The Great Pacification

Since the end of the Second World War, the major powers of the world have lived in relative peace. While there have been wars and conflicts  — Vietnam, Afghanistan (twice), Iraq (twice), the Congo, Rwanda, Israel and Palestine, the Iran-Iraq war, the Mexican and Colombian drug wars, the Lebanese civil war — these have been localised and at a much smaller scale than the violence that ripped the world apart during the Second World War. The recent downward trend is clear: Many thinkers believe that this trend of pacification is unstoppable. Steven Pinker, for example, claims:

Violence has been in decline for thousands of years, and today we may be living in the most peaceable era in the existence of our species. The decline, to be sure, has not been smooth. It has not brought violence down to zero, and it is not guaranteed to continue. But it is a persistent historical development, visible on scales from millennia to years, from the waging of wars to the spanking of children.

While the relative decline of violence and the growth of global commerce is a cause for celebration, those who want to proclaim that the dawn of the 21st Century is the dawn of a new long-lasting era of global peace may be overly optimistic. It is possible that we are on the edge of a precipice and that this era of relative peace is merely a calm before a new global storm. Militarism and the military-industrial complex never really went away — the military of the United States is deployed in more than 150 countries around the world. Weapons contractors are still gorging on multi-trillion dollar military spending. Let’s consider another Great Moderation — the moderation of the financial system previous to the bursting of the bubble in 2008.

One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility. Ben Bernanke (2004)

Bernanke attributed this outgrowth of macroeconomic stability to policy — that through macroeconomic engineering, governments had created a new era of financial and economic stability. Of course, Bernanke was wrong — in fact those tools of macroeconomic stabilisation were at that very moment inflating housing and securitisation bubbles, which burst in 2008 ushering in a new 1930s-style depression. It is more than possible that we are in a similar peace bubble that might soon burst. Pinker highlights some possible underlying causes for this decline in violent conflict:

The most obvious of these pacifying forces has been the state, with its monopoly on the legitimate use of force. A disinterested judiciary and police can defuse the temptation of exploitative attack, inhibit the impulse for revenge and circumvent the self-serving biases that make all parties to a dispute believe that they are on the side of the angels. We see evidence of the pacifying effects of government in the way that rates of killing declined following the expansion and consolidation of states in tribal societies and in medieval Europe. And we can watch the movie in reverse when violence erupts in zones of anarchy, such as the Wild West, failed states and neighborhoods controlled by mafias and street gangs, who can’t call 911 or file a lawsuit to resolve their disputes but have to administer their own rough justice.

Really? The state is the pacifying force? This is an astonishing claim. Sixty years ago, states across the world mobilised to engage in mass-killing the like of which the world had never seen — industrial slaughter of astonishing efficiency. The concentration of power in the state has at times led to more violence, not less. World War 2 left sixty million dead. Communist nations slaughtered almost 100 million in the pursuit of communism. Statism has a bloody history, and the power of the state to wage total destruction has only increased in the intervening years. Pinker continues:

Another pacifying force has been commerce, a game in which everybody can win. As technological progress allows the exchange of goods and ideas over longer distances and among larger groups of trading partners, other people become more valuable alive than dead. They switch from being targets of demonization and dehumanization to potential partners in reciprocal altruism. For example, though the relationship today between America and China is far from warm, we are unlikely to declare war on them or vice versa. Morality aside, they make too much of our stuff, and we owe them too much money. A third peacemaker has been cosmopolitanism—the expansion of people’s parochial little worlds through literacy, mobility, education, science, history, journalism and mass media. These forms of virtual reality can prompt people to take the perspective of people unlike themselves and to expand their circle of sympathy to embrace them.

Commerce has been an extremely effective incentive toward peace. But commerce may not be enough. Globalisation and mass commerce became a reality a century ago, just prior to the first global war. The world was linked together by new technologies that made it possible to ship products cheaply from one side of the globe to the other, to communicate virtually instantaneously over huge distances, and a new culture of cosmopolitanism. Yet the world still went to war.

It is complacent to assume that interdependency will necessitate peace. The relationship between China and the United States today is superficially similar to that between Great Britain and Germany in 1914. Germany and China — the rising industrial behemoths, fiercely nationalistic and determined to establish themselves and their currencies on the world stage. Great Britain and the United States  — the overstretched global superpowers intent on retaining their primacy and reserve currency status even in spite of huge and growing debt and military overstretch.

In fact, a high degree of interdependency can breed resentment and hatred. Interconnected liabilities between nations can lead to war, as creditors seek their pound of flesh, and debtors seek to renege on their debts. Chinese officials have claimed to have felt that the United States is forcing them to support American deficits by buying treasuries.

Who is to say that China might not view the prize of Japan, Taiwan and the Philippines as worthy of transforming their giant manufacturing base into a giant war machine and writing down their treasury bonds? Who is to say that the United States might not risk antagonising Russia and China and disrupting global trade by attacking Iran? There are plenty of other potential flash-points too — Afghanistan, Pakistan, Venezuela, Egypt, South Africa, Georgia, Syria and more. Commerce and cosmopolitanism may have provided incentives for peace, but the Great Pacification has been built upon a bedrock of nuclear warheads. Mutually assured destruction is by far the largest force that has kept the nuclear-armed nations at peace for the past sixty seven years.

Yet can it last? Would the United States really have launched a first-strike had the Soviet Union invaded Western Europe during the Cold War, for example? If so, the global economy and population would have been devastated. If not, mutually assured destruction would have lost credibility. Mutually assured destruction can only act as a check on expansionism if it is credible. So far, no nation has really tested this credibility. Nuclear-armed powers have already engaged in proxy wars, such as Vietnam. How far can the limits be pushed? Would the United States launch a first-strike on China if China were to invade and occupy Taiwan and Japan, for example? Would the United States try to launch a counter-invasion? Or would they back down? Similarly, would Russia and China launch a first-strike on the United States if the United States invades and occupies Iran?

Launching a first-strike is highly unlikely in all cases — mutually assured destruction will remain an effective deterrent to nuclear war. But perhaps not to conventional war and territorial expansionism. With the world mired in the greatest economic depression since the 1930s, it becomes increasingly likely that states — especially those with high unemployment, weak growth, incompetent leadership and angry, disaffected youth —  will (just as they did during the last global depression in the 1930s) turn to expansionism, nationalism, trade war and even physical war. Already, the brittle peace between China and Japan is rupturing, and the old war rhetoric is back. These are the kinds of demonstrations that the Communist Party are now sanctioning:

And already, America and Israel are moving to attack Iran, even in spite of warnings by Chinese and Pakistani officials that this could risk global disruption. Hopefully, the threat of mutually assured destruction and the promise of commerce will continue to be an effective deterrent, and prevent any kind of global war from breaking out. Hopefully, states can work out their differences peacefully. Hopefully nations can keep war profiteers and those who advocate crisis initiation in check. Nothing would be more wonderful than the continuing spread of peace. Yet we must be guarded against complacency. Sixty years of relative peace is not the end of history.

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Policies Speak Louder Than Words

I can understand why some people are concerned about Ron Paul.

Whoever wrote his newsletters, they certainly included some nasty and excruciating stuff:

If you have ever been robbed by a black teen-aged male, you know how unbelievably fleet-footed they can be. Given the inefficiencies of what D.C. laughingly calls the criminal justice system, I think we can safely assume that 95 percent of the black males in that city are semi-criminal or entirely criminal.

I can see why black people would be concerned about a statement like that, given the history of systemic discrimination against blacks in America. Now, Paul is adamant that most of these newsletters, including all the offending passages were ghostwritten, and that he was not aware of the offending content. He has also adamantly disavowed it.

But what if he wrote them himself, or at very least was aware that his ghostwriters had chosen a new incendiary direction?

That would be a pretty strong reason for anyone opposed to racism to oppose Ron Paul, wouldn’t it?

I don’t think so.

Paul is the only major Presidential candidate who opposes the war on drugs.

Paul believes that drug criminalisation in America had racist origins:

We do know that opium was used by the Chinese and the Chinese were not welcomed in this country. We do know that the blacks at times use heroin, opium and the laws have been used against them. There have been times that it has been recognized that the Latin Americans use marijuana and the laws have been written against them. But lo and behold the drug that inebriates most of the members of Congress has not been touched because they’re up there drinking alcohol.

But this is not merely a historical fact, like slavery or segregation. It is a modern fact, a deep and slippery well of real discrimination against racial minorities:

Mass arrests and incarceration of people of color – largely due to drug law violations – have hobbled families and communities by stigmatizing and removing substantial numbers of men and women. In the late 1990s, nearly one in three African-American men aged 20-29 were under criminal justice supervision, while more than two out of five had been incarcerated – substantially more than had been incarcerated a decade earlier and orders of magnitudes higher than that for the general population. Today, 1 in 15 African-American children and 1 in 42 Latino children have a parent in prison, compared to 1 in 111 white children. In some areas, a large majority of African-American men – 55 percent in Chicago, for example – are labeled felons for life, and, as a result, may be prevented from voting and accessing public housing, student loans and other public assistance.

This doesn’t just affect drug users, but entire communities:

The scale of the effects of parental incarceration on children can be revealed simply by statistics showing the number of children with a parent in prison or jail. Among white children in 1980, only 0.4 of 1 percent had an incarcerated parent; by 2008 this figure had increased to 1.75 percent. Rates of parental incarceration are roughly double among Latino children, with 3.5 percent of children having a parent locked up by 2008. Among African American children, 1.2 million, or about 11 percent, had a parent incarcerated by 2008.

Ron Paul is very clear — he will end the drug war, and release non-violent drug offenders from federal prisons. He will allow states to determine drug policy.

The racist effects of the war on drugs have been perpetuated by every recent President, including Barack Obama. One statistic rings out above all — there are more black men incarcerated via the drug war today (and thus engaging in free labour) than there were slaves in 1850. America might have a black President, but slavery is alive and well.

Those who oppose racism — including blacks who rightly fear discrimination and racial hatred — should be more concerned by the racist policies of the current administration and previous administrations than the supposed writings of a candidate who opposes the racist policies of the current administration.

However, my support for Ron Paul is for another reason altogether. Paul is the only major Presidential candidate who wants to diminish America’s imperial largesse. Simply, America’s current role in the world is not financially or economically sustainable.

Paul has stated:

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!”

Simply, Ron Paul opposes the neoconservative vision that America should be in more than 900 bases, acting as a global policeman, and engaging in proactive interventionism. America once led the world by example — she was once the greatest creditor in history, with the freest markets, and a constitution that enshrined life, liberty, property rights, due process, free speech, freedom of assembly and habeas corpus into law. While some of her founders might have been slavers, the Constitution they created sowed the seeds for that system’s destruction by guaranteeing that “all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

Those are the values that I believe humanity should aspire to as we move deeper into the 21st Century. America’s contemporary economic and foreign policy has not only led to the American government engaging in unconstitutional activities like torture, warrantless wiretapping, indefinite detention, extrajudicial killing, etc. I believe that America’s contemporary economic and foreign policy is a danger to America’s long-term well-being.

As I explained in detail last month:

Neoconservatism holds that American and Western civilisation has a unique moral role in policing the world. That means military commitment, and frequent 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 her “bread and circuses” welfare state.

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 — trillions of dollars of Western currency.

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?

Rome and Britain for all of their terrible imperial excesses also embodied many noble values. Yet their empires faded, and they lost influence as new empires arose. Today, a new empire rises: China. China’s political system embodies no liberal values whatever. Modern China’s founder Mao Zedong mused that it might be worth killing half of humanity to implement global socialism. The modern Chinese legal system, and its constitution are thoroughly authoritarian, and lack the American overtures to liberty, property rights, the pursuit of happiness, freedom of speech, and freedom of assembly.

Through over-extension America slowly bankrupts herself, and makes herself ever more dependent on Chinese goods and components. While America outspends the world militarily, the cost of her military commitment is breaking her back.

This seems counter-intuitive: America’s hunger for global power is making her weak? Hawks like Newt Gingrich and Mitt Romney might respond that the only way to maintain American primacy is through more military spending, the commitment of greater resources, and more determination to contain the expansion of China in the Pacific. But what is really happening is that America is breaking herself through the strain of effort. She ships her resources, her productivity, her young men and women overseas to guard sites in Afghanistan, Pakistan, South Korea, Germany and all of the 900 foreign military bases; in doing that she loses the productivity and wealth these people and things would create at home: infrastructure, education, medicine, technology, innovation. That — as empires always discover — is the cost of ruling the world. And it is a backbreaking one.

America should lead the world by example — through her own economic and technological development, through respect for individual and civil liberties and the Constitution, through diplomacy, through trade, through international friendship, and through being what the founders conceived her as — an independent nation that did not entangle alliances, much less policed the world.

How can America be an independent nation — in energy, in politics, in spirit — while she is chained by the shackles of maintaining and controlling an oil-dependent global empire?

Ron Paul is the only major Presidential candidate who comes close to articulating this vision. An independent and strong America can preserve the values enshrined in the Constitution. An America beaten into the ground by the implications of huge debt acquisition, systemic financial fragility and military over-extension may not even be able to preserve America.

Of course many in the media and the political establishment have already preordained that Paul cannot win. The global imperialism and the war on drugs must go on, or so they seem to believe. Anyone who points out the unsustainability of such an arrangement is marginalised, newsletters or none. Dennis Kucinich and Bernie Sanders — two other such Americans — are roundly ignored.

Alas, the march of history goes on too. Empires rise and fall. So mighty they seem, in their time.

As Percy Bysshe Shelley put it:

I met a traveller from an antique land
Who said: Two vast and trunkless legs of stone
Stand in the desart. Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed:
And on the pedestal these words appear:
“My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!”
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away

Stiglitz vs Krugman

A very interesting front is opening up regarding the current state of America.

Some economists believe that the main problem in America is a lack of demand, defined as the desire to buy, the willingness to buy, and the ability to pay for it

From Paul Krugman:

There is nothing — nothing — in what we see suggesting that this current depression is more than a problem of inadequate demand. This could be turned around in months with the right policies. Our problem isn’t, ultimately, economic; it’s political, brought on by an elite that would rather cling to its prejudices than turn the nation around.

The implication here is that people just don’t have the money in their pockets to spend at the levels they were five years ago, and the solution is (through whatever means) giving them that money.

As well as the obvious (and accurate) Austrian retort that demand in 2006 was being pushed skyward as part of a ridiculous and entirely artificial debt-financed bubble, other economists believe that a lack of demand is just a symptom of other underlying symptoms. I myself believe that the three main problems are a lack of confidence stemming from high systemic residual debt, deindustrialisation in the name of globalisation (& its corollary, financialisation and that sprawling web of debt and counter-party risk), and fragility and side-effects (e.g. lost internal productivity due to role as world policeman) coming from America’s petroleum addiction.

Now Joe Stiglitz has weighed in in a lengthy and essential Vanity Fair piece:

The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.

Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didn’t succeed in saving the economy.

Reality has not only discredited the Fed but also raised questions about one of the conventional interpretations of the origins of the Depression. The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s. The problem today, as it was then, is something else. The problem today is the so-called real economy. It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.

At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.

What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.

The cities weren’t spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.

The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity — the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers.

The consequences for consumer spending, and for the fundamental health of the economy — not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor.

So far, so excellent. Stiglitz first shovels shit over the view of Fisherian debt-deflation as the main cause of the slump in demand — debt-deflation is a symptom, and a very nasty one, but not really a cause. Second, Stiglitz also correctly notes that today’s ailments are the result of social, infrastructural and productive upheaval in the real economy. He correctly identifies the leading trend here — manufacturing (and, it should be added, primary industry) has been ripped out of America by the forces of globalisation, and the powerful pull of cheaper wages. This is a strong explanation of why Krugman’s view — that the only thing missing is demand, and that government can fix that in an instant — is nonsense.

As I wrote earlier this month:

The point here is that economic health — and real industrial output, measured in joules, or in “needs met” — and money circulation are in reality almost totally decoupled. Getting out of a depression requires debt erasure, and new organic activity, and there is absolutely no guarantee that monetary easing will do the trick on either count. Most often, depressions and liquidity traps are a reflection of underlying structural and sociological problems, and broken economic and trade systems. Easing kicks the can down the road a little, and gives some time and breathing room for those problems to be fixed, but very often that just doesn’t happen. Ultimately, societies only take the steps necessary (e.g. a debt jubilee) when their very existence seems threatened.

Stiglitz continues:

What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.

Now, I don’t really have a problem with the idea that government can do some good. If people in a democracy choose to solve problems via public spending, well, that’s part of the bargain in a democratic state. Even Adam Smith noted that government should fund “certain great institutions” beyond the reach of private enterprise.

But here we reach the great problem with Stiglitz’s view:

The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want — into productive activities that increase living standards, not those that increase risk and inequality.

The United States spent the last decade (arguably longer) and trillions of dollars embroiled in wars aimed at keeping oil cheap, and maintaining the flow of global goods precisely because America is dependent upon those things. America does not play global policeman out of nicety or vanity — she does it out of economic necessity. That is precisely because America let globalisation take away all of her industry, making her dependent not only on the continued value of her paper dollar, but on the flow of global trade in energy and goods.

Investing more money in services will leave America dependent on these contingencies. And dependency is fragility — and the more fragile America becomes, the more aggressive she becomes in maintaining and controlling the flow of global goods.

Any stimulus package ought to instead be focussed on making America energy independent, and encouraging innovative new forms of manufacturing (e.g. 3-D printing) that can undercut Chinese labour.

So while Stiglitz must be commended for seeing through the haze, it is rather puzzling that his alternative is services, rather than self-sufficiency.

While America is dependent on foreign goods and energy, she is prone to not only waste huge amounts of productive capital on war and weapons, but she also risks serious economic damage from events such as oil shocks, geopolitical shocks, regional wars, and — well — anything that might slow down or endanger global trade. Her need to police the world makes her even hungrier for oil, which means she spends more money on the world, which makes her hungrier for oil.

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