7/19/08 - a short history of current global economic instabilities.

following wwII, the us assumed the role of world protector/administrator of capitalism. The us would lend its military might to any government, no matter how corrupt, if it was judged to be favorable to capitalism. To further stabilize and extend capitalist economic relations, the us currency became the world currency for settlement of international trade.
from a contemporary perspective, the arrangement might seem a bit like racketeering, something straight out of the godfather, in return for protection from us muscle, the world would accept the dollar as international currency. the dollar being a currency beyond the control of any government but the us. in effect to pay its trade debts, the us has to just go in the back room print dollars and hand them out for the products of the world.
the ascension of the dollar to the role of the world's currency was essential to the maintenance and extension of post wwii captialism. but the fact that the dollar remained outside the effective control of any country but the us, left international holders of the dollar vulenerable to the politics of the us. there is always a temptation to print dollars to meet domestic political needs. the rest of the world is somewhat at the mercy of the good faith of the us government. everybody likes a sugar rush when feeling a bit depressed.
dollars are a price taker, not a price giver...
one systemic check to the oversupply of dollars is simply that holders of the currency will see the value of their money withering away and attempt to counter the slide. with the monetarist reaction, associated with Milton Friedman, holders of the dollar advance the common sense policy of maintaining the value of the dollar by tying it to some unchanging store of value such as gold or some given ratio of dollars to production. but by maintaining stable interest rates in the face of slowing production, the monetarist tight money position will contribute to a further slowing of the economy. finally, it is the dollar is a store of value but that value is ultimately determined by the quantity of goods and services which can be purchased by the dollar.
whose fault is this mess anyway?
the health of the capitalist system of production required the wide distribution and acceptance of an international currency. the pre-eminence of the us, economically and militarily following wwii, moved the dollar into the role of international reserve currency. the dollar's role has permitted a post-war boom and tightening of economic relations into a global capitalist system. yet this system has remained vulnerable to the fact that only one country in this system of global relations, the us, has effective control of the currency. the regime of the dollar has always been susceptible to the political needs of the us. while certainly one of those needs is a strong global economy, other political needs of domestic constituents affecting dollar policies, are not always coincident with the needs of the dollar as reserve currency.
us monetary policy for over a decade can be characterized as a loose dollar policy. the us runs a trade deficit within the global system helping to stimulate the growth of production and trade internationally at the expense of its domestic production. in return, the world uses the accumulated dollars to purchase us debt. this relieves the us from having to balance its trade and helps to keep interest rates low, permitting all manner of leveraged financial speculation and asset inflation, such as the rise in home prices.
who wins, who loses?
the us manufacturing class has lost the historically higher paid union jobs which have been outsourced to countries with lower labor costs. this plays a part in the social phenomena of growing econ inequality in the us. those with assets, such as homes, could temporarily take advantage of financial leverage to increase their personal wealth which could then be used to further leverage their purchase of more assets or simply to gain the financing for a burst of consumption of foreign imports. those with few assets were required to accumulate greater and greater amounts of debt in their effort to realize the american dream of home ownership. finally, the gap between asset inflation in home prices and flat, or decreasing, median incomes popped the housing bubble.
what needs to be done?
for over a decade, the loose dollar regime has been the favored policy of the us in its leadership role within the global capitalist sys. as expected this policy has been more favorable to the us than to other states within the system. the more weaker the economy in question the more vulnerable they find themselves to the whims of dollar policies decided in washington. in general though, the weak dollar regime, has served to keep the system functioning and even providing the fuel for an historically unprecedented boom of production in china and south-east asia.
ultimately, the global system of production and consumption is unbalanced and the dollar glut leads to an insupportable asset inflation in commodities. economic inequality is at the root of the current instability. incomes need to better reflect compensation for productive work. the consumption of the working class provides a necessary measure of value and stimulates further production. the exorbitant incomes and savings of the wealthy for the most part hinder the functioning and expansion of production and services.accumulation of wealth acts as a tax on production. the wealthy clothe greed with an ideological understanding that their money, as savings, is a necessary good for the system allowing interest rates to be lower than otherwise. but savings has little or nothing to do with the interest rate of the dollar. by syphoning off money that should be better distributed as income, it constrains demand and prevents an accurate measure of popular needs.
income maldistribution leads to societal corruption and waste and wears at the equality necessary for a healthy society.