Will the Federal Reserve Cause a Civil War?

NTS · Oct 23, 2010

The kind of debate you suggest assumes the people involved share the same basic goals.

In the case described in the video, both sides want the golf tournament to be a true test of skill and fair to the participants. They just disagree on how to get that.

In U.S. politics today, one side is people who want prosperity for all (although they may argue among themselves about how to get it). The other side is people who don't care if the country is a dump as long as they don't have to pay for it. Using the example of the video, they think golf is a waste of time and want to turn the course into a parking lot.

You can't have much of a debate when the disagreement is that profound.

ArchieBedford · Oct 23, 2010

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Martina said:
I've heard it said that our currency is being devalued so that we can pay off our foreign debt cheaper. You opinion?

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[FONT=&quot]Hello Martina[/FONT]
[FONT=&quot]So far as I understand it, reduction of overseas debt liabilities can only be done in specific ways.

1. The debt must be denominated to begin with in US$. If it were denominated in any other currency, i.e. Euros, then in order to degrade it you would have to INCREASE the value of the US$ relative to the € in order to buy more € with your US$. If the US$ devalues against the € you'll need more US$ to pay back any Euro-loan

2. So assuming your debt is denominated in US$, the only way to degrade its value is to cause inflation - i.e. well into annual double-digits every year for ten years will increase the government's eventual tax revenues due to rising wages but the original debt will stay the same, unless the interest payments are linked to inflation of the source-currency in which case there's no way the debt will reduce

3. If the US sustained double-digit inflation and its major trading partners like the Euro-zone and Japan had much lower inflation for several years, then eventually the US$ may slowly devalue against other major currencies. However, there is no sign of exceptional inflation in the US economy so the US$ is not going to devalue significantly in the next few years outside the limits imposed by the markets in normal trading. One thing to understand is if significant devaluation against other currencies happened, the whole world would flock to the US to shop and buy stuff because it would be so relatively cheap. This would bring a massive influx of foreign exchange into the country which, paradoxically, would strengthen the US$ and normalise everything. It ALWAYS works like this: the market corrects anomalies, like it did with the property bubble.

In a free market, a currency can't be devalued by one individual or scheming cabal. Its value is decided globally by millions of trading transactions, and by the markets buying and selling currencies according to their perceived strengths and the prospects of the economies they represent. The US economy is too big, too powerful and too productive for the currency to be devalued by the markets except very, very slowly over time, so it's unlikely to have significant impact. Argentina, by contrast, suffered catastrophic economic collapse numerous times throughout its history when government debt/spending was so high relative to productivity that its bonds became worthless. This is not going to happen in the US, ever, for a complex of reasons - one of which (but only one) is the existence of the Federal Reserve which guarantees a measure of stability absent in Argentina.[/FONT]
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[FONT=&quot]Of course the government can (within limits) decide to print more money to inject cash into the economy and stimulate activity, but only within responsible limits and in the current climate this has not led to price inflation – in fact, the opposite.[/FONT]
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China is the USA's biggest trading partner by far and holds trillions of US$ in foreign exchange assets, so this is another reason US$ devaluation is extremely unlikely for the foreseeable future (however a slight weakening in the 10% - 20% range is temporarily possible as a response to the markets' unease about QE). As outlined above in my rather rudimentary and non-expert economic analysis, only sustained annual double-digit inflation in the US and very low inflation everywhere else in the world could possibly devalue the US$ in any meaningful way in the next 10 years.

Professor Niall Ferguson explains the principles involved in his excellent book "The Ascent of Money" very well, IMO. The final chapter about what he terms "Chimerica" and how the US-China interdependence operates in practice to the great benefit of the economies of both nations, is particularly good.[/FONT]
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[FONT=&quot]Please feel free to shoot holes in this lengthy analysis. I've been doing successful international business and juggling currencies for years (exporting my designs) and it seems to me this is basically the way it works.[/FONT]
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Xylo · Oct 23, 2010

NTS said:
The kind of debate you suggest assumes the people involved share the same basic goals.

In the case described in the video, both sides want the golf tournament to be a true test of skill and fair to the participants. They just disagree on how to get that.

In U.S. politics today, one side is people who want prosperity for all (although they may argue among themselves about how to get it). The other side is people who don't care if the country is a dump as long as they don't have to pay for it. Using the example of the video, they think golf is a waste of time and want to turn the course into a parking lot.

You can't have much of a debate when the disagreement is that profound.

I understand why you wrote that. But I think you are looking at the issues the way that the media would like you to look at them.

I believe that deep down both Right and Left wish for a country that is secure and prosperous, in which they are able to raise their families and pursue their livelihoods unencumbered. The main difference is the two sides have two completely different visions of the role which the federal government plays in the achievement of that vision.

Personally I agree with Thomas Paine in the thought that "He who governs least, governs best." But that's just me.

NTS · Oct 23, 2010

To address one point you make:

Personally I think the federal government needs to play a much larger role in making sure every American has the basic services and opportunities they need for a decent life. But if that turned out not to be the case, I'd be for smaller government.

I don't believe the people leading the "other side" (e.g. the billionaires funding the Tea Party movement) would support a large federal government even if it was shown that it was necessary for widespread prosperity. They don't care about anything except protecting their own wealth. Increasingly this has little to do with what happens to the rest of the U.S. -- including their ordinary Tea Party followers, who are just convenient tools for an agenda that will ultimately be their own ruin.

By the way, when you say "Left" I'm not sure who you're talking about. There is no serious Left in U.S. politics at the moment. The Republican Party is far-right and the Democratic Party is center-right (although it has some left-of-center members). There is no party whole-heartedly supporting leftist ideas that has a chance of electing anyone to office.

ArchieBedford · Oct 23, 2010

NTS said:
To address one point you make:

Personally I think the federal government needs to play a much larger role in making sure every American has the basic services and opportunities they need for a decent life. But if that turned out not to be the case, I'd be for smaller government.

I don't believe the people leading the "other side" (e.g. the billionaires funding the Tea Party movement) would support a large federal government even if it was shown that it was necessary for widespread prosperity. They don't care about anything except protecting their own wealth. Increasingly this has little to do with what happens to the rest of the U.S. -- including their ordinary Tea Party followers, who are just convenient tools for an agenda that will ultimately be their own ruin.

By the way, when you say "Left" I'm not sure who you're talking about. There is no serious Left in U.S. politics at the moment. The Republican Party is far-right and the Democratic Party is center-right (although it has some left-of-center members). There is no party whole-heartedly supporting leftist ideas that has a chance of electing anyone to office.

Maybe this is why there has been a sharp decline in numbers of Europeans wanting to make a life in the US these days. Having spent a lot of time in both Europe and the USA, I think Europe generally has better social models for a coherent society than the USA, despite some obvious public sector waste which needs to be moderated.

Xylo · Oct 23, 2010

Personally I think the federal government needs to play a much larger role in making sure every American has the basic services and opportunities they need for a decent life. But if that turned out not to be the case, I'd be for smaller government.

I disagree with the idea that the federal government should be that involved. I think it should be up to municipal and state governments to assure the availability of services and opportunities for the "pursuit of happiness." After all, comparing the needs of a resident of rural Mississippi to the needs of a resident of suburban Northern Virginia is comparing apples to oranges. Local governments can more closely assess the local economic climate, whereas the Federal government tends to ignore those differences.

By the way, when you say "Left" I'm not sure who you're talking about. There is no serious Left in U.S. politics at the moment. The Republican Party is far-right and the Democratic Party is center-right (although it has some left-of-center members). There is no party whole-heartedly supporting leftist ideas that has a chance of electing anyone to office.

You are correct and I stand duly corrected.

NTS · Oct 24, 2010

One reason I'm for federal action is that I'm old enough to remember when this was big news:

George Wallace Opposes Intergration History.com Video

However clumsily or incompletely, historically the federal government has been the main force protecting the rights of every American, often in the face of state and local opposition.

A second reason is that (if they do want to do the right thing) state and local governments very often don't have the money. Even if in some cases (as you say) it makes sense to administer a program at a local or state level, the federal government is the only agency that can draw on the resources of the entire nation to make that program possible. And there are many other situations where a national solution is the only viable one. Mississippi is not going to do economic battle with the Bank of America, much less China. Only the federal government has the legal authority, the organization, and the wallet to do that with success.

Will the Federal Reserve Cause a Civil War?

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