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Tuesday, December 19th 2006

Should We Be Worried?

Is the U.S. economy coming to the end of its reign? And when it does, will the transition from world superpower to mere player be a painful one?

I don’t know. But clearly the buzz around the news is that we’re in for a rough ride. In some ways this kind’ve feels like the wackos predicting Iran would end the world. But, I don’t know anything about this, so I won’t even try to refute these op/eds.

Bits of News has a write up on what the new law against melting down coinage should tell us.

The oil-producers of the middle east have been diversifying their reserves away from the dollar for a couple years now, but as long as their currencies are linked to the dollar and the oil they sell is priced in dollars then no major changes will happen.

What doesn’t get reported is that all six members of the Gulf Co-operation Council, or GCC (Saudi Arabia, United Arab Emirates, Kuwait, Bahrain, Oman and Qatar) still peg their currencies firmly to the dollar. Yet there is absolutely no outcry from American politicians and industry leaders for them to remove those pegs. Why is that?

The fact is that those oil producing nations simply don’t have the domestic infrastructure to handle such massive current account surpluses. That means they have to recycle that money back into American debt.

But now that is approaching an end. These gulf nations have another plan – a common currency.

To put it simply, once the GCC has a currency union they will no longer need to peg their currencies to the dollar, nor keep their currency reserves in dollars, nor recycle their trade surpluses into American debt. This will drastically reduce the demand for dollars around the world. Until recently, every nation had to buy dollars in order to buy oil on the world markets, thus making a worldwide demand for dollars.

However, one thing won’t change – we will still have to buy mid-east oil. But if they no longer need our dollars what will we be able to buy their oil with, especially if they are selling it in a currency other than dollars? We would need create a currency reserve of other nation’s currencies (like every other country does) in order to buy the oil. But how can we build up this reserve if we don’t sell things to the rest of the world that they want?

Orson Scott Card (the author of Ender’s Game) sounded a similar note recently, but tied his to the War on Terror.

For a century, America has been the great cushion to absorb the shocks that might have brought down western civilization. In the Great War (WWI), Europe crashed its own population through war and then crashed further through the influenza epidemic. But the American economy provided the means for France and Britain — but not Germany — to recover. Arguably, it was the failure to include Germany in the recovery that led to repeated economic crises, and when America finally joined Europe with its own Depression in the 1930s, the stage was set for the next barbarian invasion.

In the aftermath of WWII, once again America was the economic cushion — only this time the portion of Germany under western occupation was included in the economic recovery, as was Japan.

The result, over the past sixty years, has been a pax Americana covering much of the world. And the world has prospered fantastically wherever the American military sustained it.

Let me say that again: As with Rome, the American military has been the wall behind which a system of safe trade has allowed an extraordinary degree of specialization and therefore mutually sustained prosperity.

People talk about America’s enormous defense budget as if it were a menace to the world. But our enormous defense budget has allowed Japan and Europe — and Taiwan and South Korea — to thrive without having to invest much of their gross domestic product in defense.

His collapse comes with the cessation of oil shipments (just like in Bits of News) but not because we don’t have the currency to pay for them but because the middle east goes up in flames. What is similiar however is that the consequences of our post-manufacturing economy (which doesn’t allow us to sale goods in Bits of News’ analysis), is a poor one.

America stupidly and immorally withdraws from the War on Terror, withdrawing prematurely from Iraq and leaving it in chaos. Emboldened, either Muslims unite against the West (unlikely) or collapse in a huge war between Shiites and Sunnis (already beginning). It almost doesn’t matter, because in the process the oil will stop flowing.

And when the oil stops flowing, Europe and Japan and Taiwan and Singapore and South Korea all crash economically; Europe then has to face the demands of its West-hating Muslim “minority” without money and without the ruthlessness or will to survive that would allow them to counter the threat. The result is accommodation or surrender to Islam. The numbers don’t lie — it is not just possible, it is likely.

America doesn’t crash right away, mind you. But we still have a major depression, because we have nowhere to sell our goods. And depending on what our desperate enemies do, it’s a matter of time before we crash as well.

Why? Because we’re that Syrian village. Except that what we make is food — enough to feed half the world.

What we don’t make for ourselves anymore is … everything else. We don’t produce steel. We don’t make most of our own computer equipment. We have exported our textile industry.

Some of these industries could recover. But they would be producing only for domestic consumption. We’d have nowhere to sell anything except to ourselves. That’s when we find out just how much of our new “service” economy is smoke and mirrors, dependent entirely on the surpluses generated by the global system of trade.

And our own oil production cannot meet the demands of transportation and production at current levels. Rationing will cripple us. We will not be able to maintain our huge fleet of trucks. Air travel will becoming shockingly expensive and airlines will fail or consolidate. We won’t even be allowed to drive our cars on long trips because gasoline will be rationed.

Yesterday the Thai government, trying to squelch the unprecedented rise of its currency against the dollar, put severe penalties on foreign investment.

The rest of the world is worried about inflation in America. Should we be? Or perhaps more realistically is not whether this “dip” in the American economy is coming, but is it a BIG one? How painful will the shifting of economic “power” be for America?