Reason for War

While browsing around I stumbled on this post which I think makes some very interesting points in terms of the implications for the dollar. Check it out and my response is below. If it wasn’t on LiveJournal I would trackback, but lacking that:

That’s very thorough. I think you have some excellent points, but I think you dismiss fiat money too quickly. It isn’t backed by nothing, it’s backed by all of the goods and services produced in the US. Those goods and services are currently about a quarter of the world’s total, which is far ahead from the second best, Japan.

People put money in America for the very reasons you stated, and it will stay there for those reasons. Without major changes the euro’s future is not bright because (a) they’re trying to take what was a very smart economic union and turn it into some sort of political union, which anyone familiar with European politics will tell you won’t work and (b) they are currently having problems with their unified monetary policy being an ill fit for all involved. The EU does not have the market transparency and labor flexibility that the US has, and probably never will because of deeply ingrained cultural and language issues.

One thought on “Reason for War

  1. (Posted here and in my journal; I’d prefer not to fork any discussion, but I’d rather have one, forked or not.)

    Most of my dismissal of fiat money was admittedly flippant. The problem with it remains, though; remember the Greenspan quote, fiat money has value only insofar as it can command goods and services. If the quantity or kind of things for which it can be exchanged changes, its value changes commensurately. If the dollar could no longer command oil, its value would suffer, and suffer markedly.

    There are indeed fundamental problems with trying to forge a political union out of the well-played economic one the euro was originally intended to create; the intra-union political disputes over whether or not to invade Iraq are but one small (though widely media-touted) example. On the whole, I think that’s actually a strength.

    The euro is, in a stocks metaphor, an index of the performance of its member states. When one does well, the overall value improves; when one does poorly, it decreases. Any change is tempered, though, particularly negative changes. The heterogenous and often mutually competitive natures of the consitutents, in fact, spurs growth, in much the same way competing companies in a single economy will spur the growth of that economy as a whole. Yes, you can get higher returns by betting on a single performer (to continue the metaphor), but you also run much bigger risks. An index is a far safer investment (provided, of course, that the players behind every point in the index are playing by the rules and not playing to skew the index—something the EU goes to extraordinary lengths to ensure.)

    All of that begs the question, though. The fact remains that, were OPEC to switch to the euro tomorrow, the EU would call it a success borne of their union, and even the political differences that keep the UK from adopting the euro would quickly disappear.

    Moreover, whether OPEC switches to the euro or not—at least provided it were to do so for any of the reasons I cited—has very little to do with the euro itself. All of those reasons are predicated on either a hypothetical weakness in the dollar or proponents of an already existing anti-American sentiment gaining enough clout to push the change through. Iraq has already made the switch; Iran is well more than toying with it; Kuwait, Saudi Arabia and Venezuela have enough extant or potential civil unrest that tipping the scales might come far more readily than we’d like to contemplate. The war becoming protracted or going badly similarly runs the risk, as I discussed.

    OPEC, itself, is and needs to be politically neutral; with the US as its biggest customer by far, OPEC goes out of its way to make sure that whatever decisions it makes as a body are influenced only by economic factors. There’s been speculation—and, yes, I know what speculation is worth—that, once in power in Iraq, the US will start pumping Iraqi oil and selling it (back in dollars) at a price that undercuts OPEC, whether marginally or radically. That’s an economic factor, and, whether or not it’s going to happen, the folks in OPEC boardrooms have already considered it, and moreover how they’d respond to it.

    The most likely response, particularly in light of the euro’s gaining strength and its not being tied to a single, demonstrably fickle economy but rather based on the aggregate economic performance of dozens of individual nations (which necessarily makes it more robust than the dollar), would be a switch to the euro, with all the attendant consequences for the American economy. My fundamental point, namely that the US tries to strong-arm the world into acting in its economic interest at its peril, still obtains.