Tuesday, September 6, 2011

Obama Shock

As I learn about fiat currency, I intuited that Nixon and Bretton Woods would be significant history, however I didn't realize how similar the preceding events were to today:

"The year 1970 was the crucial turning point, because foreign arbitrage of the U.S. dollar caused governmental gold coverage of the paper dollar to decline from 55% to 22%. That, in the view of neoclassical economics and the Austrian School, represented the point where holders of the U.S. dollar lost faith in the U.S. government's ability to cut its budget and trade deficits.

By 1971, the money supply had increased by 10%.[1] In the first six months of 1971, $22 billion in assets left the U.S.[2] In May 1971, inflation-wary West Germany was the first member country to unilaterally leave the Bretton Woods system — unwilling to devalue the Deutsche Mark in order to prop up the dollar.[1] In the next three months, West Germany's move strengthened their economy. Simultaneously, the dollar dropped 7.5% against the Deutsche Mark.[1]

Due to the excess printed dollars, and the negative U.S. trade balance, other nations began demanding fulfillment of America's "promise to pay..."

So my research turned up this, which supported my suspicions:

"...there are millions of Americans reaching retirement age who will be shocked to learn that they will fare no better than those in developing countries with debased currencies that have driven them into poverty. We lived through the Nixon Gold Shock. But I’m not sure we’ll make it through The Obama Deficit Shock."

Yet, what if the opposite were true?

"What the Nixon Shock recognized – what Paul did not then and still does not recognize – was that this generation's economics are naturally deflationary, not inflationary. As technology created new abundance in the form of processing power, a gold standard would have created a deflationary spiral, which is far worse in its economic implications than an inflationary one."

That article continues to explain what will be our savior: cheap energy. All the the money being poured into renewable sources will eventually jackpot, we'll drive for cheap (and not pollute), and the economy enters a new vast upswing. When that breakthrough occurs, the Green Revolution truly begins.

What do you think? Is one or the other true, somewhere in the middle? Elsewhere? The answer is certainly a global one, on a scale only dreamed of by the Nixon Era movers and shakers. Perhaps bitcoin will play a part. China certainly will.

"When the era of floating rates began, in 1971 when President Richard Nixon abruptly abandoned the link between the dollar and gold that had been the foundation of the post-war fixed-currency system known (after the place where it was agreed upon) as Bretton Woods, there was another Asian country widely accused of unfair trading. It was Japan, whose rapid, environmentally dirty growth in the 1960s, based on cheap labour and a cheap, fixed currency, had produced a big trade surplus and was being blamed for America’s trade deficit.

"At that time, America really did have a currency weapon in its hands: by abandoning Bretton Woods and the link to gold, Nixon could force other countries to revalue their currencies against the dollar. He did so as part of a deal, in which he removed a 10% surcharge on all imports that he had imposed several months earlier. The yen soared in value. The Japanese have ever since called this “the Nixon shock” which, combined with the 1973 oil-price hike, forced their companies and their government to move their economy sharply upmarket, towards higher technology and greater energy efficiency.

"Today, there are some crucial differences but one important similarity. The similarity is that tensions over currencies and trade imbalances are centring on a rising Asian giant, one whose rapid, environmentally dirty growth has been based on cheap labour and a cheap fixed currency: China, of course. The differences are that a Nixon-style import surcharge would be illegal under World Trade Organisation rules, and that thanks to floating exchange rates the currency weapon is not in the hands of President Barack Obama but rather the Chinese themselves, for only they can choose to relax capital controls and to float their currency. It is harder now to have an “Obama shock." But it is not impossible."

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