Originally posted by: PC Surgeon
Wow
That analogy sucks so bad I don't even know where to begin...
1. America still produces a vast amount of the world's goods and services, it's not like we just sit here consuming and not producing anything, which is the first strike against your analogy. As soon as the dollar plummets those goods and services become much cheaper, driving international consumption. You can see it already, as more worldwide tourists show up in the US, driving our own economy.
2. You assume that the only thing the world gets out of the US is an IOU. However, the investments made into the US, beyond just IOUs are huge. They include stocks, bonds, buildings, vehicle manufacturing plants, etc... A declining dollar means the assets decline in value. A rapidly declining dollar means they might even try to dump them, further erasing capital. They don't want that, otherwise they'll be in the same situation as many of the i-banks and CDOs.
Remember what happened to the Japanese when they bought up everything possible during the 70s and 80s? Everybody thought it was the end of the world. They ended up selling for pennies on the dollar, only to be saved by fellow companies, which is actually what caused their problems in the long-term.
3. You also assume that they don't really need our ability to consume. That's very very incorrect. China absolutely needs the US. The only thing keeping that economy cooking is the US, as soon as we crash, they crash. Why do you think the chinese stock markets drop with any sign the US is heading south? I daresay the chinese government needs us and they are desperate to keep us healthy. I say that because the first second we go into a recession and stop buying is the second the manufacturing plants stop working, as that happens inflation will hit them in a massive way, as it already is, and their economy goes south, very quickly. As that happens their people become upset and discontent ferments.
4. YOu go onto saying that the US cannot sustain a trade imbalance. I would agree to a certain extent, but not completely, as we can do it in the long-term provided people are still willing to believe in the US' ability to innovate and grow. We *DO* produce a lot of goods and services, the manufacturing sector is much larger than it was 20 years ago. People only look at sectors that have died, not sectors that have thrived. A declining dollar will make them thrive even more.
5. THe intrinsic value of the dollar is based on the economy and the whole US, it's economy, military, people, government...etc. It doesn't need an asset, since the only thing different between what backs it now, and an asset, it that the asset can be held. But that doesn't make any difference, since the asset is still beholden to the market's implied value, if that value goes away, the asset is worthless. Just the same as the US economy, if the implied value of it goes down, then the asset declines in value. You also assume that a hard asset is superior to this. Look in history for the many examples of how the US was almost ruined because foreign gold redemptions for debt. If it weren't for Pierpont Morgan, this country would have been ruined.
You also assume that a hard asset would solve everything. Unfortunately, we were always a net debtor nation until WW1. With or without gold, we were. We routinely defaulted on our assets. Our bonds were worse than junk and were considered the laughing stock of the world.
Then you go into M3. Big fucking deal it's much higher. It should be, considering the US economy's value is much higher. Economy grows, population grows, dollars needed grows! AMAZING!
It's like you guys think everything should be static. However, it's not, nor should it be. The world's entire hard asset base could not sustain the amount of money needed to be backed to contain the US economy and it'd have to be either continually adjusted down, or we'd have to keep gobbling up more hard assets to contain the economy's value, which would still mean you'd need to adjust the currency down, since the next unit of the asset is more expensive, breaking your parity. Eventually, any hard asset backing the currency would become too expensive for industry to use and industry would fail.
Let's not forget the problem with volatility within the economy. Asset based systems are much more volatile and prone to wild movements between inflation, deflation, recession, boom. All of that leads to reduced capital investments due to higher risk. It also leads to more defaults from obligors and more overproduction.
You need to do more homework outside of RPB material. Your lack of history knowledge about what happens during these different scenarios is striking. You seem to think everything was perfect under an asset based currency, they weren't. It's an antiquated system that can't possibly contain a modern economy.
You also are woefully ignorant of what would happen on a global scale if the US' currency were allowed to fail.
You really need to get outside of your traditional materials and read more history of the banking system, how it was good and bad, how it failed and succeeded. I would suggest you read a pretty decent book about the history of JP Morgan, lots of good info about world events and the banking system's role behind them. The book is called "The House of Morgan".
I'll look in my library to determine what other books might be helpful for you. I doubt you'll read them, since you only seem to be interested in one POV.
