The War and International Tax Payers

I have been following the discussions on the economy lately, especially the discussions on the larger TV networks such as CNN. What is striking about the commentary and “analysis” is the total lack of understanding (or should I say ignorance?) for what is going on. Most analysts and experts seem to blame recession for the weakening dollar and inflation in prices, as were it some kind of natural market flaw.

We’re told recession is something that “just happens” in the market; something that we cannot get around and that we cannot really understand. They don’t say the wave-like ups and downs in the market are results of what Marx called inherent conflicts in capitalism, but they sure seem to mean exactly that. The experts don’t know why, but the market seems to go up and down in periods – in general boom and bust cycles.

As gold hits and passes $1,000 per ounce, and oil reaches beyond $110 per barrel, we are destined to see a weakening dollar as a result of the overall recession. The fact that the Fed is frequently pushing out more dollars in the international market system, sometimes as loans and sometimes as alms, to cover the massive costs for the ongoing war in Iraq and Afghanistan, is something that isn’t mentioned at all.

Where does all this money come from? If the Fed decides to offer another loan to the market or hand out treasury bonds, where is the reserve of value from which this money is taken? The sad truth is that there is none, which means any such action by the Fed is adding more of the fiat currency to the market without any kind of value backing.

But judging from the “experts” on TV, I guess the number of dollars “out there” has no effect on the value of the currency. Prices of any goods that have heavily increased supply go down – that is something any economist knows for sure. But this reasoning seems to not affect money. After all, money is money and has nothing to do with other things people trade with?

The falling dollar has in only seven months cost me more than 10% of the value of my annual salary as a Graduate Research Assistant at the University of Missouri measured in my “home currency” Swedish Kronas (see August 15 vs. March 14). This is not because the Krona is unbelievably strong; on the contrary, the Krona is – like any other fiat currency – inflated, but it is so at a much lower rate than the American dollar.

How much has the dollar fallen? (Or, in more correct language: how much poorer have Americans become “thanks” to their politicians?) Let’s have a look at the exchange rate five years ago, on March 14, 2003, about the time when the war began. The dollar has fallen almost 29 % since then as compared to that small, insignificant country‘s fiat currency.

Theoretically, this should mean American products are a helluvalot cheaper now than five years ago, which should be good for exports and for countries importing American goods. So the problem of the dollar shouldn’t be anybody else’s problem.

Even considering that the dollar is a “world currency” (whatever that means), and that a lot of companies and corporations have signed contracts in dollars, shouldn’t affect e.g. European countries too much. At least not in the long term – such losses are nothing but temporary and should therefore be covered by temporary measures or productivity increases.

The reason the world is so closely following what is happening with the dollar exchange rate (but no one is of course asking why this is happening) is that the international system of trade is 100 % political. It is managed by political organizations that enforce political rule; it is traded through political channels with political favors and with politically controlled currencies; and the corporations acting in the system are almost without exception heavily subsidized by “its” country’s political government.

This is the reason politicians around the world are now aiming to collectively save the dollar (link in Swedish). The natural thing to do in a time of crises would of course be to take whatever measures to strengthen one’s own nest, to make sure the “home market” is strong enough to survive a dollar crisis. Which can only be done through massive deregulation and depoliticization of the market (broadly defined). This is, of course, not in the interest of politicians and political power – even though it is definitely in the interest of people and firms everywhere.

Instead of taking advantage of the situation, politicians around the world get together to do what they do best: make things even worse. The dollar is to be saved only so that status quo is unaffected by the problems caused by political meddling with the economy – and this can only be achieved through intervention in support of the dollar.

What we are about to see is therefore a collective effort by politicians worldwide to make their central banks spend enormous amounts of tax payers’ money to buy paper dollars so that the supply in the market is limited (or decreased), which will make the dollar regain some of the illusion of value. This may seem like another one of politicians’ stupid ideas to try to do something about something they are utterly ignorant about.

But let me assure you it is worse than that.

The reason the dollar is crashing is because there is a war going on in Iraq and Afghanistan (and there might soon be another one in Iran). Wars are costly and they certainly cannot be financed through regular taxation – the Iraq war will cost as much as the U.S. federal income tax for two full years according to Nobel prize-winning economist Joseph Stiglitz. It is obvious that such costs cannot fit in the budget; it is also impossible to “temporarily” raise taxes to cover for such costs.

In other words, costs have to be covered in other ways than direct taxation. When a thief cannot steal enough to cover his costs, what does he do? He starts another lucrative business: counterfeiting. The Fed is literally pumping billions of dollars into the market to cover the costs of the war, which causes the dollar to fall. And then politicians all over the world take tax payers’ hard earned money to “rescue” the dollar from collapse.

So when people work hard in Europe and Japan to make a living, their politicians are taking their money and literally sending them to Washington D.C. to be spent on killing more people in Iraq.

What a wonderful world.

Update: The Financial Times is now writing on how non-American central banks will bail out the United States financial problems. They don’t mention what it means, of course, but they report on what is about to happen.