HomeEconomics The US Monetary Monopoly under Challenge and a New World Order
The US Monetary Monopoly under Challenge and a New World Order
Articles -
Economics
Contributed by Warren Pollock
Thursday, 03 July 2003
The US has become an export and import driven economy but not in the traditional sense as it normally gets defined through the exchange of goods and services. The major difference being that for six decades the US has retained the sole right and privilege of controlling and allocating international working capital. The mechanisms for allocating and concentrating working capital, a.k.a. accumulated global wealth, both defines and dominates the US import export cycle.
This dynamic arose in 1944 when the US Dollar (USD) became the world's reserve currency through the Bretton Woods accord. The idea behind this accord, and its predecessor the Hague Conference of 1930, which organized the Bank of International Settlement BIS, was to prevent the reoccurrence of global conflagration and economic depression. The net effect however was that to the victor of World War II, the United States, so went the spoils of war.
In a sense the currency reserve structure provides the US with the hegemonies of superpower because it established a monopoly in capital formation, allocation, and investment. The global economic system has been biased to the US Dollar therefore the following economic dynamic operates as a background process through the normal function of stock, commodity, and currency markets; The US; Exports dollars through consumption Imports foreign capital in bond and equity markets for investment Through the export-allocation of capital it imports labor work hours (& goods); Concentrates net investment gains and profits for reinvestment; Provides a return on investment Through capital formation allocates manufacturing and service jobs internationally; Politically determines which regions will be developed; Sets core commodity prices; Returns profits to investors both foreign and domestic; Enjoys a high standard of living. Monopoly of currency provides a spiral of synergies and resulting benefits.
People in the United States enjoy a high standard of living in an economy that as its main functions manages world finance and develops new products and technology. This monopoly also facilitates allocations to necessities of hegemony such as military projection.
It must be noted that property laws in the United States and other stabilizing factors such as military presence and liberal taxation policies have helped the nation to retain its monopoly in capital formation. These factors provide and offer investors, both domestic and foreign, a high return in with a low risk exposure.
Recently, the United States failed to provide a return on investments during the Internet boom. It imported working capital from the international community but failed to provide value. Failing to do what you say you are going to do represents a breech of trust that cannot easily be repaired.
Even within the mainstream of the monopoly, we beginning to see domestic US debt instruments denominated in Euro Dollar. This tepid action provides a telltale that the US monopoly established in Bretton Woods may be under challenge. Unlike manufacturing monopolies that are challenged, like Airbus vs. Boeing, currency markets have the potential to rapidly and violently adjust.
Foreign governments have recently accelerated purchases of US public sector debt because they rely on USD thus they want to prevent a violent correction and a loss of world economic stability and prospects. Governments are looking to maintain the US import-export equation at all costs.
Recent trends in USD reserve accumulations by other governments India is at 70 billion up from 30 Billion, China is at 310 Billion up from 150 Billion, Japan is at 500 Billion up from 200 Billion (BIS).
Unfortunately US public sector instruments are not as productive as private sector initiatives thus they are not multiplied into the global economy nor do they offer the same level of return as private capital investment in stock markets.
Money supply may increase while velocity of money declines as it trends to a liquidity trap. Increases in currency supply cannot stimulate an economy that has fundamental imbalances. That is exactly why the Bank of International Settlements, which coordinates international reserves as it both reconciles and facilities global common economic interest concluded in its annual report that; "The global economy faces a fundamental dilemma which is becoming more acute with time. How can imbalances in growth and external accounts across the major economic regions be resolved while maintaining robust global growth overall?" The answer is of course that growth cannot be restored without painful adjustment.
The last time the US hegemonic position was challenged by such an adjustment was during the 1970's in a response to the deficits incurred because of the Vietnam War. The reallocation process stressed labor markets, incited severe inflation, and broke the back of the gold standard established to give the USD irrefutable value in the first place.
This adjustment also concurred with geo-political concerns such as, a war between the Arab States and Israel, and an oil embargo and revolution in Iran. The period of adjustment found conclusion after the Iran hostage crisis was resolved in 1979 and Ronald Reagan's administration introduced supply side stimulus. The late seventies were very bleak economic times for the United States yet the situation at hand then was not as severe as today and supply side economics are less relevant given USD and political alternatives.
Perhaps the United States was able to preserve its monopoly of capital formation for so long because no viable alternative existed. We are seeing signs that the United States held politically responsible by radical movements such as theocratic-politic. It will also face contention from mainstream movements such as economic Unions convinced that they have workable alternatives well in hand. These alternatives will be sough regardless of the global ramifications and the United States will be at the epicenter of change because it represents both a binding force to the past and the blocking force to the future.
The formation of geopolitical blocks such as the European Union, and a less visible Pan Islamic Union organized around the Islamic Development Bank are aligned to supplant USD hegemony. One layer deeper a "Komplimentranost"of Eurasianism consisting of China, Russia, India, parts of Central Asia and the resource rich but highly radioactive Kazakhstan are eventually going to find economic synergies of union.
Natural resources will flow from Russia and the Caspian region to China, which has an insatiable thirst for both oil and materials. China will also provide both a manufacturing and consumption engine without having to resort to exports.
Foreign investors in Chinese markets will find as they do today, that their efforts in a managed economy will be devoid of profit margin. As the Internet boom proved market share without profit has no benefit other than generating noise. Unlike the misallocation of capital in the Internet boom, profit cannot be found in China because the economy remains under government management to the social and political agenda of stability.
We are seeing the short-term story of the long-term unwinding of the USD monopoly as the world reserve currency. Perhaps the response, after severe adjustment will be the formation of some kind of Pax-America consisting of the US and its resource suppliers including Venezuela, Mexico and Canada.
The "American" union could also accommodate Japan and Australia, both of which now appear to be orphaned in terms of union. England has not been firmly integrated into the EU it could find a home in the EU or in a Pax Americana. Non aligned nations that have resources such as Nigeria and South Africa might be brought under a sphere of influence.
An adjustment process has begun to occur complete with all components of suffering including severe economic dislocation and military conflict. It might be possible for the Unites States to snap away from the present course either through decisive conflict, revolutionary technology, or consensus among World Bank players to avoid or manage a radical adjustment.
During a period of exaggerated prosperity, the Internet boom, the United States significantly curtailed both its diplomatic and military projection.
This fact combined with the collapse of the Soviet Union has created a tremendous global power vacuum. Most of the people of the world live in this vacuum, and they experience a daily shortfall in expectations, entitlements, requirements, and living standards.
The United States as the economic power of the world will be held responsible and radical alternatives will be sought even though they might not be practical or reasonable. The United States has a tremendous exposure and it faces tremendous risks and challenges because it occupies a unique position in the world.
Pretty sraight forward, but I think a few aspects are missed. People in the US are by no means enjoying a high standard of living. About a third of the population is completely left behind without even the most basic access to education, medical care and other basic services considered standard in Western Europe. Another aspect that continuously is left out in this - and similar - discussion is the dilemma of exponential growth that is brought about as an inevitable side effect by the dominating money systems (interest based fiat money), the dilemma being that infinite exponential economic growth is only mathematically possible, but not in a real world.
Posted by Stefan Thiesen, on 10/24/2009 at 05:02
Great article, compared with current situation (5 years later) it all makes sense.
Posted by sebastien trudel, on 03/09/2008 at 08:09
