Economic and Political Cause and Effect

by Fernando Caracena, III © 2017

Where to McGoo?

A young person's choices for what to do in life are daunting. In that respect, I recall Maurice Chevalier singing, "I'm gland I'm not young anymore." I really like the energy of youth. I think growing old physically is a real shame. In my spirit, I am ever young. Unfortunately, there are problems associated with being young that really have nothing to do with age. These problems have to do with making a living and finding out what one would love to do if money were no object. Really, the average person has been sold a bill of goods in our corporate advertising culture.

A plot of percentage of economic growth for the nation vs. that of the hourly wage.

The choice of what to do in life has become more difficult now because conditions have put the average American worker on a treadmill with no future.  A Policy Institute report

["Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay Why It Matters and Why It’s Real" By Josh Bivens and Lawrence Mishel • September 2, 2015]

presents evidence that since 1973, American workers have not participated in the gains in economic productivity. Before that date, hourly wages kept pace with and in proportion to gains in productivity. Since 1973, wages have stagnated even as productivity per man hour has continued to increase.  The article states, the "hourly pay became the primary mechanism that transmitted economy-wide productivity growth into broad-based increases in living standards." Further, "Since 1973, hourly compensation of the vast majority of American workers has not risen in line with economy-wide productivity. In fact, hourly compensation has almost stopped rising at all."

Slamming the Gold Window shut

I looked for historical causes of the divergence between wages and productivity and found one major event that stands out. On August 15, 1971, President Nixon “closed the gold window”, thereby abrogating the Bretton Woods agreement that pegged the dollar to the price of gold, see this article. Through that agreement, the dollar had been fully convertible into gold at a fixed rate, which made it as good as gold and much more convenient to use. This convertibility put the same fiscal restraints on the economic policies of the United States as a gold exchange market system requires. Since the United States was not able to economically discipline itself enough, a run developed on United States's gold: foreigners turned in their dollars and demanded gold.

The gold backing of the dollar had strengthened its position as a reserve currency. The enhanced economic position of the United States increased its credit standing, which allowed it to be a spendthrift in favor of supporting guns and butter. This in turn raised fears internationally that the United States could not maintain the dollar as a reserve currency. As a result, the dollars role as reserve currency, established by the Bretton Woods Agreement, was threatened. Faced with the potential loss of power, the Washington elite looked for a way of rescuing and supporting the dollar.

Petrodollars

The solution to the dollar crisis brought on by removing its gold backing was carried out by Henry Kissinger. He went to Saudi Arabia and hammered out an agreement with them to sell all oil only in terms of dollars in exchange for several concessions by the United States: the U S would be responsible for defending Saudi Arabia against Israel and it would sell arms and ammunition to the Saudis. Additionally, the Saudis agreed to put their petro-profits in U S banks and securities. This agreement subsequently spread to all the major oil producing nations effectively backing the dollar with someone else's oil. This move made the backing of the dollar depend on the entire oil supply, which allowed the dollar to become a fully inflatable, fiat currency, yet retain its reserve status. Dollars generated through the oil markets are known as petrodollars. As the hyperlinked article states,

"And from the perspective of empire, this new "dollars for oil" system was much more preferred over the former "dollars for gold" system as its economic requirements were much less stringent. Without the constraints imposed by a rigid gold standard, the U.S. monetary base could be grown at exponential rates."

The effect of petrodollars is that it tilted the whole international economy into a certain pattern in doing business with the United States.  Many modern nations need to import oil, but where do they get the dollars to buy the oil? The article on petrodollars explains how, as follows:

"The easiest way to obtain U.S. dollars is through the foreign exchange markets. This is not, however, a viable long-term solution as it is cost-prohibitive. Therefore, many countries have opted instead to develop an export-led strategy with the United States in order to exchange their goods and services for the U.S. dollars that they need to purchase oil in the global markets. "

The result of the petrodollar solution was therefore to flood the United States with cheap imports, cheaper than what could be manufactured in the country. The result is that American manufacturing became non competitive. Wages in the U S were just too high to be competitive. The only solution then was to export industry abroad to countries where labor was competent but cheap. We have seen the result. The poor American worker has taken it on the chin.

Further, petrodollars created in the Middle East have found their way into the coffers of militant Moslem extremists. This has led to the destruction of secular Middle Eastern States and has unleashed a wave Islamic immigrants into Europe.

Look at how all these consequences are connected to a policy of guns and butter, and catch up by patch up politics.

 

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