The demise of the dollar - This article requires a little bit of a discussion.  From the article.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. (1)

How we got here:

If this report is true, to say this isn’t good for the dollar is an understatement.  If you haven’t read anything about dollar hegemony I would suggest that you do.  Also, if you haven’t read anything about the petro dollar and petro dollar warefare I would suggest that you do.  In a nutshell since our dollar is fiat money, meaning nothing is backing it’s actual value but the promise of the government, the only thing keeping the dollar’s value is the fact that oil is only sold in dollars.

What does all this mean?

I think that common sense would tell someone that since the Saudis are in control of the oil they would want a strong dollar and a dollar that retains its value.  However, with the spending spree that the US is on with an estimated nine trillion dollar deficit in the next ten years (2) the world is losing confidence in the dollar as seen by the following.

• UN is calling for new reserve currency saying, “The United Nations called on Tuesday for a new global reserve currency to end dollar supremacy which has allowed the United States the “privilege” of building a huge trade deficit.” (3)
• Dollar under scrutiny at G20 summit saying, “The embattled US dollar is expected to come under scrutiny at a summit of developing and industrialized nations following China-led calls to review its role as a reserve currency.” (4)
• China Urges New Money Reserve to Replace Dollar saying, “In a paper released Monday, Zhou Xiaochuan, governor of the People’s Bank of China, said a new currency reserve system controlled by the International Monetary Fund could prove more stable and economically viable.” (5)
• China backs talks on dollar as reserve -Russian source saying, “Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions.” (6)
• Gold hits record at $1,045, gains on report of dollar’s demise - ”Gold futures hit a new high on Tuesday, lifted by weakness in the dollar after Australia hiked interest rates and after a report that Gulf-area oil producers, along with China, Russia, Japan and France, are planning to eventually end dollar-based oil pricing.” (7)

What does this all mean?  From the looks of it a new reserve currency that is controlled by the IMF, which would mean to me that we would outsource our monetary policy to the IMF.  The IMF would issue the currency and be controlled by a very small group of people.  This small group of people would hold a massive amount of power over the world economy.  I see it as the Federal Reserve on steroids on a world stage.

Any thing positive?

There is some good news.  We have time to change things if the world decides to create a new world currency without the consent of the US.

Finance Minister Alexei Kudrin told reporters on the sidelines of the G20 finance ministers meeting that it would take up to 30 years to create a new super-currency, suggesting there was no unity in Russia on the issue. (6)

…

While few analysts believe that the dollar will be replaced as the world’s dominant foreign exchange reserve anytime soon. (5)

…

But he [Richard Cooper] said there were no feasible alternatives to the US dollar as a widely used international currency, discounting even IMF’s synthetic SDR currency, comprising a basket of the dollar, euro, yen and the pound.”The dollar will remain the dominant world currency, thanks to the stability of our political system and the rule of law that isn’t a feature of many other economies,” said Irwin Stelzer, director of economic-policy studies at the Washington-based Hudson Institute.

Some groups, he said, were buying euros and other currencies from time to time, “but not in amounts that threaten the dollar’s primacy.”

“Even the Chinese are stuck with nearly a trillion dollars worth of US bonds and are not likely to drive down the value of that hoard by selling large amounts of dollar-denominated assets”, Stelzer said. (4)

For now the dollar is fairly safe.  However, with the recent moves by the international community and the continues policy by the US government of intervention, spending, and isolation of other countries, I’m one to think that the US is only digging itself into a deeper hole.  A drastic course correction is in call for the US.  The question is; is the US going to do it on its own or is it going to be forced to change due to the actions of the international community that it can not control.

I should probably reserve my thoughts on Iran, Iraq, Afghanistan, and our isolation of ourselves to the rest of the world.  I should probably reserve my thoughts on Healthcare reform, Cap and Trade, and the Labor Union bills going through congress now.  However, I’m sure you can probably guess what my thoughts are so I’ll leave it at that.

UPDATE: Mike “Mish” Shedlock has a couple good blog posts with a different outlook for the dollar.  I would suggest taking a look at them.

• Ridiculous Hype Over Secret Oil Meetings
• Why Would Anyone Want To Hold Dollars?

External Sites:

• dollar hegemony
• petro dollar
• petro dollar warefare
• fiat money

Sources:

1. The demise of the dollar
2. Obama to raise 10-year deficit to $9 trillion
3. UN calls for new reserve currency
4. Dollar under scrutiny at G20 summit
   
5. China Urges New Money Reserve to Replace Dollar
6. China backs talks on dollar as reserve -Russian source
7. Gold hits record at $1,045, gains on report of dollar’s demise

It looks like thanks to the Obama administration the US is imposing a 35% tariff on Chinese made tires to protect jobs here in the US.

The federal trade panel recommended a 55 percent tariff in the first year, 45 percent in the second year, and 35 percent in the third. Obama settled on slightly lower penalties — an extra 35 percent in the first year, 30 percent in the second, and 25 percent in the third, White House press secretary Robert Gibbs said Friday.

The steelworkers union brought the original case in April, accusing China of making a recent push to unload more tires ahead of Obama’s expected action. The union says more than 5,000 tire workers have lost jobs since 2004, as Chinese tires overwhelmed the U.S. market. (1)

Does this not make sense to anyone else or is it just me? During this tough economically time people are now going to have to pay more for tires. Thanks Obama for forcing me to pay more for tires. I really appreciate it!

Economics of Tariffs:

Economically speaking wouldn’t you want to keep the prices low and keep businesses competitive? If a business can’t compete then it should go out of business and have those resources redistributed into the economy for more efficient jobs.

The book “Economics in One Lesson” chapter 11, “Who’s ‘Protected’ by Tariffs?”, section 3 has a great example of the consequences of imposing tariffs. It’s a bit to read but it is an excellent analogy to the tariffs the Obama administration has decided to impose on Chinese tires.

Now let us look at the matter the other way round, and see the effect of imposing a tariff in the first place. Suppose that there had been no tariff on foreign knit goods, that Americans were accustomed to buying foreign sweaters without duty, and that the argument were then put forward that we could bring a sweater industry into existence by imposing a duty of $5 on sweaters.

There would be nothing logically wrong with this argument so far as it went. The cost of British sweaters to the American consumer might thereby be forced so high that American manufacturers would find it profitable to enter the sweater business. But American consumers would be forced to subsidize this industry. On every American sweater they bought they would be forced in effect to pay a tax of $5 which would be collected from them in a higher price by the new sweater industry.

Americans would be employed in a sweater industry who had not previously been employed in a sweater industry. That much is true. But there would be no net addition to the country’s industry or the country’s employment. Because the American consumer had to pay $5 more for the same quality of sweater he would have just that much less left over to buy anything else. He would have to reduce his expenditures by $5 somewhere else. In order that one industry might grow or come into existence, a hundred other industries would have to shrink. In order that 50,000 persons might be employed in a woolen sweater industry, 50,000 fewer persons would be employed elsewhere.

But the new industry would be visible. The number of its employees, the capital invested in it, the market value of its product in terms of dollars, could be easily counted. The neighbors could see the sweater workers going to and from the factory every day. The results would be palpable and direct. But the shrinkage of a hundred other industries, the loss of 50,000 other jobs somewhere else, would not be so easily noticed. it would be impossible for even the cleverest statistician to know precisely what the incidence of the loss of other jobs had been—precisely how many men and women had been laid off from each particular industry, precisely how much business each particular industry had lost—because consumers had to pay more for their sweaters. For a loss spread among all the other productive activities of the country would be comparatively minute for each. It would be impossible for anyone to know precisely how each consumer would have spent his extra $5 if he had been allowed to retain it. The overwhelming majority of the people, therefore, would probably suffer from the illusion that the new industry had cost us nothing. (2)

Even in history we have a good example of the effects of tariffs with Smoot-Hawley Tariff Act in the 1930s.  The act, according to Wikipedia, “was an act signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels.” (13) 

The purpose of the act was due to the “weakening labor markets in 1927 and 1928 (which) prompted Smoot to propose yet another tariff increase.” (13)  I interpret this as Smoot trying to protect American jobs.  However, it had a drastically different affect.

The act was on 20,000 items but the effects were devastating on the American economy at the time.

U.S. imports decreased 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports decreased 61% from US$5.4 billion to US$2.1 billion, both decreases much more than the 50% decrease of the GDP. (12)

How does this relate to the tire tariffs?  Depending on China’s reaction to the tire tariffs something like Smoot-Hawley is in the realm of possibilities.  It may not happen legislatively, but the president reacting and China reacting could spiral downwards.  I think the risk of this happening is low, at the same time, it could happen to a scale we haven’t seen since Smoot-Hawley was passed.  You can also use this as an example of what might happen in the case of the tire industry and the unintended consequences of the tariffs.

The China and US Difference:

The US has other competitive disadvantages against China.  The US has labor laws and worker’s rights.  China has labor laws but with a minimum wage of roughly $0.60 per hour (3).  As a result China get the edge here because they have massive amounts of people who are willing to work for cheap pay.  The US has a much higher minimum wage of $7.25pr/hr. (4)  China like the US has a 40 hour work week.  However, with such lower wages it’s no wonder how China can produce for less.  

Minimum Wage Laws and their consequences:

The high minimum wage laws cost US businesses as a whole billions of dollars a year.  I’m not saying that workers shouldn’t have rights.  What I’m trying to show is how these laws make the US less competitive.  It’s no wonder outsourcing is as popular as it is.  

A quick browse of Wikipedia will show a history of the minimum wage laws.  The first minimum wage law was set in 1933, during the depression, at $0.25 per hour.  However, the law was struck down by the supreme court in 1935 as unconstitutional.  Then in 1938 as part of the Fair Labor Standards Act, the minimum wage was established again at $0.25. (7)  How this can be unconstitutional once in 1935 and then not again in 1938 is beyond me.  

None the less in 1941 the supreme court found it to be constitutional saying:

[I]t is no longer open to question that the fixing of a minimum wage is within the legislative power and the bare fact of its exercise is not a denial of DUE PROCESS under the Fifth more than under the Fourteenth Amendement. (8)

The question of the minimum wage laws in 1938 is unconstitutional or not is out of the scope of this post, but it is definitely a debate that I believe needs to be started once again.  If you are interested in pursuing more about minimum wage laws I would suggest looking at mises.org and libertarianpapers.org.

These laws have created a black market for labor.  Just take a look at all the illegals that do all types of labor that others won’t do at a cost that is much cheaper than minimum wage.  It seems that for some businesses it is worth the risk of hiring illegals to stay competitive and in business than have to pay minimum wage for legals to work and face the face that it will drive them out of business.

A few months ago I found some great videos made in the 80s of economist Walter Williams.  These videos go into a bit of detail on the consequences of minimum wage laws.  It is definitely worth the time to watch (~30 minutes). If you can’t watch all the videos I urge you to at least watch part 2. (5)  If you even have more time check out IdeaChannel.tv they have some great original content worth checking out.  (See the end of the post for the videos.)

Union Influences:

Let me start with this quote that president Obama said in a speach at the AFL-CIO cenvention in Pittsburg on September 15th, 2009.

We’ll grow our middle class by building a stronger labor movement. (9)

Obama also said the following about unions.  I would argue that Obama really doesn’t understand economics or at the very least his ideas are so backwards that the things he believes will make for a better America will only make it worse.

So let us never forget: much of what we take for granted-the 40-hour work week, the minimum wage, health insurance, paid leave, pensions, Social Security, Medicare-they all bear the union label. It was the American worker-union men and women-who returned from World War II to make our economy the envy of the world. It was labor that helped build the largest middle class in history. So even if you’re not a union member, every American owes something to America’s labor movement. (10)

The labor unions are also very influential to the Obama administration.  Senator Sherrod Brown (D-Ohio) said, “Since China joined the WTO, American workers have not been assured that the government would defend them against unfair trade.” (11)  At the same time during the Obama campaign he said, “(Obama) had pledged to “crack down on China” and “work to ensure that China is no longer given a free pass to undermine U.S. workers,” as his Web site put it.” (11)  Apparently, since the American unions are so influential it is no wonder why Obama is protecting the tire industry with these new tariffs.

In the same article, The Washington Post Leo W. Gerard, president of the United Steelworkers union said, “The president sent the message that we expect others to live by the rules, just as we do.” (11)  It seems as Mr. Gerard is only thinking about himself and his union workers and not the bigger picture of the economy or his consumers as a whole.  If I could question Mr. Gerard I would ask him one question.  How do we get others to live by the same rules we have set?  There are only two answers I can think of.  One, we don’t and two, there would have to be some global orginzation that would enforce the same standards world wide (WTO anyone?).  Anyone else have any other thoughts about this?

Lastly, on Judge Napolitano’s internet show on FOX News, Freedom Watch, he had Dan Griswold from CATO on to talk about the tariffs.  They go into the discussion of Union pressure on Obama to impose tariffs not only on tires but possibly an array of goods coming into our country.  The effects it has,  going to have, and who is going to have the most impact due to the tariffs.  It is a very good segment and I highly recommend watching the ~9 minute video. (6)

Conclusion:

Regardless of what you think about labor laws and worker’s rights China has a competitive advantage.  This should be good for the US consumer.  However, the influences of Unionized work in the government and the government’s reluctance to follow the constitution it seems as though the American public are in the cross hairs of the policy of the government.  The consequences are numerous as seen through Smoot-Hawley Tariff Act, the loss of cheap tires for people who can otherwise not afford them pointed out by Dan Griswold from CATO on Freedom Watch, and Marguerite Trossevin, who represents a coalition of American tire companies that import Chinese tires said, “the tariff decision is “very disappointing.” She predicted price increases for U.S. consumers and losses for U.S. tire importers.  ”For the U.S. tire distributors and consumers, there’s going to be a heavy burden to bear,” she said. “It sends the message that special interests will get protection if they ask for it — regardless of what that means for broader trade policy.” (11)

In conclusion, I will leave the rest up to you to do the research necessary to make up your own mind.

Sources:

1. China Slams U.S. Tariffs on Tires as ‘Serious Act of Trade Protectionism’
2. Economics in One Lesson
3. Minimum Wage Law – Republic of China
4. United States Department of Labor – Minimum Wage
5. Idea Channel
6. Freedom Watch, 9/22/2009
7. Minimum wage in the United States
8. Find Law – U.S. v. Darby
9. What Obama’s trying To tell union folks these days
10. Obama’s Labor Day Speech: ‘We’re So close To Real Health Reform’
11. U.S. to Impose Tariff on Tires From China
12. Smoot-Hawley Tariff Act
13. Obama to impose tariffs on Chinese tires

External Links:

• Freedom Watch
• mises.org
• libertarianpapers.org

Part 1: Public Schools

Part 2: Minimum Wages and Occupational Licensing

Part 3: Welfare

At any rate, below is another video of Max.  I must say in this one he is a lot less crazy.  Maybe because he’s not debating anyone.  He does come up with some good talking points.  You may or may not agree with everything he says but some of the things are just blunt truth that you probably won’t hear from any major news outlets in the US.

From Russia Today: