Economics for the Muppet Generation

Mark McHugh of Across the Street provides a succinct summation of the problem America faces:

McHugh continues:

  • From 1947 to 1974 US income per capita grew more than National debt per capita 25 times.
  • In the last 30 years, National debt per capita has grown more than income per capita 24 times.
  • The last time income per capita grew more than national debt per capita was 2001.
  • Ben Bernanke arrived at the Federal Reserve in 2002.

So simple, even a muppet can understand what the problem is, right?

Not exactly. We know what the problem is: national incomes aren’t rising, even while we get deeper and deeper into hock trying to maintain our standard of living. We know that this pattern is totally unsustainable; unless incomes rise, that debt will become increasingly impossible to service. What is less clear is the cause of this stagnation.

So what changed between 1990 and 2005 that led the nation debt per capita to so quickly overtake national incomes per capita?

While I am mindful that correlation does not necessarily imply causation, that data fits pretty beautifully. The explanation for this trend would be that as America has become more and more consumptive, and less and less productive that more and more capital went offshore to pay for consumption, and thus less and less contributed to the national income, even as Bernanke ponied up trillions in new reserves, and even as the shadow banking system created trillions in pseudo-money.

So where’s America’s money?

Here:


So is this a criticism of free trade? Should America have been more protectionist of her industries and her domestic manufacturing? Not necessarily; what the Washingtonian elites refer to as “free trade” is heavily subsidised. The status quo that Washington has made seems to heavily favour China and disfavour America. Imports from China are subsidised by American military largesse; every dollar America pushes into its military-industrial complex pushes shipping costs like insurance a little lower. So while labour costs in the Orient are naturally cheaper (due to population density, and development level), that doesn’t necessarily mean that Chinese goods are naturally cheaper in the American market. Under a genuinely free system — where America was not subsidising shipping costs — would made-in-America be more competitive compared to Chinese goods? Would China have built up a less  mountainous supply of American cash? I think so.

About these ads

Confucius on Central Planning

The natural Universe maintains order without giving commands, and the ruler should do likewise, remaining motionless like the North Star and letting the people revolve spontaneously around him. If you yourself are correct, even without the issuing of orders, things will get done; if you yourself are not correct, although orders are issued, they will not be obeyed.

Did Confucius detect the inherent fragility in central planning? That is, that the pushier and more micro-managerial that rulers become, the more they elicit big unwanted side-effects? The relevant example, of course is Mao’s Great Leap Forward. Mao sought to bring the entirety of Chinese society under his yoke, and drag China quickly forward to equal Western industrial development that had taken place organically at a much slower pace.

From Wiki:

Before 1949, peasants had farmed their own small pockets of land, and observed traditional practices connected to markets—festivals, banquets, and paying homage to ancestors.

By 1958 private ownership was entirely abolished and households all over China were forced into state-operated communes. Mao insisted that the communes must produce more grain for the cities and earn foreign exchange from exports.

While collectivisation was eventually achieved (though not without resistance), the largest unsolicited side effect in this case was mass starvation.

Dutch historian Frank Dikötter explains:

The Great Leap Forward began by collectivising rural farms. Farmers were no longer allowed to grow food for themselves and for profit; instead, they grew it for the collective and the nation. Kitchens were also collectivised; in many places, people were not allowed to own pots and pans because they were required to take all their meals in community dining halls.

To boost crop production, planners took people who once grew grain and put them to work on new irrigation projects. Other farmers were told to work on community iron smelters, thousands of which were built in the campaign to overtake Britain. To produce “steel,” party leaders required many villages to melt down all metal in the community, including farm tools. The resulting pig iron was often of much poorer quality than the source metal.

The lack of incentives to work combined with the lack of people and, in some cases, the lack of farm implements led almost immediately to reduced crops. But provincial leaders who were rewarded for meeting targets didn’t want to admit declines to the central party, so they reported great successes. The national government appropriated 25 to 33 percent of the reported crops for export and to feed the cities. But with actual crops much less than reported, this didn’t leave enough to feed the villages, who in many cases were forced to eat the seed reserved for next year’s crops.

Given that collective farmers had no positive incentives to work, party officials quickly began using negative ones, namely violence against anyone not working hard enough. One county leader considered violence a “duty” and told people working for him, “having a campaign is not the same as doing embroidery; it is impossible not to beat people to death.” Another county leader told cadres, “There are so many people working, it doesn’t matter if you beat a few to death”.

The people who passed out food in the community dining halls knew who worked and who shirked; they would dip to the bottom of soup pots to provide the former with meat and vegetables while the latter would get a watery gruel skimmed from the top. Eventually, some people were denied access to food at all and beaten if they were found with food. One boy who stole a few ounces of grain was stripped, bound, and thrown into a pond where he eventually died of exposure. In some regions, as many as 10 percent of the deaths were due to violence, not food shortages.

If the steel mills were failures, the poorly engineered irrigation projects were no better, often actually reducing the productivity of the land. Within a few years, thousands of poorly built dams collapsed. The failure of one set of dams during a storm in 1975 led to floods that killed 230,000 people.

It is hard to understate how far Maoism was a departure from Confucianism. And it is telling that China only dragged herself out of her great slumber when she ditched Mao’s regressive centralism and returned to a closer approximation of Confucianism under Deng Xiaoping, and to a greater extent under Wen Jiabao’s present regime.

Readers trying to understand the present clash between two factions of the Chinese Communist Party, would do well to see it in terms of Wen’s Confucian faction being challenged by Bo Xailai’s Maoist faction.

From Tom Doctoroff writing in the Huffington Post:

Bo Xilai’s brand of populism was a threat to the nation. He championed the interests of Everyman, but his modus operandi was steeped in Cultural Revolution hysteria. The flip side of massive investment in low-income housing was manipulation of economic insecurity. His anti-mafia zeal, heralded as a campaign against corruption, was a bid to monopolize power within the Party, exacerbating an accountability deficit that tarnishes credibility amongst both rich and poor. His “red song” campaigns, reactionary homages to the Cult of Mao that continue even now to chill both foreigners and mainlanders. To advance his own agenda, he tapped into a latent but enduring impulse to worship, and blindly follow, imperial god-kings, false leaders whose anti-rational policies lead to disaster.

Perhaps then the greatest threat to China — Confucian, not Maoist — as regional and global superpower has just fallen…

A Tale of Two Bens

Paul Krugman has an interesting post up on Ben Bernanke’s contrasting economic policy positions. Simply, the younger Bernanke was much more Krugmanite than the older Bernanke:

[The younger Bernanke] endorsed, at least as possibilities:

- Targeting long-term interest rates
- Currency depreciation
- Money financed deficit spending
- A Krugman-style inflation target

After 2003, however, his menu seemed to have been reduced to:

- Guidance on future short-term rates (the rates the Fed sets)
- Purchases of long-term bonds and other nonconventional assets
- “Oversupplying reserves”, that is, just pushing up the monetary base

Krugman concludes — quite rightly — that Bernanke has been “assimilated by the Fedborg.” Krugman should probably know that Ben’s main goal has nothing whatever to do with inflation, or “aggregate demand” or currency depreciation. Nothing. These are all handmaidens to one thingthe rate that the Treasury is paying on its debt.

America is in an impossibly tough fiscal position:

Even at the government’s impossibly cheap projections, a lot of money is going to be pushed out from the Treasury to creditors.

And so the Fed’s main implicit goal is to keep Treasury rates as low as possible without excessive inflation  — the more inflation, the more creditors will ditch Treasury debt, thus forcing the Fed to monetise more. This is a foreign policy imperative: the bottom line is that America has gotten herself deeply in hock to foreign creditors. The Fed’s task is to keep the creditors buying debt, and to minimise rates so as little capital gets out of America as possible. Ben Bernanke has become precisely what many American accuse China: a currency manipulator.

There are a few secondary goals: reflating housing is one (more home equity means more consumption), and reflating equities is another. But all of these are subordinated to keeping rates cheap and thus delaying America’s inevitable fiscal (and thus foreign policy) meltdown.

Of course, under present circumstances, this is an impossible task. And without another round of QE, rates are rising.

From Bloomberg:

U.S. government securities lost 1 percent from the start of the year to March 29, Bank of America Merrill Lynch indexes show.

And that — in one sentence — is why Bernanke will be printing again soon.

This Looks Like a Bubble

 

But they can’t even cleanly win Iraq or Afghanistan? Clearly, there is more to military success than spending alone. Not overcommitting would seem to be one aspect.

There is no instance of a nation benefitting from prolonged warfare.

Sun Tzu

Yeah.

Further Reading:

The Uniting States of Eurasia
The Decline and Fall of the American Empire
The Changing World
Romneythink

The Uniting States of Eurasia

I have, these last few months, been documenting the current state of geopolitics — specifically the growing isolation of the West, the ditching of the dollar as the global reserve currency, the growing unity between the authoritarian Eurasian nations, and the brewing storm in the middle east between Israel and Iran.

Now another piece of the puzzle falls into place.

From The Sun:

Pakistan yesterday warned Britain to help stop the American “Drone Wars” that are slaughtering hundreds of its innocent civilians.

The nuclear power chillingly declared it “has the means” to retaliate unless the carnage ceases.

Pakistan’s High Commissioner to Britain Wajid Shamsul Hasan told The Sun in an exclusive interview that his country’s relations with America are at their lowest ebb.

He said: “Patience is definitely reaching exhaustion levels.” Mr Hasan said Pakistan backs the War on Terror waged by Britain and the US.

But he urged PM David Cameron to condemn US drone attacks on al-Qaeda and Taliban training camps in the north west of his country — dubbing them as “war crimes” and “little more than state executions”.

Tough-talking Mr Hasan also declared Pakistan would have no choice but to support Iran if “aggressive” Israel attacks it

This isn’t a joke. This isn’t “just rhetoric”. This is Eurasia uniting to keep America out, to trample American and Israeli interests, and to dominate geopolitics. Let me be clear: this is the systemic and complete failure of 40 years of American foreign and domestic policy

From Zbigniew Brzezinski’s Grand Chessboard (pp. 31):

[H]ow America manages Eurasia is critical. A power that dominates Eurasia would control two of the world’s three most advanced and economically productive regions. A mere glance at the map also suggests that control over Eurasia would almost automatically entail Africa’s subordination, rendering the Western Hemisphere and Oceania (Australia) geopolitically peripheral to the world’s central continent. About 75 per cent of the world’s people live in Eurasia, and most of the world’s physical wealth is there as well, both in its enterprises and underneath its soil. Eurasia accounts for about three-fourths of the world’s known energy resources.

With Eurasia uniting around Russia and China (exemplified by their joint veto on Syria) it seems like America — stripped by globalisation of her productive base, and thus dependent on Eurasian resources and manufacturing — is about to lose the colossal free lunch she has enjoyed since the 1970s. And American aggression to impose its will on the Eurasian powers is becoming less and less viable. America is not only deeply in debt to her enemies, but would find herself gravely injured by any future trade war.

Of course, there is a path forward for America. But it is not the path desired by the current administration:

A sensible American plan going forward would recognise [these issues], and would be developing the means and the infrastructure to end America’s free lunch — specifically, through redeveloping American manufacturing capacity and supply chains, and scaling back America’s role as global policeman. Unfortunately, I see no such thing from government, and very little from private industry. America is clinging onto the old foreign policy doctrines — that if America is powerful enough, and if it can retain its role as global hegemon and world policeman, then it will always be free to consume a chunk of the rest of the world’s production and resources, because its currency will forever be the global reserve. But that simply isn’t true — Russia and China have already ditched the dollar for bilateral trade.

But this is bigger than just the implications for America. We are moving into a new era; a new world order, a multi-polar (bipolar? tripolar? apolar?) world.

What will this mean for the rest of the world and all her citizens? I have very little clue — but hopefully not world war, or trade war, or proxy war. Hopefully America will gracefully accept the end of American hegemony. Hopefully the new powers will be gracious and fair toward the old ones. Hopefully the new world will be friendlier to liberty, friendlier to freedom.

But given that the new bloc’s powers all exude authoritarian rhetoric, I doubt it.

Most concerningly, regular readers will be aware that Pakistan are the second Eurasian power to pledge military support to Iran in the case of an Israeli attack. These nations know the score:  the last hope for American imperial hegemony is to bring the Arab Spring to Moscow, Beijing, Tehran, and Islamabad.

The Complex Syrian Situation

I have talked at length about the growing monetary, ideological and political schism developing between the Eurasian powers, and the Western ones.

I have talked at length about the growing Eurasian coalition of resistance against American interests, against American interventionism, against the dollar.

I have talked at length about that coalition’s fear of further American encroachment into Eurasia.

So I was especially prepared for further spats between the two coalitions during 2012, and especially over Iran and Syria.

But the nastiness and disdainfulness of today’s events surprised even me.

From the BBC:

An Arab and Western-backed resolution condemning the violent crackdown in Syria has been vetoed at the UN Security Council by Russia and China.

The two permanent council members rejected the draft resolution, which came hours after activists accused Syrian security forces of killing at least 55 people at Homs.

The US ambassador said the vetoes were “shameful”, Britain was “appalled”.

China and Russia defended their move, saying the draft was “unbalanced”.

Russia says the draft resolution had singled out the government of President Bashar al-Assad, and did not containing measures against armed opposition groups.

But proposed Russian amendments to the text were described as “unacceptable” by the US ambassador to the UN, Susan Rice.

Russian Foreign Minister Sergei Lavrov is due to have talks with Mr Assad in Damascus on Tuesday.

To be clear: this resolution was a step toward military intervention against Bashar al-Assad. I am extremely sceptical that this is a good idea. I believe that the best thing that the global community can do is facilitate dialogue between the government and the protestors, and work toward a peaceful compromise.

This is not because I believe al-Assad deserves to remain in power. He is certainly a tyrant and despot of the highest order. But can we honestly say that committing guns, blood and money to deposing him will guarantee peace and stability? Can we honestly say that the next regime might not be worse? I do not believe we can — especially considering that almost every nation involved in the “Arab Spring” has since elected Islamists to power.

Even with the support of the Arab league, is getting entangled into another messy and open-ended conflict in Russia and China’s backyard really a good idea?  Some voices in China are already rumbling that they would be willing to go to war to prevent an American takeover of Iran.

If avoiding nuclear proliferation is our goal, intervention is certainly a bad idea. Qaddafi’s deposition — in stark contrast to nuclear-armed North Korea — was a signpost to rogue regimes that the only way to ensure their survival is to pursue nuclear armaments.

So the biggest story here — and the real reason for the Sino-Russian veto — is the rumbling tension between the Western and Eurasian blocs.

It is a hornets’ nest the West should not stir. Instead, I believe, we should be more concerned about our own economies, particularly the factors of energy independence, resource independence and domestic manufacturing. For the Eurasian powers are not merely nations far across the world: they are our productive base, our resource base, our labour base. Without their support and co-operation the West’s physical economy will be severely damaged.

In insisting upon picking sides in the Syrian Civil War, we might well be shooting ourselves in the foot. Or the head.

The New Goldbuggery

In my travels across the internet, I often hear a disparaging label being thrown around to describe libertarians and adherents of Austrian economics: goldbug.

The Economist’s Free Exchange column from last July encapsulates this perfectly:

The disappointing thing about Ron Paul’s goldbuggery is the weakness of the analysis behind it. His support seems almost mystic in nature: that gold is money is a law of economics that’s held for 6,000 years! In his defence, this quasi-mystical belief in the sanctity of gold in a monetary system was shared by the world’s financial leaders for much of the industrial period. That’s not much of a defence, though. Gold worship repeatedly drove the economy into ditches and off cliffs, but for a few lucky years in which the pace of new gold discoveries fortuitously matched growth in the global economy.

I can do a pretty good job of analysing and deconstructing that (and indeed have already strongly questioned the claim that it was “gold worship” that drove the economy off a cliff in the 1930s) but in the interests of economic “progress”, I would rather outsource my analysis to China. If it’s good enough for Apple, it’s good enough for me.

More specifically, I want to outsource my analysis to Zhang Jianhua of the People’s Bank of China.

From Forbes:

Analysts believe China bought as much as 490 tons of gold in 2011, double the estimated 245 tons in 2010.  “The thing that’s caught people’s minds is the massive increase in Chinese buying,” remarked Ross Norman of Sharps Pixley, a London gold brokerage, this month.

So who in China is buying all this gold?

The People’s Bank of China, the central bank, has been hinting that it is purchasing.  “No asset is safe now,” said the PBOC’s Zhang Jianhua at the end of last month.  “The only choice to hedge risks is to hold hard currency — gold.”  He also said it was smart strategy to buy on market dips.  Analysts naturally jumped on his comment as proof that China, the world’s fifth-largest holder of the metal, is in the market for more.

Wow. This, more or less, is the argument about gold that I advanced last month:

[Gold] doesn’t do anything. It doesn’t create any return. It just sits. It’s a store of long-term purchasing power.

And most importantly it is a hedge against counter-party risk.

What is counter-party risk?

Counter-party risk is the external risk investments face. The counter-party risk to fiat currency is that the counter-party — in this case the government — will fail to deliver a system where that fiat money will be acceptable as payment for goods and services. The counter-party risk to a bond or a derivative or a swap is that the counter-party  will default on their obligations.

Gold — at least the physical form — has negligible counter-party risk. It’s been recognised as valuable for thousands of years.

Counter-party risk is a symptom of dependency. And the global financial system is a paradigm of interdependency: inter-connected leverage, soaring gross derivatives exposure, abstract securitisations.

When everyone in the system owes shedloads of money to everyone else the failure of one can often snowball into the failure of the many.

All-denominated fiat securities are touched by counterparty risk, because of the nature of the hyper-interconnected global financial system. Physical gold will still be physical gold, even after the dust settles, even after all the unpayable debt has liquidated, and after the new global financial order has taken shape. That is what Zhang Jianhua — and presumably the PBOC — have understood. For those who possess physical gold, there will be no haircuts or write-downs on that asset. There are precisely zero historical examples of gold-denominated hyperinflation.

This is an entirely different argument to claiming that the monetary base should solely consist gold, of course. The gold standard doesn’t seem to prevent credit-driven bubbles, because it merely restricts the size of the monetary base.

But gold has retained its moneyness, its for 6,000 years for a reason. While value is subjective, I would suggest that its liquidity, its freedom from counterparty risk, its fungibility, and above all its natural scarcity have played a huge part in that.

The Changing World

The world is changing, and politicians can’t keep up.

From the New York Times:

When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

Paul Krugman adds:

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

The point is that manufacturing plants don’t exist in isolation; they benefit a lot from being part of a manufacturing cluster, with specialized suppliers and a large pool of workers with the right skills close at hand. This is the kind of stuff I emphasized in my own work on both trade and economic geography.

As I wrote in October:

Looking at global population density — with American taxpayers subsidising the cost of a flat global marketplace — where can we expect productivity to agglomerate?

The high-density zones. But it was not always thus, because the world was not always flat. Technological, intellectual and social infrastructure once dictated that the agglomeration of manufacturing, skills and industry took place in the West. Development spirals into greater development. Alas, the world was flattened under the aegis of American imperial grandeur, and so capital, skills, supply chains, and so forth took off to where the labour was cheaper, the population denser, regulations laxer, and factories clustered:

“Our customers are in Taiwan, Korea, Japan and China,” said James B. Flaws. “We could make the glass here, and then ship it by boat, but that takes 35 days. Or, we could ship it by air, but that’s 10 times as expensive. So we build our glass factories next door to assembly factories, and those are overseas.”

This agglomeration presents a geostrategic challenge to America that I am yet to see other commentators recognise. As America’s productivity has gone overseas, America has not really experienced many negative effects beyond the obvious problem of job migration. That’s because as the originator of the global reserve currency, other nations need dollars. That has meant that the fruits of the Earth, and the world’s labour have flowed and flowed into America irrespective of America’s own productive decline.

America’s internal workings — her agriculture, her internal transport network, her consumption, and indeed even her internal manufacturing (and so forth) — are dependent on a global system of resource extraction, labour, production and shipping. More or less, America is dependent on foreign energy and goods, and her foreign policy is geared toward sustaining the global flow of energy and goods. That’s why America spends more on her military than any other nation, and over 50% of the global total. However this has meant great debt, as America is producing far less than she is spending.

So does that mean globalisation is bad? No — I am all for free trade, and global markets, and that requires a degree of security. But at the same time, free markets require proper pricing mechanisms. American manufacturing has been out-competed in the American market predominantly because Chinese products do not accurately reflect the costs of global security; those costs are reflected not in prices, but in the Pentagon’s budget, and in Federal deficits. Those cheaper Chinese goods might not have put so much American industry — and subsequently industrial infrastructure — out of business without that subsidy; for a start shipping would be costlier and less reliable. With a less obvious advantage in selling to the American market, it is likely that both China’s growth, and America’s decline would have been slower.

So America’s rising government debt burden, and America’s lost industrial infrastructure are in at least one way two sides of the same coin. Less world policeman would not only mean less debt, but more domestic industry.

These concerns are reflected in Obama’s recently announced foreign policy and global defence doctrine:.

From the Washington Post:

President Obama pledged that the $489 billion in defense cuts he has proposed over 10 years would be governed by a concerted strategy, and on Thursday he delivered one. At the Pentagon, Mr. Obama unveiled a “strategic guidance,” which aides said reflected a considerable investment of his personal time and ideas. The president’s thesis is that the need for fiscal austerity coincides with a global “moment of transition,” in which the United States is winding down a decade of land wars in Iraq and Afghanistan and facing the need to turn toward a very different set of challenges, particularly in Asia.

Several previous administrations have tried to shift to Asia from the messy Middle East, only to be dragged back by wars, terrorists, turmoil and the unending need to protect allies and the flow of oil. The Obama strategy acknowledges that history and says this pivot will be different. The means to reduce spending and build capacity in Asia, it suggests, will come not from the Mideast but from U.S. deployments in Europe, benefit and retirement costs, Cold War weapons systems and the U.S. nuclear arsenal.

The trouble is, this is much too little much too late. Had President Bush announced this in 2002 (or President H.W. Bush in 1992) years of fruitless imperialism in the middle east and trillions in debt might have been avoided. American industry, supply chains, technology, industrial infrastructure and skills have already been gutted; as Steve Jobs alluded to, the iPhone will never be made in America. America is still deeply dependent on foreign oil.

More or less, this strategy is trying to close the stable door after the horse has bolted.

The effects of decades of policy will be hard to mitigate. America must face the fact that her most important export — dollars and Treasury bonds — will be blighted by the end of the dollar as the global reserve currency.

A significant number of Eurasian nations — including Japan, India, China, Russia and Iran — have pledged to in future conduct bilateral (and surely soon also multi-lateral) trade in their own domestic currencies, including for trade in oil and other commodities.

The impact of this would be disastrous. Simply, nations would not need to sell their wares and resources to America; a hostile Chinese or Arab regime could foreseeably cut America off from essential resources, components or goods. China already limits exports in rare earth metals. How long before nations feel capable of blackmailing America by withholding or heavily taxing resources, goods and components on which America depends?

Hawks might respond that no nation on Earth would feel capable of doing that, because America has the military clout to bite back. But for all of Obama’s assertions that the military is refocussing on the Asia-Pacific, America is too broke to start a war or proxy war with her great creditor. More importantly, such an event would probably shut down or slow the flow of global goods and energy meaning immediate and disastrous economic consequences for America.

America could be taking every step imaginable to make herself energy independent  (or at least dependent only on North American energy) as soon as possible as a matter of urgent national security. This would be a solid base from which to build. Alas, Obama totally rejected the Keystone XL Pipeline, which could have formed a major plank toward this goal.

The Edge of Bankruptcy

We are like a man who used to be rich and is in the habit of paying for everybody’s meals and announces at a lavish dinner that he will pay the bill, only to then turn to the fellow sitting nearby and say, “Can I use your credit card? I will pay you back!”

— Ron Paul

I have in the past very briefly made the case for why it is not time to attack Iran:

The truth is that Iran (and more explicitly a strong and united Eurasia) is only a threat to America if America chooses to continue the absurd and destructive path of a world-dominating petrodollar superpower, dependent on foreign oil and resources, and with a foreign policy designed to (essentially) extort these things from the rest of the world.

Today, I want to go a little further: While — unlike some readers — I believe that Islamic terrorism is a real (though minor) threat, I believe that America’s neoconservative foreign policy is the greatest threat to American interests.

Neoconservatism holds that American and Western civilisation has a unique moral role in policing the world. That means military commitment, and very often war. That, in turn, means spending:


Spending has meant huge deb acquisition:

There are many historical antecedents of empires convinced of their own special role in history, and determined to impose it on the rest of the world by force. Look at Rome — driven into the ground by the cost of imperialism, and its “bread and circuses” welfare state.

A greater example still is Britain:

This graph is a tale of imperial overstretch, a tale of debt acquired by a colonial power playing world policeman, and trying to maintain the status quo.

Imperial Britain’s debt load hit its peak at the very point when its empire crumbled into the sand. This is not a co-incidence, and the good news for America is that once Britain ended its global role, growth soon returned, and Britain’s debt-to-GDP ratio fell back to a sustainable level.

Of course, America’s debt position might be more sustainable if she was still the world’s greatest industrial powerhouse. But she has instead exported much of her productivity to her hostile creditor, China:

The deindustrialisation of the West has allowed newly industrialised nations, especially China, to build up huge monetary wealth. This is a map showing the net of each nation’s reserves, minus external debt:


And neoconservatives continue to believe that America — dependent on foreign goods and resources, hugely indebted to hostile nations, and war fatigued — is somehow in a position to expand her empire, and to attack more countries?

Japan and China Ditch the Dollar for Bilateral Trade

While American hawks will have been unsurprised that long-time antagonists Russia and China have ditched the dollar for bilateral trade, this year’s post-Christmas bombshell will shock many who believe that America’s ongoing reign as petrodollar superpower is assured.

From Bloomberg:

Japan and China will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said.

Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday. Encouraging direct yen- yuan settlement should reduce currency risks and trading costs, the Japanese and Chinese governments said.

This is a Japan that remains under the yoke of American imperial occupation. That simple logistical fact means that this cannot have been an easy decision.

Of course — having run the gauntlet of twenty years of Keynesian (or, more accurately, Bernankean) failure — it is probable that Japan is growing sick of Anglo-American demand-side economics. Having unsuccessfully taken Bernanke’s Rooseveltian Resolve treatment for so long — and now watching America doing the exact same thing to herself — the temptation of closer relations with young, vigorous China will be strong for the Japanese.

And so China moves one step closer to her monetary endgame — dethroning the debased petrodollar as the global reserve currency, and replacing it with the yuan.

What will America — grossly indebted to her enemies, dependent on foreign oil and goods, and bogged down in her role as world policeman — do about it?

The Sun sets over the Petrodollar Empire