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“Men are expendable; women and children are not. A tribe or a nation can lose a high percentage of its men and still pick up the pieces and go on, as long as the women and children are saved. But if you fail to save the women and children, you've had it, you're done, you're through! You join Tyrannosaurus Rex, one more breed that bilged its final test.”     Robert A. Heinlein,    Address at the U.S. Naval Academy April 5, 1973

January 12, 2007

Federal Reserve Taxes On The Rest Of The World

by Brad Warbiany

I was listening to Free Talk Live this morning (1/10/07 episode), and they were talking about Hugo Salinas in Mexico, and his attempts to remonetize silver down there. It led me to do a little investigation on Salinas, as he pointed out (accurately, IMHO) the fact that the US is actually benefiting from our trade deficit. Other countries are sending us goods, and we’re sending them pretty little green pieces of paper that become more worthless every day.

It led me to an article Salinas wrote in 2001. And it explains something that makes a lot of sense. While the Lou Dobbs types are haranguing America for our trade deficit, they miss the point: America benefits greatly from the trade deficit! They think America is getting the short end of the economic stick, when in reality we’re getting something for nothing. Those guys think America is exporting our wealth, but when it comes to money, all we’re doing is exporting the promises of our government. If you’ve paid any attention to American politics, you know exactly what those promises are worth.

When it comes to the trade deficit, I’m not an expert. I’m not an economist, and have never claimed to be. But I’m an intelligent guy, who can usually tell when he’s being lied to. When I listen to the Lou Dobbs types, what they say seems like it might make sense, but there’s an underlying feeling that something is missing. When I go read Coyote Blog, or read the below piece by Salinas, though, the missing piece shatters the explanation of Dobbs. This actually makes sense.

Excerpt from Salinas below (emphasis original), in a piece titled “What Really Killed Argentina?”:

With a dollar that did not have to be redeemed, as of 1971 the U.S. was free to expand credit out of nothing, and this expansion of credit resulted in conditions which led the American people to believe themselves superior in many ways, to the rest of the world.

As the years went on, credit – debt that is – kept expanding and this expansion of credit, led to more money in the hands of the public. The U.S. public proceeded to buy anything and everything the world had to offer, and send dollars in payment, to such an extent that today, dollars in the amount of some $400 billion a year, leave the U.S. to purchase goods and services, and even for the purchase of all sorts of assets all over the world.

The other side of this “exorbitant privilege” for the U.S., is a corresponding “exorbitant impoverishment” for the rest of the world.

It is essential to recognize that the U.S. trade deficit of $400 billion a year, is really a tax on the whole world, for the benefit of the U.S.

Imports are not really paid with dollars sent abroad. Imports are only actually paid with exports of goods and services. Since the U.S. has no intention of ever actually paying for present and past imports, with goods and services, and bringing back to the U.S. the immense amount of dollars sent abroad through its accumulated trade deficits, that yearly trade deficit amounts to a yearly tax on the rest of the world. The accumulated taxation extorted by the U.S., is huge. (see my article, “Why Are the Americans Smiling?” www.plata.com.mx) The measure of the taxation is the amount of Central Bank reserves – in dollars – which have built up enormously since 1971.

That is what really killed Argentina: U.S. taxation through the monetary system which prevails, and which allows the U.S. to buy things without paying for them.

Since 1971 (barely 35 years), the dollar has lost 80% of its value. During that time, we’ve been bringing in products form all over the world, and sending them these dollars. Other countries think they’re getting the best of the USA, but by sending us these products in exchange for worthless currency, they’re destroying themselves in the process. They’re often doing this at detriment to their own societies, by closing their markets to American exports, thus denying their own people the benefit of imported products.

It’s been pointed out elsewhere that there is a benefit to the first people to get the “new money” when inflation occurs, because they get the new money with the old purchasing power. The last people to get that money, then, are worst off, because they get the money after the purchasing power has been diluted. Well, the first people to get the purchasing power are Americans, and then we send those dollars, after dilution, overseas.

In truth, this isn’t a good system, and the entire world (including the US) would be best off for it to change. But as long as it’s occurring, let’s call a spade a spade. Lou Dobbs think we’re hurting America by importing goods and sending out dollars. In reality, we’re enriching America while harming the rest of the world. We’re likely to continue doing so, until the American system itself collapses.

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8 Comments

  1. Where do you stand on bringing back the gold standard?

    Comment by Kevin — January 12, 2007 @ 8:44 am
  2. Kevin,

    I’m still a newbie when it comes to currency/money issues. I haven’t quite wrapped my head around why gold is “real” money other than the fact that people consider it to be “real” money.

    It would have advantages over fiat money in that government cannot devalue the currency unless they manage to dig more gold out of the ground. So I see it as a whole lot better than the system we have, where there is no standard and fractional reserve lending creates new money out of nowhere.

    But I’m not enough of an expert on currency issues to necessarily endorse it as an ideal solution.

    Comment by Brad Warbiany — January 12, 2007 @ 9:29 am
  3. “this expansion of credit resulted in conditions which led the American people to believe themselves superior in many ways, to the rest of the world.”

    It is not that the expansion led to America’s superiority, it is the inherent belief that we are. So we have manipulated or experimented with other countries, both politically and socially to benefit our corporations and our proxy fights with communism. So it’s not at all impossible to believe that a monetary system would benefit us.

    Comment by VRB — January 12, 2007 @ 10:23 am
  4. just thought i would share with you a few thoughts that i have been sharing with a few other bloggers recently … …

    I personally believe that silver & gold should resume its tradtional role of sole coinage for our kingdom, but since mankind has become addicted to the ease & convience of paper money, it might be thousands & thousands & thousands of years before we have a true bi-metalic monetary sytem, and instead it is likely that the iraqi dinar will play a major role in covering up our birth right of “just weights & measurements” , yet these thoughts do not deter me from giving my full support to the iraqi dinar as being the leading candidate for the new world currency, because I think the iraqi dinar is an excellent practical tool that will bring about a political unity.

    It has been said that politicians wish to separate and economist wish for unification and i have found that statement to be basically true. So, in many ways, it will be the economists that will help the politicians to graciously accept their role in the new world order.

    In such a world, silver & gold is left behind for those souls who are pure in heart ,that are capable of rejecting all the various & assorted mankind idealogious, and have an inner peace within them that no storm shall ever disturb.

    Yet silver & gold are much more than the most common expressions of wealth. Silver & gold are also a tool for creating wealth as can be readily seen in the industrial uses of these metals in such things as medical & eletronical applications.

    I imagine one day the iraqi dinar will have set a price for silver & gold
    and that will be that.

    “It would be difficult to exaggerate the psychological and social impact of the anticipated replacement of the jumble of existing monetary systems–for many, the ultimate fortress of nationalist pride–by a single world currency operating largely through electronic impulses.”

    i often post on the “investors iraq forum”

    Comment by Dean Hedges — January 12, 2007 @ 11:16 am
  5. Brad,

    The question on gold reminds of something I wrote on this topic a while back. It is simplified for a general audience but roughly describes what is going on. Here is an excerpt (http://asecondhandconjecture.com/?p=368):

    To understand the situation imagine if all the worlds gold was produced here in the US and was the asset other countries banks used to back their currencies. In essence a gold standard with the US being the sole supplier of gold. We literally could export money (gold) in return for goods and services. Not a bad deal. Well, that is what we do now, we just use dollars instead of gold and it is a sweet deal. The reason people trust other currencies to have value is that the currency is backed by a portfolio of US currency, stocks and bonds which theoretically can be exchanged as needed for the local currency. So what we do here in the US is buy goods from other countries (I’ll use China as an example) and the Chinese exporter takes our dollars and exchanges them for Chinese currency. The central bank keeps a good bit of those dollars and thus demand for dollars is not fully met, thus propping up the value of the dollar versus the Chinese currency. More demand versus reduced supply leads to a higher price for the dollar than otherwise would exist. This means the Chinese run a trade surplus with us. As long as the Chinese accumulate dollar assets the trade deficit we run cannot be eliminated.

    So what do the Chinese get? We gain in an obvious way. We in essence export money in exchange for goods. Most countries have to export services and goods in exchange for goods and services. We don’t have to to a certain extent, which is a wonderful situation. The Chinese get a currency people feel can be exchanged for dollars which they know can be exchanged anywhere, because it is other governments primary reserve as well. Of course idle currency is a pretty poor store of long term value, so the government exchanges that for bonds and other assets which back their currency and is what people are referring to when they say we are in debt. I think that is a poor way to look at it, because the term debt implies that what they have bought hasn’t evened out the exchange, but I’ll avoid that complication for now. The practical effect of this debt is that they can at some time in the future take those assets and spend them here on goods and services, which is exactly what people concerned about the trade deficit want them to do, they just want them to start sooner rather than later. My own opinion is they have spent it here, they sent us goods, we sent them money and bonds which are a pre-requisite for their currency to have any value. That is a pretty valuable service for them, and one we don’t need. We don’t need to run a surplus, they do.

    This is a form of seignorage. We are exporting a very valuable product, a stable reserve for their own currency.

    Comment by Lance — January 12, 2007 @ 12:26 pm
  6. Lance,

    Sounds like if the United States is hit by a severe terrorist attack or anything that would weaken the US Government, which would in turn make the dollar useless, the whole world is screwed.

    Comment by Kevin — January 12, 2007 @ 1:27 pm
  7. Lance,

    I read your link. Excellent explanation, and even a gorilla like me could understand it :-)

    Comment by Brad Warbiany — January 12, 2007 @ 2:34 pm
  8. I have been reading you for quite a while Brad, I am sure you could understand it on a far higher level than that. However, I am a big believer in self deprecation so go ahead you big gorilla.

    Comment by Lance — January 12, 2007 @ 3:47 pm

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