I was immensely annoyed to read today’s Professor Paul Kennedy’s editorial in the NYT. He wrote a great book about the decline and fall of empires and then proceeds to ignore his own research to pen a ridiculous article about how the US dollar will sail on and on for some time because….well, because it should. And yet, at the end of his own article, he talks about how he doesn’t want to be paid in dollars only, JUST IN CASE. He wants other currencies if the dollar is destroyed by the Chinese.
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Op-Ed Contributor – The Dollar’s Fate – NYTimes.com —an editorial by Paul Kennedy
Kennedy was born in Wallsend, Tyne And Wear, and attended St. Cuthbert’s Grammar School in Newcastle upon Tyne. Subsequently, he graduated with first class honours in history fromNewcastle University and obtained his doctorate from St. Antony’s College, Oxford. He was a member of the History Department at the University of East Anglia between 1970 and 1983. He is aFellow of the Royal Historical Society, a former Visiting Fellow of the Institute for Advanced Study in Princeton, New Jersey, United States and of the Alexander von Humboldt Foundation inGermany. In 2007-8, Kennedy was the Phillipe Roman Professor of History and International Affairs at the London School of Economics.
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He is the J. Richardson Dilworth professor of British history at Yale University in New Haven, Connecticut, United States. He is also the Director of International Security Studies and along withJohn Lewis Gaddis and Charles Hill, teaches the Studies in Grand Strategy course there.
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His most famous book, The Rise and Fall of the Great Powers, has been translated into 23 languages and assesses the interaction between economics and strategy over the past five centuries. The book was incredibly well received by fellow historians, with A.J.P. Taylor labelling it “An encyclopaedia in itself” and Sir Michael Howard crediting it as “a deeply humane book in the very best sense of the word”.[1][2]
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A generous interpretation of all of this talk is that it actually is rather better for the world to have its monetary exchanges based upon some international “spread” of currencies rather than upon a single one that, if it toppled due to domestic mismanagement, could bring ruin to many innocent players. Had not the great economist John Maynard Keynes proposed this with the creation of the “bancor” in 1944, to head off a dollar-denominated world that would in the end meet its fate of carrying too much on its shoulders?
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As the British Empire floundered and then sank, there was general anxiety concerning how the US would run things. The US was the world’s biggest industrial power as well as the major creditor nation on earth. And it still had the gold standard. The Brits desperately needed to have an easy credit/no gold system. The war spending had to continue for the foreseeable future. Britain needed US credit and for this credit to not be restricted by gold reserves.
. This would have been good for the international community and, actually, good for America. Why should the Weary Titan have to stagger under the too-vast weight of its single-currency burden? But Washington vetoed Keynes’ scheme. It’s nice to feel you are Top Dog. Besides, if you possess the world’s leading foreign currency, you can run enormous trade and current-account deficits without being punished for it.
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What ails Professor Kennedy? I used to respect him. He has garnered tremendous awards and lavished with praise due to his hard-hitting book about the decline and fall of great empires. Here we are, in the midst of such a fall, he he has fallen off his own pedestal. His editorial is lying, first of all. The US did NOT think being the main currency in the world was a wonderful opportunity to run everything in the red. Far, far from it!
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First of all, the US taxed the public at a very harsh rate to pay off the WWI and WWII debts. This kept our credit ratings up. The gold standard was used as a harsh restriction on the creation of world credit and the Federal Reserve as well as other people involved in running the US, worried about inflation. This was thrown away, not all at once but slowly, step by step. And Professor Keynes was cheering this on. He and others of his ilk groused that gold was a straightjacket preventing proper government wealth creation via easy, cheap credit.
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Incidentally, the US trade deficit didn’t begin in ernest until after Nixon cut the gold standard entirely. Before then, the US was worried if the deficit was just one or two billion dollars. After the great severance, the deficit basically expanded exponentially and is now a very grave danger to the very survival of the US as an economic force.
. The nastier interpretation of this move toward ending the dollar’s preeminence is, let there be no doubt, an anti-American one. It seems to be in the nature of things that the leading power in world affairs is always resented by countries further down the totem pole, even when that hegemon is fairly successful at distributing what economists term “public goods.”…
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Professor Kennedy is a Brit. This means, he can’t see clearly why the Chinese plan to teach him and all the invaders of China, a sharp, harsh lesson. The Chinese public fairly seethes with suppressed rage which sometimes focuses on the communist leadership but also is very intent on redressing past wrongs committed by foreigners. Especially, Britain, of course. The ‘hegemon’ has NEVER ‘fairly successfully…distributed….public goods’ to the Chinese. The hegemon has had one goal: to break up China and keep it broken apart and then, exploit the Chinese as labor and creative force.
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The US and UK are one of the major sellers of cheap debts. Both wish to suck down Chinese goods while telling China how to live, do politics and behave in the world. The US and UK merrily invade one country after another, butchering people left and right, at will. While demanding the Chinese not even patrol their own streets to prevent ethnic battles. The US and UK are in the middle of brutalizing barely armed peasants in the poorest countries on earth, while ordering China to stand aside and let peasants riot and burn cities run by China.
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The Chinese control their resentment but are not ignoring this double standard. They are hyper aware of it and will hammer us with it, in the future.
. ….So why not, then, push for a more equitable “basket of currencies” to grease the world’s commercial exchanges or, as a variant of that, try to arrange trade through the medium of the I.M.F.’s special drawing rights? .
It turns out that there all sorts of reasons why those SDRs cannot at present function as a common currency — that is, as something you would price a Toyota car in, or as a wad of bills you could withdraw from a cash machine. Their function is intergovernmental by nature and not at all like, say, Barclay’s foreign-currency departments. .
Maybe Professor Kennedy is going senile. I can’t imagine why he can’t figure out what he is saying to himself. The entire nature of using gold as the basis for export currency resolution was to prevent a country from debasing their currency so they could buy stuff, ‘on the cheap’ by handing out money that was fading in value faster than it could be spent! Namely, governments can destroy their own currency, if they wish. But they won’t be allowed to use it for trade because NO ONE WiLL ACCEPT IT! Duh.
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So, why do countries accept US dollars? Easy: they know they can turn around and use this money to suck out all US industries. Because the US has to constantly drop the price of goods so we have no inflation because we owe more and more money. But the more we owe money, the more we have to import goods from cheaper labor venues so we can prevent inflation and this is a vicious cycle which Asia exploits to the hilt. Asia knows that the more the US and UK go into debt, the more we have to import to keep prices from reflecting the inflation money printing is causing! And Asia wins!
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When the US and UK cease taking on debt, this system collapses. So our Asian rivals have real strategic interests in keeping this cycle going until they finally own all US as well as their own industrial systems. Then, we are the slaves of the creditor nations that kept the US dollar on artificial respiration.
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This was well explained recently by the financial writer Swaminathan S. Anklesaria Aiyar of the Cato Institute, in Washington (see www.cato.org/pub_display.php?pub_id=10331). It should be noted that Aiyar is not like certain nationalist American commentators on this topic who seem to regard a reduction in the dollar’s world role as something like a threat to one’s masculinity. .
In fact, Aiyar cold-bloodedly argues that the dollar’s relative fall will much more likely come as a result of the continued growth of China’s G.D.P. and the future arrival of the yuan as a fully convertible currency — and not as a recourse by the governments of the world to some artificial I.M.F. instrument like the special drawing rights. With the yuan joining the euro, the yen and the dollar as the four biggest foreign currencies by far, there will be even less pressure and logic for substitution of the traditional means of money exchange.
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I am just astonished. HAHAHA. Good gods! I keep saying, people can’t see in mirrors for some reason. And here is proof. The substitution of the yuan as the currency that resolves world trade deals will happen very suddenly. Just like the US replaced the British pound. That is, the old system runs SIMULTANEOUS with the new regime for a limited time. When the old regime is forced to go bankrupt (the UK had to apply to the IMF to be rescued after less than 20 years of struggle after WWII) the new one rules triumphant. This is why Nixon could cut the golden Gordian knot right at the same time the Brits gave up entirely on being a solvent empire.
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That is, there was no gold-based major currency to retreat to when the old Empire collapsed for good. The US is limping along with a tattered dollar tottering on the edge of extinction only because the Chinese are methodological people. That is, the 50 Year Plan is still operative and going quite well, despite the global collapse.
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This banking/trade collapse showed clearly that the Japanese method of only relying on exports is a total failure since it is aimed mostly at the dying US empire. And the Chinese method, which imitates a lot of the Japanese system, is superior because the government of China is making China, not the US, grow stronger and spreading the wealth to the populace, not cutting wages like in the US, UK or Japan. China displayed its power by not shrinking into negative territory during a global depression. And taking off faster than competitors. The US hopes for a 1-3% growth rate while China is betting on running a 9-15% growth rate! The US and UK are rapidly deindustrializing while China is building industries like crazy.
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Not only that, look at this news:
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The Next Global Economy: US Postal service stop using dollar for its international transactions
The U.S. Postal Service is valuing its international transactions no longer in the U.S. dollar but in the accepted “currency” of the International Monetary Fund, Special Drawing Rights (SDRs). China, Russia, Brazil and India are calling for a new world currency due to our rising debt and falling dollar. Russian President Dmitry Medvedev pulled the newly minted gold Euro-dollar (valued at $3,900) from his pocket at the G-8 summit in July declaring it the future world currency.
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So, the SDRs that Kennedy mocks are being used by the US Postal Service? Benjamin Franklin must be spinning in his grave! He was very intent on designing a good US currency and a good postal service! The gold Euro-dollar will be surpassed by a gold yuan that will not be for domestic circulation but for resolving trade issues. Now, back to Kennedy’s NYT editorial:
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Op-Ed Contributor – The Dollar’s Fate – NYTimes.com
Overall, though, these academic papers make some basic sense. We live in a world right now where one single country, possessing only about 5 percent of the earth’s population, has roughly 20 percent of its G.D.P., spends almost 50 percent of its total defense expenditures, and freely prints bills that account for 65-70 percent of global foreign-currency reserves. .
And these reserves are time bombs. That is, we no longer control our own currency. The Japanese carry trade created immense seas of US dollars via moving lending from Japan to offshore British colonies and then into the US banking system. This money is like damming the Yangtze River: if the dam breaks, this red ink money will flood world markets and the US will drown like a rat.
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If one believes in the economists’ theory of “convergence” — that is, the coming closer together of the product and income of companies, regions and countries — then the conclusion is clear: As China, India, South Korea, Brazil, Mexico and Indonesia all “catch up,” the American share of things will relatively shrink. Sooner or later — and this debate really is about “sooner” or “later,” not about “if” — we are going to witness another major shift in the global balances of power. .
Even in the shorter term, I guess I would be looking a little more keenly at the current distribution of my portfolios, just to ensure that when I had to come to “render my accounts,” I would not look awfully out of date. And, as an international author, I am happy to take my fees and royalties in many currencies, just to be on the safe side.
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After this mishmash mess of an editorial, the professor decides he wants to hold ‘many currencies’ so he won’t be destroyed when the entire thing collapses? HAHAHA. Some vote of confidence! I will note, he doesn’t say he will buy gold. If I were him, I would. But I have almost no money to invest in anything right now, so I can only wish. The global shift in power has already happened. The US is a deep in debt nation that owes tremendous sums to rival trade powers who have many reasons to hate the US. We can’t presume they want to make us happy. They have no reason to presume this.
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Mish’s Global Economic Trend Analysis: Barney Frank Says Ron Paul’s Audit The Fed Bill Will Pass In October is good news, by the way. I pray this bill passes intact and really does pry open the doors of the private Federal Reserve. This is the first step in turning this private banking consortium into a public entity responsible to our leaders, not a free agent to do as it pleases. Too many things in the US that should be public, are private and the other way around. Private banks should hold US mortgages, not a government agency which holds over 80% of these things, just for example.
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Private banks should lend money to car buyers, not the US Treasury! Etc. And the Pentagon should not pay privateers to run wars, either. This is a public matter, not a private one. And above all, Congress should run for office on public money, not private money. This is to keep out corruption and bribery.
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