On Economic Cycles

I posted this to Larry Elliott of the Manchester Guardian. The original essay referred to was posted in the Politics Forum of the International Mensa Forums.

I have recently been posting similar things to those you write about to the International Mensa Forums. I take the points you’ve made farther and in a slightly different direction.

I have argued that the venality of financial agents and the seeking after advantage of virtually everyone, individuals to corporations to nations, is similar. The effect is to create imbalance. Trade imbalance comes first, followed by imbalance in the form of debt. And I further argue that imbalance cannot be sustained indefinitely. Adjustment of currency standards was a way of doing this, but with the formation of the European Union this tool was taken away from nations; only the ECB still maintains a floating balance against the dollar. The US can’t really adjust the value of the dollar, because the US dollar is the standard. Asian nations can do it, and do, in order to favor exports over imports. The ECB also tries to keep the euro competitive against the dollar so that exports are favored over imports of US goods.

Money, in the form of dollars or euros or yuan, currency or electronic credit, is not worth anything except in the nation(s) that originated it. Those credits cannot be maintained indefinitely, because inevitably they become worth less over time. I model the modern world economy as a series of cycles within a larger cycle, in which nations rise economically and fall. Eventually the cycles achieve balance through a number of mechanisms.

One of these is the necessity to maintain liquidity in whatever monetary standard is in use. Think of the world economy as a board game in which tokens flow from one side of the board to the other. If one player gains most of the tokens, then the game must end; but in economics, demand for liquidity to keep trade going creates pressure to make more ‘credits’ available. So more dollars and euros and yen are created and fed into trade. The credits that were hoarded on one side of the board are now a smaller fraction of the whole. Their value lessens.

Dollars can be exchanged for other currencies, of course, but inevitably they come back to the US. At one time this largest economy was strong enough to provide a ‘sink’ where the world’s business could be absorbed. But this is no longer the case. That strong economy was based on manufacturing and trade, and now there is little of either. ‘Trade’ is now ‘sales’ on the part of foeigners; the US GDP and GNP are almost identical. Dollars flow out, very little comes in. The US is no longer a nation of manufacturers, it’s a nation of service workers, surviving by doing each other’s laundry. No longer sustainable as the world’s center of exchange, in other words.

Dollars can be used to exchange for other currencies and for purchasing American goods. They can also be used to invest in either T-bills or similar, or to purchase shares of stock in corporations or to invest in businesses. There’s a limit to this, however. When investment becomes too great, governments step in to protect their national interests. In any case, investment only creates more dollars which, again, must be funneled into the US. Nationalization of industries and economic default are two of the catastrophic ways in which cycles adjust to balance.

The only indefinite mechanism to prolong economic activity is by means of balanced trade. This is where that search for advantage comes in. There is no mechanism I know of to balance trade except to wait for the cycles to play out. In the end, nations and empires rise and inevitably fall, balancing the cycles in this way. Should the US ‘fall’ in the near future, economic imbalance, financial chaos, would result. The yuan or euro would replace the dollar, and so all those dollar ‘counters’ so amassed would become virtually useless. Balance is restored, but now with the European union or, more likely, China on top of the financial heap. To prevent this, advantage must be seen as imbalance, and balance short of catastrophe must be sought. But neither individuals nor nations will willingly forgo advantage, and so I expect the cycles to continue to their conclusion.

Jack Knapp


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