As we all know, the rest of the world is crazy - and therefore wrong.
Only each one of us is, in his or her view, NOT crazy - and, ipso facto,
has the brilliant insight to be right.
On that basis, I have the "right" to tell those who have been
contributing to the discussion of the United States trade deficit, that
none of you has come even close to a true and reliable analysis of the
dollar situation and that huge - should I say massive? - US dollar trade
So let me enlighten you.
The huge dollar trade deficit is not unique. It has its little-cousin
equivalent down there in Australia - a country whose currency has never
dominated world markets, never been a reserve currency, never done any of
those grand things that are customarily attributed to its big cousin
across the Pacific.
The huge US dollar deficit - and the smaller but still not
inconsiderable Australian $ deficit - are both due to the inflation -
domestic inflation which then spread internationally - the inflation that
started in 1969 and whose "remedy" produced the even greater
inflation and stagnation which followed throughout the 1970s and into the
1980s. The inflation plus stagnation came to be known, reasonably enough,
Most people have come to believe that it was some sort of clever policy
- possibly founded on some variant of monetarism - and the
"discipline" of central banks, including the Fed, which brought
about a cure to this inflation and stagnation and delivered us into the
mind-bogglingly prosperous 1990s.
None of this is true.
First, anything resembling "monetarism" has been/is an
unqualified disaster. Not only did it not cure inflation, it made
inflation worse, indeed, made it chronic.
Second, there were no other clever policies that had anything to do
with providing a cure for "stagflation." Almost without
exception, US policies and the equivalent elsewhere, again for example in
Australia, made things worse, if not in the short term, then not much
later. The policies did result in a lowering of the living levels - or at
least a stagnation of those levels - for the workers and the middle
classes. This was accompanied by a stagnation or even an absolute
reduction of social services, including such things as unemployment
benefits, invalid and old-age pensions and so on.
Third, the reduction of social-services expenditure tended, ceteris
paribus, to stabilise inflationary pressures. Unwillingness of governments
to undertake essential infrastructure expenditures and eagerness to sell
off the family silver to private enterprise also gave the impression that
something closer to a match between demand and supply was being achieved.
However, these savings were made in a context in which investment
generally was limited, in which disinvestment took place through failure
to replace depreciated assets, and in which the economy exported much of
its industry overseas or across the national borders.
Fourth, while all this was going on, inflation in the US (and
Australia, remember) was offering a juicy market to anyone who could get
in there and sell. For a while, in the 1970s and 1980s, only countries
like Japan and West Germany, who maintained their real investment and
their export capacity, could help meet these needs but the Asian Tigers
and their kin gradually and quite quickly came into their own. Their
unprecedented economic growth was the other side of the United States
coin, which, comfortingly, showed a decline in levels of domestic
inflation. At the same time, there came into being those famous trade
deficits - which have, after so many years, become chronic trade deficits.
That's a rough and brief outline.
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