Saturday, June 28, 2014

US Foreign Policy in the Middle East

Over the past few decades, US foreign policy has been insane, crazy, misguided, and stupid. The US backs and funds the most oppressive regimes in the world (ex. Saudi Arabia). The US also propped up Saddam Hussein in the early 80's before deposing him in 2003. All of this is happening while the rhetoric coming from the State Department has been that the goal of US foreign policy is to promote human rights and democracy. First off, the promotion of democracy and "human rights" in other parts of the world makes absolutely no sense. Secondly, the rhetoric has been the exact opposite to the actual policies that have actually guided the State Department.

In the case of human rights and democracy, many cultures and nations across the world simply do not agree with the principles of human rights. It goes against their cultural views of the way the world works. Secondly, many places in the world cannot structurally handle democracies (note that the even the US isn't close to a direct democracy although there are some democratic elements). Many of theses countries who have been supported as "democracies" in the Middle East have actually become more extreme. In many of these countries like Iraq, there are long-standing sectarian or ethnic divides between the countries. These conflicts have been going on for thousands of years. To think that "understanding" and "democracy" can fix the problems in these countries is flat out ignorant.

Another major consideration in the Middle East is that there are obviously lots of natural resources in these areas like natural gas and oil. These resources are very important for countries across the world to operate normally and the supply lanes and trade routes in the Middle East must be kept open. In other words, it's actually dangerous for one major power to come in and take control of the entire Middle East. The reason it's dangerous is because then you get a regional hegemon that actually has the power to disrupt these supply lanes, trade routes, and impact the price of natural resources very suddenly.

Therefore, the US must take a balance of power strategy in the Middle East. In other words, it becomes critical to make sure that there is no country, nation, or empire that gains too much power in the area. Fortunately, the internal conflicts in this region of the world automatically create conflict in the region. The job of American foreign policy should be to make sure that no one in the Middle East has the ability to dominate every part of the region. If one country is becoming too strong, the US must undermine that country by supporting its enemy and vice-versa. If you can keep these nations in the Middle East fighting one another, it becomes much more difficult for them to get into wars against others.

Also note that direct military intervention should be used as a last resort and should be avoided at all costs. The best way to win a war is to win without military conflict. US foreign policy shouldn't be to go into countries, overthrow governments, and install puppet regimes nor should it be to try to nation-build. As we've learned from Iraq and Afghanistan, nation-building is extremely difficult and very costly. The best strategy for the US in the country's current position should be to maintain the balance of power in the region. It should be to make sure that no regional hegemon can come to power in the Middle East. The balance of power strategy could also be useful in other parts of the world as well, but it's particularly true in the Middle East. The US must stop propping up puppet governments and must instead try to maintain the balance of power. Trying to suppress conflict in a part of the world where conflict has been the norm for thousands of years is flat out stupid.

Wednesday, June 25, 2014

The Case for a New International Monetary System

One of the primary reasons for the world’s economic ills is because the international monetary system has yet to adapt to the structural shifts that we’ve seen in the world’s financial system. Since the Bretton Woods agreement, the US Dollar has been the world’s reserve currency and the USD went off the gold peg in 1971.  The US is also one of the world’s richest countries per capita and is the world’s largest in terms of pure output and has been that way since around World War II (in 1945, the US was around a third of world output). However, we have seen countries like India, China, and other emerging markets grow very rapidly over the past few decades, which created a shift in the power struggle across the world.

Historically, the world’s reserve currency usually belongs to the world’s most powerful superpower, which is still (and still will be for some time) the US. However, we’ve seen a very large housing bubble in the US in the previous decade and we’ve also seen the US run persistent current account deficits. A country without capital controls that’s running current account deficits MUST necessarily be experiencing an inflow of capital. Since the dollar is the world’s reserve currency and payment system, the US cannot impose any form of capital controls. This has led to the world’s most capital rich country importing capital from much poorer countries. We must also remember that the capital account is the inverse of the current account, which means that when the US runs a capital account surplus, the country must run a current account deficit. Also note that a country’s output is equal to the total amount of consumption (both private sector and government) plus the total amount of investment (both private and government investment) plus the net balance of trade. Since the turn of the century, the US has experienced a rise in the current account deficit which has led to a fall in output. Until 2008, this fall in output was counterbalanced by a rise in debt-fueled consumption. This rise in consumption was fueled by an increase in both public and private sector debt (mostly private sector) that forced up both private and public debt/income ratios. Since debt/income ratios cannot be rising forever indefinitely (as debt servicing costs eat up a larger and larger portion of the income), the result was a massive debt-fueled asset bubble that led to a financial crisis, which occurred in 2008.
Basic Identities/Formulas:
·      Rather than define Y=C+I+G+NX, we’ll define Y=C+I+NX where C=Cp+Cg (total consumption = private consumption + government consumption) and I=Ip+Ig (total investment = private investment + government investment)
·      NX is defined as the current account balance
·      (capital account)+(current account)=0

The advantage for the world’s reserve currency is that the inflows of capital allow the country to fund wars and imperial expansions. In the case of the US today, the wars and imperialism of the United States has created major conflicts and utter chaos in most of the world. In the previous decade, the US has started two unnecessary wars in two third world countries (Iraq and Afghanistan), has taken up nation-building in those same countries, and when the US has left one of them (Iraq), the country fell into absolute chaos. So while the run-up in private sector debt led to an asset bubble, the unsustainable run-up in government debt led to two reckless wars and poor spending policies that ended up bailing out large corporations (ex. Medicare Part D). The result of the War in Iraq has forced the country to completely fragment as the map in that region of the world has changed more in the past few months than it did in the previous two decades.

Another important point of note is that every time there is debt, there is also a transfer of real resources. If the transfer of resources isn’t productive, then the debt servicing costs will act as a drag on future growth. Over the past few decades, we’ve seen American debt/income ratios explode in both the private and public sector while we have an economy that’s suffering from a lack of capacity utilization and clearly not producing at capacity. What we’ve witnessed is a transfer of resources from the middle and working classes, who are paying for these reckless wars in taxes, debt servicing costs, and higher unemployment to large corporate organizations like the big banks (who have made poor decisions, lost a lot of money, and got bailed out), big oil companies (who benefit from the US having the ability to dictate terms to countries with large reserves of oil and gas), and the military industrial complex (who supplies weapons, ammunition, etc.). The resulting depression (we’re in a depression, not a recession) caused asset prices to collapse while the liabilities remain. This has left the balance sheets of the working and middle class completely decimated while the banks and other large corporates all got bailed out for their decisions.

What current US monetary policy faces is the age old Triffin Dilemma. The Federal Reserve is currently forced to choose between supplying enough international currency for foreign nations to hold or for domestic policy objectives. If the Federal Reserve chooses to provide enough currency in the system for international demand of the currency, this forces the US to run persistent current account deficits which reduce production and create capital inflows which will either create asset bubbles, unemployment, and often both. However, not providing enough international currency in the system can create some major problems like creating financial crises and liquidity problems in other parts of the world—primarily third world nations.

It’s obviously in the interests of other nations to have an alternative global currency as they don’t have to rely on the Federal Reserve to provide enough currency in the system to make payments, but it’s also in the interests of the American people to have an alternative currency. The current system effectively transfers resources from the lower and middle class while rewarding large multi-nationals. The current monetary policy also fuels the American warfare state that is not only unnecessary, but also counterproductive. Therefore, the international monetary system with the dollar as its centerpiece needs to be torn apart. It no longer makes any sort of sense for the dollar to continue to be the world’s reserve currency—the hallmark of the current international monetary system.