Would you trust a dictator with your wallet?April 8, 2008
The Federal Reserve is printing dollars to stimulate consumption, but since most products Americans consume are produced abroad their dollars flood the world and foreign governments print their domestic currencies to take them off the market and stabilize the exchange rates. That is literally the inflation that is ravaging emerging markets, meanwhile foreign leaders persist in their vain attempt to maintain the status quo. The only possible reason they would follow such a stupid policy is a false belief that American demand is driving global economic growth. In reality, demand is practically unlimited. Anybody can consume more if given enough wealth, nobody needs America to consume on their behalf. The trick is producing enough to trade with others in exchange for their goods and services, which despite the political rhetoric, foreigners do better than Americans. In a perfectly rational global economic system Asians would be dominant. The reason this has yet to occur is a direct result of government manipulation of the market, which combined with irresponsible lending in the US has created a US dollar bubble that is on the verge of popping. This activity has increased the wealth of foreign leaders at the expense of their people. Workers toil all day in factories to accumulate US dollars in the nation’s foreign exchange reserves, they don’t see any of it. The only solution to inflation and poverty in the third world is a collapse of the US dollar, which is exactly synonymous with an explosion of purchasing power in the east. It will allow all these workers to purchase the goods they produce themselves, rather than sending everything abroad. However, the prevalence of dictatorships and controlled economies may increase the risk developing nations will delay the appreciation of their currencies. The residual appeal of US dollars may influence ignorant leaders to continue acquiring worthless American paper at the expense of their people’s economic health, longer than a normal free-market economy would have permit. Also, if average people suddenly become wealthy the potential colossal shift of power must be a terribly daunting proposition. The hypothesis that China will become the new center of global finance is predicated on the assumption Beijing actually cares about its people. If their intent is to improve the average person’s standard of living, they will appreciate the RMB. If their intent is to increase an already bloated horde of foreign securities and further consolidate control over the people, they will be satisfied to let inflation impoverish millions and return them to a state of dependence. In a sense, the de-coupling theory is a gamble on the integrity of foreign leaders. It’s an appealing idea, but personally I prefer not to trust anybody.
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[...] theory has always been dependent on a dramatic appreciation of Asian currencies. I have always been a little skepticle of their intent to allow such an appreciation, which is the reason I generally avoided too much [...]