficit.

To finance its deficits, America looks to the kindness of foreigners to continue to accept the outpouring of dollars and dollar-denominated debt.

The dollars are accepted, because the dollar is the world’s reserve currency.

At the meeting of the World Economic Forum at Davos, Switzerland, this week, billionaire currency trader George Soros warned that the dollar’s reserve currency role was drawing to an end: “The current crisis is not only the bust that follows the housing boom, it’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars.” Continued>>>>
http://dandelionsalad.wordpress.com/2008/01/27/the-dollar%e2%80%99s-reserve-currency-role-is-drawing-to-an-end-by-paul-craig-roberts/

[thunder rising]

1. Surely the world would like the dollar more if they had various picures of Bush

instead of those old time dead guys

[Hydra]

2. Oil is being paid for without dollars more and more now

the era of the dollar as being dominant for that reason is quickly fading.

I say unto all the free traders- where is your "paradise" now? Where has your holy vision taken us?

Superpowers don't import more than they export, except from colonies.

[water]

5. It wasn't free trade that ruined us....

... it was Keynesian economics, wars, and all-round hilarious spending.

In other words: Republicans have no clue what the hell they're doing.

[dantyrant]

6. Keynesian economics?

I suggest that Keynesian economics work fine when accompanied by prudent monetary policy. Some would argue these two paradigms are mutually exclusive, but ought to look at the New Deal for solutions. The Congress has the authority and, indeed, the duty according to the constitution to create money. They've abdicated that responsibility to private banking, and now we're bogged down by debt as a result. The smart move would be to remove the parasite from the economy that's siphoning off all the productivity.

I remind you that the system we have now is one Keynes would have abhorred. After WWII he proposed an innovative world framework in which it would effectively be impossible for trade imbalances of the present kind to develop, but his proposals were rejected. Joe Stiglitz has proposed revisiting this idea in his book Making Globalization Work.

[water]

7. Well, let's see:

Lots of government monopoly money pumped into the economy? Check.
No 'excessive saving'? CHECK.
Artificially low interest rates? Check.


I was under the impression that Keynesian theory had fallen out of favor, along with "supply-side" theory.

[dantyrant]

8. That the money supply is expanding faster than GDP is worrying yes...

In part it's because of loans being made against houses, but regardless it's inflationary. You'll get no argument from me there. Interestingly, M1 has been contracting sporadically the past few years.

The low savings rates comes out of the downward pressure on income because of so-called 'free trade'(really wage and regulatory arbitrage). Americans have been encouraged to go into debt while their jobs are being shipped overseas.

Low interest rates aren't a problem in and of themselves. People holding ARMs want lower rates. The problem is that the money is created by a bank and loaned to banks, and the banks speculate with that money. This is where the bubbles are blown, not in the rates. Lower rates just encourage this sort of behavior, but they're not the root cause. That said, as rates lower, money becomes cheaper. The Yen carry trade is free money when they can borrow at 0.5% and park it in New Zealand at 6%, all leveraged. Insta-hedge fund.

[water]

10. Low interest-rates discourage saving, devalue the dollar, and...

... cause its buying power to diminish. Outsourcing jobs overseas is no different to Americans than inventing something that allows more work to be done with less labor, and is a net boost (to both economies).

[dantyrant]

12. No argument with your first point...

In fact, there's a danger of foreign investors getting rid of their treasury bills should interest rates continue to drop. My comment was more in reference to the way in which money is created and how that ties into interest rates, but given the current monetarist regime I'm in agreement with you.

But I find it strange how often the same people who defend outsourcing practices are the ones advocating for a weaker dollar, ostensibly to 'boost exports'. (To be clear, I know this is not your position, I'm just ranting) However, as PCR points out, when production is outsourced America must then import those products, and this gets tacked onto our trade deficit.

PCR again:

There are two reasons for the dollar’s demise. One is the practice of American corporations offshoring their production for US consumers. When US corporations move to foreign countries their production of goods and services for American consumers, they convert US Gross Domestic Product (GDP) into imports. US production declines, US jobs and skill pools are destroyed, and the trade deficit increases. Foreign GDP, employment, and exports rise.

US corporations that offshore their production for US markets account for a larger share of the US trade deficit than does the OPEC energy deficit. Half or more of the US trade deficit with China consists of the offshored production of US firms. In 2006, the US trade deficit with China was $233 billion, half of which is $116.5 billion or $10 billion more than the US deficit with OPEC.

The other reason for the dollar’s demise is the ignorance and nonchalance of "libertarian free market free trade economists" about offshoring and the trade deficit.

There is a great deal to be said in behalf of free markets and free trade. However, for many economists free trade has become an ideology, and they have ceased to think.

Such economists have become insouciant shills for the offshoring interests that fund their research and institutes. Their interests are tied together with those of the offshoring corporations.

Free trade economists have made three massive errors:

1. they confuse labor arbitrage across international borders with free trade when nothing in fact is being traded,

2. they have forgot the two necessary conditions in order for the classic theory of free trade, which rests on the principle of comparative advantage, to be valid, and

3. they are ignorant of the latest work in trade theory, which shows that free trade theory was never correct even when the conditions on which it is based were prevalent.

When a US firm moves its output abroad, the firm is arbitraging labor (and taxes, regulation, etc.) across international borders in pursuit of absolute advantage, not in pursuit of comparative advantage at home. When the US firm brings its offshored goods and services to the US to be marketed, those goods and services count as imports.

[GOPBasher]

11. Keynesian economics

I don't know much about this topic, so I can't really debate you here. However, wasn't it Keynesian theory that got us out of the Great Depression -- i.e. massive government spending on the war and the New Deal? Again, I'm not claiming to be an expert here, so don't be too harsh. :-)

[dantyrant]

15. That, and...

public infrastructure projects. Roosevelt took control of the credit of the united states and created the money that funded those projects -- it wasn't borrowed money.

[water]

18. I'll have to watch out, here, unfortunately... :( [edit: so many typos]

It would be insane to go to Free Republic and try to tear down the ridiculous Reagan myth, and it would be equally insane to try to tear down the ridiuclous FDR/Gread Depression myth here at Democratic Underground.

I'll just say this:

If you look objectively at Hoover, he actually was very anti-laissez-faaire and anti-capitalist, and he started many programs which FDR expanded. You can read some more on his Wikipedia page here. Many progressives view him an a very good light, as a matter of fact.

It's also important to realize that the Great Depression never ended under FDR! When aggregate demand for labor was dropping, which would normally lower wages, what did FDR do? Raise the minimum wage! It's a nice thought, but what do you think that did do employment levels? That's just one of many, many, many things he did (another? pay farmers to NOT produce food, raising food prices and allegedly helping farmers, something that Hoover started).

I have full faith that if modern liberals looked at the New Deal and FDR with the same critical eye with which they look at Reagan and the fall of the Soviet Union, they would see that nothing FDR did could have possibly helped the economy.

[TrogL]

24. Keynesian heresy

They are supporting a false version of Keynesian theory. Under Keynes you do NOT do that stuff to support a war.

http://en.wikipedia.org/wiki/Military_Keynesianism

[Fredda Weinberg]

3. There are more of "them" than "us" ... this was inevitable and the

sooner, the better for the rest of the world. Some of us won't have to adapt - much.

[gateley]

4. Sobering. nt

[applegrove]

9. It will be ugly.

[Wednesdays]

13. Wow, and I thought things were bad already

:scared:

[CGowen]

14. The Financial Foundations of the American Century - Financial Tsunami Part II

...

The Carter dollar confidence crisis

This second phase, the post-gold era, fuelled by the manipulated 1973 oil shock and US pressure on Saudi Arabia and OPEC to price oil exclusively in dollars, Kissinger's “petro-dollar recycling,” rolled along without major trouble until early 1979 when the dollar faced a major foreign sell-off during the end of the Jimmy Carter Presidency. The American Century faced one of its greatest challenges at that juncture. German, Japanese even Saudi Arabian central banks began dumping US Treasury holdings in what was called a loss of “confidence” in Carter's world leadership role.

In August 1979, to restore world “confidence” in the dollar, President Jimmy Carter, himself a hand-picked protégé of David Rockefeller's Trilateral Commission, was forced by the big New York banks, led by David Rockefeller's Chase Manhattan, to accept Paul Volcker, a protégé of Rockefeller's from Chase Manhattan Bank, as new Chairman of the Federal Reserve with an open mandate to do what was necessary to save the dollar as reserve currency.

On taking office, Volcker bluntly announced, "the standard of living for the average American has to decline." He was Rockefeller's hand-picked choice to save the New York financial markets and the dollar at the expense of the nation's welfare.

The Volcker ‘shock therapy'

Volcker's shock therapy, begun in October 1979, lasted until August 1982. Interest rates shot through the roof to double digits. The US and world economies were plunged into a monster recession, the worst since World War II. Within a year, the prime rate had shot up to the unheard-of level of 21.5%, compared to an average of 7.6% for the fourteen previous years, a more than threefold rise in weeks. Official US unemployment peaked at 11%, while unofficially when those who simply had given up seeking work were counted, it was far higher.

...

http://www.marketoracle.co.uk/index.php?name=News&file=article&sid=3391

[JDPriestly]

16. These are the problems that Edwards, and Edwards alone,

is responding to. We have to strengthen and enforce the trade agreements we have with the goal of protecting the American economy. There are no ifs ands or buts about it.

Neither Obama's "let's get together and negotiate about it" nor Hillary's "we're beat before we begin, so we might as well accept it" will resolve this problem.

It's going to be a fight between us, the American people, and the corporate structure that has betrayed us by outsourcing our jobs and industrial capacity, i.e., ultimately our ability to feed, clothe and defend ourselves.

As our economy declines, Americans will wake up to the realization that this is a fight for survival on a very immediate and personal level. Edwards is the only candidate who recognizes that this fight is looming and who is prepared to wage it.

[penguin7]

17. I do not see how Edwards even understands these issues

How can Edwards make so many votes in the Senate opposite of his view today if he really understood the issues?

[JDPriestly]

19. Assuming you are correct, there is a simple explanation;

Edwards spent the last four years studying poverty and wealth. He traveled the country and informed himself. He talked to the poor. He worked for a hedge fund.

I find it interesting to note that, while Hillary and Obama studied political science before getting their law degrees, Edwards studied how to manage a textile factory. I suspect that Edwards has a more practical background in economics than the abstract historical stuff that Obama and Hillary learned in their Ivy League, top schools.

A lot of people claim that Edwards spent the last four years in Iowa. Those same people question why he is taking the strong, populist stances he is taking. They know the answer, you know the answer to your question. You just don't want to admit the truth.

[penguin7]

20. So he didn't understand the issues when he was in the Senate?

[JDPriestly]

21. Most senators do not know what is going on here in

real America. They spend year after year pontificating, impressing each other and then compromising. I wish more of our representatives in D.C. would take sabbaticals and study what is going on in the real world before going back to D.C.

The most that even the best of them do is to come and hold meetings with constituents on weekends. The lack of contact with the ordinary folks who don't attend such meetings is just appalling.

[penguin7]

23. Why did he run for Senator without understanding the issues?

I am sure when he ran for Senate he implied that he understood the issues.

[JDPriestly]

25. They all think they understand the issues,

and they do understand the point of view of their own social milieu. What they don't understand is the point of view of their many, many constituents who are different from them.

We have a particularly good Representative who meets with his constituents regularly in town meetings open to the public. He is a rarity. And, I don't know to what extent he really lives in our community and knows the problems of the relatively low-income people in this community.

It is much tougher for a senator. The senator knows ABOUT poverty, ABOUT lack of health care, but these are just additional issues to be thought about. Most of the Congress does not know the suffering that poverty or lack of health care mean in the lives of individuals out here. So, subsidies to wealthy oil companies, stricter bankruptcy laws and raises for judges are issues of far greater importance to the Senate than poverty or health care.

We get what we pay for. Look at this campaign. We are getting the candidates the relatively wealthy can pay for. And no one would be talking about poverty at all were it not for John Edwards.

[MattSh]

22. Thank you...

The idea that anyone can spend a majority of their time in DC, or with lobbyists and big money people, or even just in the district or state they represent and still understand what is going on in this country is totally preposterous.

In other words, if you're a Senator or a Representative, by definition you are out of touch with Americans.