America’s Eurasian Endgame

I have written before of the Chinese aim in this great international game:

I believe that the current world order suits China very much — their manufacturing exporters (and resource importers) get the stability of the mega-importing Americans spending mega-dollars on a military budget that maintains global stability. Global instability would mean everyone would pay more for imports, due to heightened insurance costs and other overheads. China also recognises that while America falters and struggles under the weight of its military burden, its lack of growth, and its deep debt concerns, Chinese military strength can grow at a much faster pace thanks to Chinese domestic growth, and a high domestic savings rate. They are happy that their dollar pile — China has over $3 trillion in foreign exchange reserves — can still buy plenty, and they want its value to remain as stable as possible. But above all they want to gradually diversify out of those dollars and into productive assets.

So, if China is happy with the status quo, or at least where the status quo is going, what does America want out of all this?

America wants to keep the free lunch of oil and goods for dollars and treasuries that is so swiftly evaporating. Someday soon America will have to bring more to global trade than its role as global policeman, its universities and a humungous stack of freshly-printed dollars. While some may carp about the demand created by the American consumer, consumption is not production — consumption does not bring anything to the party except dollars, and the rest of the world already has plenty of those. Some day soon, when the dollar is no longer recognised as the universal reserve currency, America will have to face up to the fact that consumer goods and oil will cost more and more in dollars — and she will either have to choose to be poorer, or to manufacture more, and generate more energy at home.

A sensible American plan going forward would recognise this, 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 she can retain its role as global hegemon and world policeman, then she will always be free to consume a chunk of the rest of the world’s production and resources, because her currency will forever be the global reserve. But that simply isn’t true — Russia and China have already ditched the dollar for bilateral trade.

Sadly, America’s foreign policy is ever-more fixated on interventionism, and maintaining the petrodollar standard.

Essentially, American exceptionalism has created a blindness to reality. Humungous debts to hostile creditors often makes an empire fall. Resource and energy dependency often makes an empire fall. Yet America just continues spending ever greater amounts on her military, and just hopes for the best. Every President since Carter has promised to reduce American oil dependency, but there has been no substance to that.

So — absent any real progress on reducing dependency — America’s endgame seems to involve taking the Arab Spring to Tehran, Islamabad, Moscow and Beijing, and having the new middle classes of consumerist Americanised zombies take out uppity creditor regimes — and replace them with Facebook-friendly State Department-endorsed place men, and adhering more closely to edicts out of Washington.

That way, America’s free lunch can go on forever.

The Great Hunger

What is the real problem with the global economy? The traditional academic position, espoused by Paul Krugman, Christina Romer and most the White House and Federal Reserve is that this ever since 2007 we have experienced a series of severe negative demand shocks — starting with the bursting of the housing bubble, the sub-prime bubble, the implosion of AIG, Lehman Brothers, and Bear Stearns, and continuing through the European debt crisis, various natural disasters and geopolitical upheavals — which first brought us into crisis, and have since imperilled any nascent recovery. The staunchest view – pushed especially by Krugman — is that the only way to reverse the effects of these demand shocks is through massive stimulus, to create a multiplier effect and raise aggregate demand.

But I believe that simply juicing the wheels of the economy with more money is simplistic, frivolous and mechanistic. We have to understand that the negative demand shocks are not simply bad luck or statistical noise, but instead reflect the reality of severe underlying structural problems. And without solving the underlying problems, a stimulus will keep things ticking over for months or years, until the same problems rear their head again down the road.

So the dissenting view, as posited by myself among others, is as follows:

Those troubles are non-monetary — they are systemic and infrastructural: military overspending, political corruption, public indebtedness, withering infrastructure, oil dependence, deindustrialisation, the withered remains of multiple bubbles, bailout culture, the derivatives-industrial complex, food and fuel inflation and so forth.

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