Wednesday, April 16

What happened when "C'est la vie" became the U.S. government's guiding principle

How to make a smart government (or person) stupid

Maintaining U.S. dollar hegemony is the issue that has quietly dominated official Washington since the end of World War Two.  If Barack Obama didn't know that before he became U.S. President, Larry Summers would have spelled out the reality for him during his first week in the White House. Whatever sociopolitical agenda Obama had in mind, it didn't mean squat unless his administration could maintain the dollar's status as the world's chief reserve currency.
This explains the curious sameness to Washington policy no matter which political party is in power.  Behind the stage show of political elections the brass knuckles agenda of defending the U.S. dollar's premier status is the only agenda that counts. If the status is lost it's game over because the U.S. federal government no longer knows how to survive unless other nations purchase large chunks of its debt. That's because its responses to the myriad challenges of this new era have been characterized by incompetence on an increasingly grand scale.  The escalating incompetence was also in evidence in the British Empire in the years running up to World War One and during British management of their war effort.

How, then, did the British Empire manage to survive for so long, with idiots in charge? 

For the same reason the United States has survived mistakes that would have destroyed any other nation: the British currency unit, pound sterling, was the world's major reserve currency.  This meant that no matter how much the British government screwed up, the reserve status of their currency kept it afloat.

There is a catch, however, to every fall being amply cushioned.  The people who ran the British Empire became incapable of learning from mistakes. There was no need to learn. 

Once the impetus to learn from mistakes is removed, there is no surer way to turn intelligent people into stupid ones.  It happened to the British, it probably happened to the Roman Empire, and it's happened right here in the USA.

It's a myth that the USA became a hyperpower when the Soviet Union was signed out of existence. It became a hyperpower once the U.S. dollar was established as the world's major reserve currency. A casualty of the situation was the American public's say in Washington; this happened because the federal government no longer needed to rely on taxation. The revenue from taxes was chump change when the rest of the world's importing nations had no choice but to buy U.S. government debt.

The downsides weren't immediately evident. But by 1968 it became clear to other governments that the U.S. was using the dollar's reserve status as a blank check to finance its war boondoggle in Indochina -- by then "Vietnam."  So some of the major trading nations in Europe launched a concerted war against the U.S. dollar. When the dust settled, in 1973, the U.S. had hung onto its hyperpower status but the dollar peg was dead, replaced by a system in which the dollar and other currencies would float against each other in value.

The Saudis were the biggest winner in the deal. Just as the post-World War Two United Kingdom had to turn to the Kingdom of Saudi Arabia to keep itself afloat after it found it didn't know how to survive without being buoyed by its currency, so the United States became dependent on the petrodollar and Saudi influence at OPEC. 

From Too Big to Fail to C'est La Vie

But then began a series of banking crises in the United States, one crisis seeding another, every crisis signaling bad to worse management of the U.S. economic system. The era of Zombie banking arrived, which was soon mirrored in Zombie U.S. state and municipal governments and Zombie industries.  Everything became too big to fail, requiring federal bailouts, whether it was the savings and loan industry, the City of New York or the U.S. steel industry.

But it was only money. And there was always more money where that came from, thanks to the rest of the world's nations buying up U.S. dollars to keep their currency reserves replenished toward purchases of imported oil or any other major items.

The Japanese, not too big too fail, and not cursed with the Yen being the world's major reserve currency, had been able to learn from their mistakes. In the post-World War Two period they became avid disciples of American manufacturing practices and in particular quality control. With those lessons and a great deal of elbow grease and innovation they transformed products that had been synonymous with junk into ones that were the world standard for quality.
The response from Washington?  I've blanked out the memory of whether this happened on the floor of the Senate or the House of Representatives, but members of Congress donned safety glasses then swung hatchets and sledge hammers at piles of Japanese electronic products.

But it was okay.  C'est la vie had become Washington's guiding principle because when you command the world's major reserve currency there's always more than one way to deal with a pesky trade rival.  And there is never a need to learn from mistakes.  Until it's too late to learn.


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