Tuesday, July 14, 2009

Priced Out Of the Market?

A man I know at the day job emailed me a link. The essay is well worth a read. Here's an excerpt:
The sticking point with all these countries is the US ability to print unlimited amounts of dollars. Overspending by US consumers on imports in excess of exports, US buy-outs of foreign companies and real estate, and the dollars that the Pentagon spends abroad all end up in foreign central banks. These agencies then face a hard choice: either to recycle these dollars back to the United States by purchasing US Treasury bills, or to let the "free market" force up their currency relative to the dollar - thereby pricing their exports out of world markets and hence creating domestic unemployment and business insolvency.

When China and other countries recycle their dollar inflows by buying US Treasury bills to "invest" in the United States, this buildup is not really voluntary. It does not reflect faith in the U.S. economy enriching foreign central banks for their savings, or any calculated investment preference, but simply a lack of alternatives. "Free markets" US-style hook countries into a system that forces them to accept dollars without limit. Now they want out.
This is the part that I have trouble wrapping my head around. If I'm a Chinese manufacturer, why do I sell my goods to anyone in exchange for US Federal Reserve Notes, when I can plainly see that they're useful primarily as toilet paper, based as they are solely on the "full faith and credit" of a collection of political whores who lie for their living? Sure, the US is a big market ... but it's a big BROKE market. Why wouldn't I tell the corporate successors of ol' Grampaw Sam Walton: Sure, I'll sell you my "China Steel Garden Shovel." As many shovels as you want. The unit price is 75 renminbi, with a ten percent discount for volumes of over 100,000. Oh, you don't have any renminbi? Go to the currency brokers and buy some.

So the renminbi's value, relative to the US dollar, increases by a factor of two, or five, or ten, or whatever. How does that price my shovels out of the world market? (I can see how it prices them out of the US market pretty good, but that's not the same thing.) Can't I still sell them to Brazilians or Indians, for reals or rupees? If Uncle Sam is the world's only slug, then presumably the reals and rupees have also become more valuable, relative to dollars, by the same factor, more or less, that the renminbi has. (Which is another way of saying that the real-to-renminbi or rupee-to-renminbi exchange rate should remain approximately constant.) And, if not, that's telling me that the Brazilians and Indians are also American-style ne'er-do-wells, to one extent or another, so maybe I don't want to send them shovels either, not in exchange for their flavor of wastepaper. Bottom line: you can still trade with solid citizens. And if there aren't any solid citizens left in the world, well, I guess there won't be much trade, either.

I'm sure there's something here that I'm just not getting.

Still, the writer's overall point is that the American Empire is economically doomed. I hope he's right. Because, after all, it isn't only about the money. In fact, it isn't primarily about the money at all.


akaGaGa said...

I don't pretend to understand all the machinations of government and paper money, but here's a thought.

Perhaps China and other countries have already invested so much in T-bills that the value of their own paper money is dependent on the value of US paper, and they just won't allow the shovel maker to declare that the emperor has no clothes 'cause then everybody would be naked.

And then, of course, there's the carrot of aid that we send abroad, and the stick that comes in many calibers. It's not nice to mess with Mother America.

Jim Wetzel said...

I think you're right. The present situation became what it is through a process, not all at once. I expect that, if they could've foreseen the result, everybody would have done something different decades ago.