New World Order Unraveling as Patience with Trade Imbalances Wears Thin

The “New World Order,” a term I use to describe international cooperation through organizations like the United Nations, the World Trade Organization, the International Monetary Fund (IMF) and the World Bank, as opposed to the term used by conspiracy theorists, is beginning to unravel over the issue of currency exchange rates.  It’s about time. 

All of these organizations (or their precursors) were established in the wake of World War II in the hope of breaking the cycle of misunderstanding, mistrust and nationalism that fostered global conflict twice in a span of less than thirty years.  It’s not that I have a problem with international cooperation.  But such cooperation and organizations, based on false premises and flawed economics, have been doomed from the beginning.  Cooperation toward a goal of perpetual exponential growth (including population growth), coupled with a seismic shift in trade policy to unproven and flawed 18th century trade theories, produced ever-worsening global trade imbalances, culminating in the fall of 2008 with the only logical outcome possible – the bankrupting of the United States and the collapse of the global economy. 

In the wake of that crisis, world leaders pledged cooperation in enacting stimulus to arrest the slide, and cooperation toward eliminating the trade imbalances.  Predictably, the Obama administration tried to fly under the radar with approaches that wouldn’t ruffle any feathers – verbal arm-twisting of China on their currency and cajoling Europe and Japan to boost their domestic economies.  None of it worked and now Obama and the Democrats are paying the price for their timidity, facing huge losses in the mid-term election.  Finally, U.S. Treasury Secretary Tim Geithner, having had enough of China’s delay tactics, dropped his opposition to labeling China a currency manipulator.  In short order, the House last week, by a wide margin, passed a bill that (if also passed by the Senate and signed into law by Obama) does just that, opening the door to punitive tariffs on Chinese products. 

Predictably, howls of protest from China and hand-wringing by other export-dependent nations over the prospects for rising U.S. protectionism soon followed.  Japan, alarmed over the unrelenting rise of the yen has just resumed blatant manipulation.  And the U.S. Federal Reserve has all but said that it will soon be dumping huge volumes of dollars on the world market to further erode the dollar’s value.  Emerging nations (led by China, of course) have taken their concern to the IMF, demanding that it intervene and stop this escalating currency war. 

All of this is good news and I expect that it will continue.  It’s good because it’s finally getting at the root of our economic woes.  But, in the short run, it won’t make a bit of difference for the U.S. economy, since currency exchange rates have very little to do with global trade imbalances, which are actually rooted in population density and per capita consumption disparities that can only be mitigated by across-the-board tariffs.  But at least the trade imbalances are coming under fire and eventually, one way or another, we’ll arrive at a point where a return to sensible trade policy will put this economy back on its feet.  It’s going to be a long road, but finally the first steps are being taken.

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4 Responses to New World Order Unraveling as Patience with Trade Imbalances Wears Thin

  1. MikeF says:

    I won’t belabor my comment here as I’ve stated this so many times before. Compounding interest in a closed environment is mathematically impossible. What we are observing is the end of our monetary system as we know it.

    Note that the Fed lowered the overnight interest rate to zero some time back in order to slow the speed of the crash. Japan did so in 1995 and remains so today. In a finite world, the interest rate MUST reach zero in our predictable non-growth environment.

    • Pete Murphy says:

      I agree that interest rates would have to remain at zero in a non-growth environment. Where I don’t agree is that we’re not in that environment yet. World population growth continues at a near-record pace. Unless every person added to the population consumes nothing, then we’re still in a growth environment. We’re in an environment characterized by the 2nd half of the graph in Chapter 6, page 106, where per capita consumption is declining in the face of continued population (and therefore “economic”) growth. We’re also in a post-bubble economic collapse, brought on by the global trade imbalance.

  2. MikeF says:

    Pete,
    Consumption must be accompanied by finite physical inputs which has nothing to do with population density other than to bring balance to an end in an accelerated manner.

    Debt and the accompanying phantom compounding interest represent FUTURE economic development that is impossible to produce at the necessary levels due to constrained inputs. That is why we have a $14 Trillion National Debt and a Federal Government that is our nations largest employer.

    “Make everything as simple as possible, but not simpler.” Albert Einstein

    I do not disagree with your theory Pete, however it represent one piece of a very complex mechanism.

    • Pete Murphy says:

      I agree with you completely regarding the finiteness of resources and the constraint that puts on future growth. But where I guess we’re disagreeing is on the interpretation of the cause of the current state of our economy.

      No resource constraints have yet materialized and, since no economist with any influence on public policy buys into the concept of constraints in the future, they’ve had no effect thus far on our economy or on our national debt. We have a huge national debt for lots of reasons, but I don’t see future resource constraints being one of them. The trade deficit, of which our deficit in imported oil is part, is probably the biggest reason for the national debt. It’s no coincidence that the cumulative trade deficit since 1975 almost exactly matches the growth in our national debt during that same time frame. With over $10 trillion drained from our economy by the trade deficit since 1975, and growing by over a half trillion dollars per year, it’s been imperative for the federal government to overspend by an equal amount to maintain the illusion of an economy unaffected. Trade dollars return to the U.S. in the form of purchases of U.S. treasuries, putting the money into the coffers of the Treasury Department. The only way to get it out of the Treasury Department and back into the economy is through deficit spending. More recently, in the last decade, mortgage-backed securities were sold to foreigners and used as a vehicle to “main-line” the trade dollars back into the economy, pumping up a housing bubble. When people began defaulting on those mortgages, thanks largely to a dearth of jobs caused by the trade deficit, the whole scheme blew up. Now, stripped of that vehicle for directing trade dollars back into the economy, the government has resorted once again to deficit spending. Growth has slowed because credit has dried up, since the trade dollars aren’t being funneled back into the economy in the way that they were.

      I believe the time you speak of, when growth will grind to a halt because of the exhaustion of resources, is coming, but it’s not here yet. In fact, it may never arrive if the population density effect takes over first, driving up unemployment and poverty and, consequently, the death rate along with it.

      We’ll just have to agree to disagree on the root cause of our current economic woes.

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