[Benjamin]

Fortsetzung...

Six and a half years since the launch of the European Monetary Union, the eurozone is trapped in an environment in which monetary policy of sound money has in effect become destructive and supply-side fiscal policy unsustainable. National economies are beginning to refuse to bear the pain needed for adjustment to globalization or the EU's ambitious enlargement. The European nations are beginning to resist the US strategy to make the euro economy a captive supporter of a rising or falling dollar as such movements fit the shifting needs of US economic nationalism.

It is the modern-day monetary equivalent of the brilliant Roman strategy of making a dissident Jew a Christian god to preempt Judaism's rising cultural domination over Roman civilization. Roman law, the foundation of the Roman Empire, gained in sophistication from being influenced by, if not directly derived from, Jewish Talmudic law, particularly on the concept of equity - an eye for an eye. The Jews had devised a legal system based on the dignity of the individual and equality before the law four centuries before Christ. There was no written Roman law until two centuries before Christ. The Roman law of obligatio was not conducive to finance as it held that all indebtedness was personal, without institutional status. A creditor could not sell a note of indebtedness to another party and a debtor did not have to pay anyone except the original creditor. Talmudic law, on the other hand, recognized impersonal credit, and a debt had to be paid to whoever presented the demand note. This was a key development of modern finance. With the Talmud, the Jews under the Diaspora had an international law that spanned three continents and many cultures.

The Romans were faced with a dilemma. Secular Jewish ideas and values were permeating Roman society, but Judaism was an exclusive religion that the Romans were not permitted to join. The Romans could not assimilate the Jews as they did the Greeks. Early Christianity also kept its exclusionary trait until Paul, who opened Christianity to all. Historian Edward Gibbon (1737-94) noted that Rome recognized the Jews as a nation who as such were entitled to religious peculiarities. The Christians, on the other hand, were a sect and, being without a nation, subverted other nations. The Roman Jews were active in government and, when not resisting Rome against social injustice, fought side by side with Roman legionnaires to preserve the empire. Roman Jews were good Roman citizens. By contrast, the early Christians were social dropouts, refused responsibility in government and civic affairs and were conscientious objectors and pacifists in a militant culture. Gibbon noted that Rome felt that the crime of a Christian was not in what he did, but in being who he was.

Christianity gained control of Roman culture and society long before Constantine, who in AD 324 sanctioned it with political legitimacy and power after recognizing its power in helping to win wars against pagans, as pope Urban II in 1095 used the Crusade to prolong papal temporal power. When early Christianity, a secular Jewish dissident sect, began to move up from the lower strata of Roman society and began to find converts in the upper echelons, the Roman polity adopted Christianity, the least objectionable of all Jewish sects, as a state religion. Gibbon estimated that Christians killed more of their own members over religious disputes in the three centuries after coming to secular power than did the Romans in three previous centuries. Persecution of the Jews began in Christianized Rome. The disdain held by early Christianity for centralized government gave rise to monasticism and contributed to the fall of the Roman Empire.

By allowing a trade surplus denominated in dollars to be accumulated by non-dollar economies such as the yen, euro, or now the Chinese yuan, the cost of supporting the appropriate value of the US dollar to sustain perpetual economic growth in the dollar economy is then shifted to these non-dollar economies, which manifest themselves in perpetual relative low wages and weak domestic consumption. For the already high-wage EU and Japan, the penalty is the reduction of social-welfare benefits and job security traditional to these economies. China, now the world's second-largest creditor nation, it is reduced to having to ask the US, the world's largest debtor nation, for capital denominated in dollars the US can print at will to finance its export trade to a US running recurring trade deficits.

Market impotence against trade imbalance
The IMF, which has been ferocious in imposing draconian fiscal and monetary "conditionalities" on all debtor nations everywhere in the decade after the Cold War, is nowhere to be seen on the scene in the world's most fragrantly irresponsible debtor nation. This is because the US can print dollars at will and with immunity. The dollar is a fiat currency not backed by gold, not backed by US productivity, not backed by US export prowess, but backed by US military power. The US military budget request for Fiscal Year 2005 is $420.7 billion. For Fiscal Year 2004, it was $399.1 billion; for 2003, $396.1 billion; for 2002, $343.2 billion; and for 2001, $310 billion. In the first term of George W Bush's presidency, the US spent $1.5 trillion on its military. That is more than the entire gross domestic product of China in 2004. The US trade deficit is about 6% of its GDP, while it military budget is about 4%. In other words, the trading partners of the US are paying for one and a half times the cost of a military that can some day be used against any one of them for any number of reasons, including trade disputes. The anti-dollar crowd has nothing to celebrate about the recurring US trade deficit.

It is pathetic that Rumsfeld tries to persuade the world that China's military budget, which is less that one-tenth of that of the United States, is a threat to Asia, even when he is forced to acknowledge that Chinese military modernization is mostly focused on defending its coastal territories, not on force projection for distant conflicts, as is US military doctrine. While Rumsfeld urges more political freedom in China, his militant posture toward China is directly counterproductive toward that goal. Ironically, Rumsfeld chose to make his case about political freedom in Singapore, the bastion of Confucian authoritarianism.

Normally, according to free-trade theory, trade can only stay unbalanced temporarily before equilibrium is re-established or free trade would simply stop. When bilateral trade is temporarily unbalanced, it is generally because one trade partner has become temporarily uncompetitive, inefficient or unproductive. The partner with the trade deficit receives more goods and services from the partner with the trade surplus than it can offer in return and thus pays the difference with its currency that someday can buy foods produced by the deficit trade partner to re-established balance of payments. This temporary trade imbalance can be due to a number of socio-economic factors, such as terms of trade, wage levels, return on investment, regulatory regimes, shortages in labor or material or energy, trade-supporting infrastructure adequacy, purchasing power disparity, etc. A trading partner that runs a recurring trade deficit earns the reputation of being what banks call a habitual borrower, ie, a bad credit risk, one that habitually lives beyond its means. If the trade deficit is paid with its currency, a downward pressure results in the exchange rate. A flexible exchange rate seeks to remove or moderate a temporary trade imbalance while the productivity disparities between trading partners are being addressed fundamentally.

Dollar hegemony prevents US trade imbalance from returning to equilibrium through market forces. It allows a US trade deficit to persist based on monetary prowess. This translates over time into a falling exchange rate for the dollar even as dollar hegemony keeps the fall at a slow pace. But a below-par exchange rate over a long period can run the risk of turning the temporary imbalance in productivity into a permanent one. A continuously weakening currency condemns the issuing economy into a downward economic spiral. This has happened to the United States in the past decade. To make matters worse, with globalization of deregulated markets, the recurring US trade deficit is accompanied by an escalating loss of jobs in sectors sensitive to cross-border wage arbitrage, with the job-loss escalation climbing up the skill ladder. Discriminatory US immigration policies also prevent the retention of low-paying jobs within the US and exacerbate the illegal-immigration problem.

Regional wage arbitrage within the US in past decades kept its economy lean and productive internationally. Labor-intensive US industries relocated to the low-wage south of the country through regional wage arbitrage, and despite temporary adjustment pains from the loss of textile mills, the northern economies managed to upgrade their productivity, technology level, financial sophistication and output quality. The economies in the southern US also managed to upgrade these factors of production and in time managed to narrow the wage disparity within the national economy. This happened because the jobs stayed within the nation. With globalization, it is another story. Jobs are leaving the United States mercilessly. According to free-trade theory, the US trade deficit is supposed to cause the dollar to fall temporarily against the currencies of its trading partners, causing export competitiveness to rebalance, thereby removing or reducing the US trade deficit. Jobs that have been lost temporarily are then supposed to return to the US.

But the persistent US trade deficit defies trade theory because of dollar hegemony. The broad trade-weighted dollar index stays in an upward trend, despite selective appreciation of some strong currencies, as highly indebted emerging market economies attempt to extricate themselves from dollar-denominated debt through the devaluation of their currencies. While the aim is to subsidize exports, this ironically makes dollar debts more expensive in local-currency terms. The moderating impact on US price inflation also amplifies the upward trend of the trade-weighted dollar index despite persistent US expansion of monetary aggregates, also known as monetary easing or money printing.

Adjusting for this debt-driven increase in the exchange value of dollars, the import volume into the US can be estimated in relationship to expanding monetary aggregates. The annual growth of the volume of goods shipped to the United States has remained around 15% for most of the 1990s, more than five times the average annual GDP growth. The US enjoyed a booming economy when the dollar was gaining ground, and this occurred at a time when interest rates in the US were higher than those in its creditor nations. This led to the odd effect that raising interest rates actually prolonged the boom in the US rather than threatened it, because it caused massive inflows of liquidity into the US financial system, lowered import-price inflation, increased apparent productivity and prompted further spending by American consumers enriched by the wealth effect despite a slowing of wage increases. Returns on dollar assets stayed high in foreign-currency terms.

This was precisely what Greenspan did in the 1990s in the name of preemptive measures against inflation. Dollar hegemony enabled the US to print money to fight inflation, causing a debt bubble of asset appreciation. These data substantiated the view of the US as Rome in a New Roman Empire with an unending stream of imports as the free tribute from conquered lands. This was what Greenspan meant by US "financial hegemony".