ECONOMIC NIHILISM DECRIED.

DEVALUATING TO DEATH IS NO PANACEA.

Overview: The USA has used a devaluation of the US Dollar to help the US economy by increasing exports. This is an attempt to rob Jeanne (d’Arc) to feed (Uncle) Sam, and the exact sort of attempt to claw out some unfair advantage, that ignited the Great Depression that led to World War Two. This is not just injust and immoral, it’s grotesque, immoral, and very dangerous. Instead the USA should proceed with its long delayed drastic economic overhaul.

Currency devaluation to gain a short term economic advantage leads to political, social and moral devaluations. Ultimately it is the most guaranteed path to fascism and war, and defeat, history is very clear on that, all the way back to Rome. The USA cannot use its old devaluation trick to re-launch its economy anymore, because the rise of the rest of the world, and, in particular, of the colossal European Union, has deprived it of its special status. Obama is now talking about (part of) this, and it’s excellent news. Putting the US back on track involves first a rise of the Dollar, and since that’s done with the mouth, and a few clicks of the mouse, it can be done right away.
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A lot of the rise of commodity prices, measured in dollars, has been caused by the devaluation of the US Dollar. In the last eight years, as oil went from 20 to 150 in US Dollars, the relative rise in Euros was only half of that.

As Barack Obama puts it:.”If we had a strengthening of the dollar, that would help” reduce fuel costs, (he said, according to Reuters). Instead, Fed Officials and the Bush administration blame high commodity prices on supply and demand, despite falling demand due to slower global growth. Meanwhile, they pursued what the Wall Street Journal calls “their destructive and all but explicit dollar devaluation strategy” (WSJ, August 8, 2008).

The recent lowering of the dollar was a competitive devaluation (ever since it breached parity with the Euro). In a competitive devaluation, a country (call it X) lowers its currency, to make its products cheaper. This is supposed to bring up the economic activity inside the country. There are several problems with this though:

1) In the very first stage, other countries get irritated because they then sell less of their own products, lowering their own activity, making them lose long term market share to X, etc.

2) Simultaneously, inflation of imports inside X is proportional to the lowering of the currency of X. This is what is happening to the US right now with oil and commodities. The lowering of the currency of X can lead foreigners to not invest in X as much as they should, because they wonder where it will stop (the USA is at this stage where foreigners are starting to pull away).

3) In the preceding stage, if the rise of exports’ worth does not keep pace with the rise of imports’ cost, the situation of X can get worse (this is not yet the case in the USA presently: the trade imbalance is going down). That stage is often facilitated if other countries take, in response to (1), corrective measures, not to say outright retorsion. Should the rise of exports not keep pace, other countries and investors lose trust in X’s currency, and, in a first stage, pull their investments out, making a bad situation way worse (the USA is approaching this stage: the big European countries receive much more Foreign Direct Investment than the USA, increasing the gap; the UK gets about three times more FDI, relative to its population).

4) In the final stage, X becomes so cheap, foreigners swoop in, and exert undue influence (this happened to imperial Rome, just before it transmogrified itself into a fascist “Catholic Orthodox” theocracy: it was easier to teach the rudiments of civilization to barbarians through a superstitious religion, than by sending them to school).

Competitive devaluations are therefore economically destabilizing and lead to civil unrest, fascism, and war. The textbook examples are the Weimar Republic and Argentina in the twentieth century. Britain, France, and many Mediterranean countries used competitive devaluations on a regular basis, creating havoc. Meanwhile Germany, (remembering that after using a massive devaluation to annoy France in the early twenties, she ended up with Nazism), became obsessed, come what may, to insure the value of the Deutsch Mark. The result was a flourishing economy, and that strategy was so good, it was even adopted by France within a generation, resulting ultimately in the creation of the Euro (after the Franc and the Mark got locked together for a decade, one may as well have called them the same, indeed).

This is not the first time the USA indulges in a competitive devaluation. In the past, though, the US Dollar was the world’s one and only reserve currency. So, when the US Dollar was going down, US exports would become cheaper, but payments of oil and commodities would not go higher (because they were all in US Dollars). The USA could engage in competitive devaluation without punishment, so it did. Now, for the first time, it’s being punished.

Indeed, the European Union’s sixteen trillion dollar economy has become much larger than that of the USA’s, and it has its own currency, the Euro (the British Pound , Swiss Franc, and various critters are more or less locked to it). Thus, the US Dollar should not be the world reserve currency anymore, and it is in the process of losing this status. Many countries are building reserves of Euros, and following Saddam, are asking for payments in Euros for oil and commodities. (As a confirmation of the economic, financial and increasing rise of Europe, world’s British Pound reserves are now larger than the reserves in the Japanese Yen… A telling forecast of what the world thinks of the future of open Britain and semi closed Japan.)

When Saddam Hussein decided unwisely to switch to oil payments in Euros, the USA replied by invading and destroying Iraq. That method, though, cannot be duplicated easily. Many countries are now switching to Euros, and when oil and commodities have prices in Euros, as the US Dollar goes down, their prices in Dollars go up. The USA is now approaching the sort of infernal descent into an inflationary spiral Argentina was destroyed with, nearly a century ago. The only saving grace is that the US debt to foreigners is, so far, in US Dollars (so it goes down with the Dollar; Argentina had a lot of its debt in foreign currency).

Barack Obama is right to call for a rise of the US Dollar. When the Euro was created, its value was found by looking at the long term average of the French Franc relative to the US Dollar over a century (around 6.66 Francs for a Dollar). That fixed the Euro-Dollar parity, and we are presently more than 50% above it. The present imbalance has been caused by deliberate short term neglect of the Dollar and US economy, and long term erroneous civilizational strategies. A correct US administration would point out that this is over, and that the US Dollar will regain its correct value right away. The turn around will be signaled by turning the Dollar around. This can be done tomorrow morning: the European Central Bank will be delighted to have an opportunity to ambush the speculators, it has been chomping at the bit, and is tired to intervene alone). This would bring capital in the USA immediately, helping to reverse the part of its economic decline which is caused by a dearth of modern investments.

Whereas, if the present situation perdures, it would do so because of the persistence of disastrous economic policies inside the USA, and the failure to even talk as if one wanted to turn things around. Ultimately, a catastrophic loss of control over the US currency could occur if a clear signal does not come that US authorities have decided to stop the decay of their country. Not a good way to go. Remember Argentina.

Patrice Ayme.

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