Our Grave Economic Reality: Of Reserve Currencies and Trade Deficits; Of The Oxymoron that is The ‘Service Economy’; and Of Our Planet’s Economic Carrying Capacity

-“The only way the rest of the world will hold your currency is if you run a trade deficit.  Economics is the opposite of religion, it’s better to receive than to give.”  – Warren Mosler, economist

What a fantastic notion; unfortunately we Americans prefer to purchase seemingly infinite amounts finite commodities which we deplete and can never use again.  The US seems determined to export its’ sovereignty in exchange for foreign crude oil, placing more and more of our dollars in reserve at Central Banks around the world; and we’re purchasing a single-use asset which we must continually replenish.  This is not merely the ‘national security risk’ that most pundits speak of, but also represents the mass-exportation of our wealth overseas in exchange what amounts to handfuls of magic beans (or, no-so-magic beans).  Translated: The ‘Emerging Market’ is something of an oxymoron, we’re merely allowing a great deal of economic activity that ought to take place in the US to occur overseas instead; in exchange we’re either borrowing their money (China) or relying on their commodity-rich economies (Brazil, Russia).

Being that our economy is now service based (meaning most of our economy produces nothing tangible, and that may be worth nothing in future, but certainly has no certainty of having any value for resale), we find ourselves the perpetrators of our very own self-fulfilling Ponzi scheme; we keep moving around greater and greater sums of money, but no new value is necessarily being created.  e.g. If the massage-therapist I paid recently chose to fill her gas tank with my payment, surely most of that money has now left our economy for good (who buys American anymore, that is not American?) – and, I will never be able to resell my massage.

Economic Growth, and International "Self-Delusion"

GDP Growth versus Inflation, and the Farce of a Service Economy:

For whatever reason (I’m sure an economics professor, or charlatan, once told me) no one seems to consider the rate of inflation alongside measurements of our, or any country’s, GDP growth.  To me that seems rather ‘convenient.’  In my mind, in a year where the US grows GDP at a rate of 3.0%, annualized, and the rate of inflation is 3.0%, annualized, that our economy’s GDP did not in fact grow at all.  I will not endeavor the validate that notion mathematically (I dare you to negate it in such a manner) but I will do the much more heroic thing, and be so audacious as to apply logic to an economic debate (if Congress could only see me now).  Of course GDP as we know it is adjusted for inflation, but the manner in which we adjust subjects to a suspicion of the validity of both figures – ultimately.

-‎”By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”  – John Maynard Keynes

Clearly the Fed’s recent determination to create inflation (hey, they’ve been saying for years that part of their dual-mandate was to target inflation) could have the positive effect of  making it easier to repay our foreign debt, but apparently no one responsible for US fiscal policy understands that this will only be effective if we were actually to brand China a “currency manipulator” – because most of what we owe is to them.  Thusly, as Keynes so astutely said, the true effect of the inflation we aim to create will be the mass-robbery of wealth from the American people in the form of a rapidly depreciating currency, but without a meaningful reduction in national debt.

“If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.” – John Maynard Keynes

If we were Greece, we could use the above to our advantage.  Clearly, we have little to no real interest in using the depreciation of our dollar to our advantage with regard to our national deficit as it pertains to foreign economies – such as China.  What everyone seems to forget, is that a huge portion of our deficit is owed to the American people (ah yes, all those Treasuries you own – in Mutual Funds, etc) and, as Keynes so astutely put it, this destruction of the value of the dollar is tantamount to the ‘secret and unobserved confiscation’ of the wealth of the citizens of the United States; by the United States, but not to the enrichment of the United States (as perverse as that sounds).

With regard to the trade-deficit itself (and what a deficit it is), there seems there is little that we can do in light of our never-ending quest for increased productivity and our lust for ordering and owning goods built by the lowest bidder.  What I can say on this topic involves immigration; those of who believe that illegal immigrants in this country are taking jobs from  you obviously haven’t come to grips with the fact that most of the jobs performed my illegal immigrants are simply undesirable to most Americans.  For those of you who say these immigrants are unjustly taking jobs from Americans for less money than an American would work for, obviously don’t see the cruel irony of a country, 10% of which is unemployed (though it very well is more), playing a game of ‘beggars can be chooser.’  What’s that?  You say you don’t like that these immigrants save their money and send it overseas?  Well, as I described, even if those monies were made by Americans, many of those dollars would be finding their way overseas anyway.

Economic Carrying Capacity:

While I may or may not have coined this phrase, its’ definition should escape no one.  We have all heard the notion that, for example, our planet has a carrying capacity; a limit, by virtue of space and, more importantly, resources available for the inhabitants of our planet on which to exist.  I say that there is just such a limit to the ‘real’ potential economic activity of our planet.  Clearly we know that our resources are finite.  Yet, as I described previously, we are clearly very good and creating the semblance of economic activity, as if by our divine will to make money.  If we have learned anything from our recent crisis’ (surely if we have, it is not much) then we should know by know that this type of economic activity, in the long-run, amounts to little more than an economic game of ‘musical chairs.’ – When the music stops someone will surely be left with no seat.

I am not here to say what the capacity of our planet is to produce economic activity (I don’t believe anyone could – and, I am certain we would not know it even if we were there).  What we need to realize is that, in many cases, our expectations do not align with what is possible, or even probable, in terms of economic growth – we must be skeptics, to an extent.  In a world of limited space (even if we colonize the ocean-floor) and finite resources, it stands to reason that there is a finite amount of legitimate economic activity that can be affected – the rest is either inflation, or smoke and mirrors.  Look at the past decade, for example; nearly the entirety of the US’ post-9/11 economic expansion can be explained by an easy-money fueled real estate boom; the problem is that it was a zero-sum game, lots of money changed hands and plenty of people made or lost money – but nearly $0 dollars of new wealth was actually ‘created’ (see my 1st comment, below).  Furthermore, with globalization, this notion of reaching a maximum-threshold of economic capacity allows us the delusion that we can find the growth elsewhere: Well I’m here to tell you that the growth elsewhere certainly appears to be at the expense of growth ‘here’ (insert developed nation in lieu of ‘here’).  Money managers are often accused of (or credited for) chasing growth; the reality is that we are just as much leading growth away, as we are chasing it.

The clear point is that it is likely that there is a finite amount of legitimate economic activity that can be produced on this planet, given the resources that we have.  Of course, with the beauty of inflation we will continue to delude ourselves with notion of  growth in economic activity – in reality what we will be seeing won’t be growth, but the devaluation of our currencies and appreciation of commodity assets that create the appearance of further growth.  Yes, there will be innovation.  Yes, things will be invented that I haven’t thought of that people in fact want to buy – but that doesn’t necessarily equate to legitimate increases in economic activity – gains in productivity are likely to further reduce the employability of our lower, and lower-middle classes; increasing the drag on unemployment, government programs, and socialist tendencies within governments (see Obama care).  Simply put; in addition to what I believe are the obvious (if eventual) constraints on the global economy, we will continue to see an ever-increasing role of government spending as a percentage of the global economy; and, if not, we will have to realize that there must be a limit to how many new gadgets and services can be created that we can convince the citizens of the world they cannot live without.

One Response to Our Grave Economic Reality: Of Reserve Currencies and Trade Deficits; Of The Oxymoron that is The ‘Service Economy’; and Of Our Planet’s Economic Carrying Capacity

  1. Andre Zdanow says:

    For anyone wondering how one could create the ‘semblance’ of economic activity I highly recommend this blog on Asset Bubbles posted in September, 2008:


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