Tag: economics

Is the Dollar America’s Achilles Heel?

“…the US government has a technology, called a printing press (or, today, it’s electronic equivalent) that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”  Ben Bernanke, 2002

Throughout history, the world’s economic powers have had to decide how they should be paid for their goods and services.  At first, gold, silver and precious stones were stores of value that could be exchanged for goods and services.  As currencies were developed and became widely accepted, countries had to decide which currency or currencies they would accept for their hard work.  The most widely accepted currency is usually known as the reserve currency.  Countries hold these reserves as a store of value and as national savings.

Until the early 1900s, there was no official reserve currency, but some currencies acted in a de facto reserve status.  Starting in the 1700s, the de facto reserve currency was a combination of the French Franc, the British Pound and the Dutch Gilder.  Later, in the 1800s, it was a combination of the British Pound, US Dollar and the Russian Ruble.

By the 1900s, many currencies were backed by gold.  This means that a person could exchange paper money for an exact amount of gold.  After World War II, the global powers signed the Bretton Woods Agreement, which made the US dollar the central reserve currency.  It allowed countries to exchange their currencies for dollars or gold at fixed exchange rates.  This system worked well while the US had a much stronger economy compared to other countries, but as Japan, Europe and Asia began to recover after WWII, the Bretton Woods Agreement began to to show signs of strain.  The US felt it was paying more than its fair share.

In the 197s0s, the Bretton Woods Agreement broke down as other countries rose to prominence and began demanding gold from the US in exchange for their US dollars that they had accumulated through trade.  After Nixon closed the gold window and permanently detached the US dollar from gold, the United States was in the unique position of being able to print the reserve currency, but not have it convertible into anything tangible.  The US could print money out of thin air and use it to buy cars from Japan.

Since the US can issue the world reserve currency, it receives huge economic benefits in the short term.  The US can simply print as much currency as it wants, as long as the rest of the world is willing to accept dollars in exchange for goods or services.  This process allows the US to live beyond its means for as long as foreign countries are willing to continue to accept dollars.  Countries, like China, accumulate US dollars and loan them back to us at low interest rates.

This process has been going on since the 1970s, but has accelerated since globalization has taken hold.  The United States lost its manufacturing base to China, India and Asia and has been paying for goods and services through increased leverage and increased running of the “printing press.”  Printing press is a misnomer, as most of the new money that is created is just created out of thin air and deposited by the Federal Reserve into the world economy via banking reserves.

As the US continues to go into more debt, we are forced to either raise taxes or print more money to pay off our debt.  Since raising taxes is politically unfeasible and cutting spending is even harder, the US will most likely pay off the debt by printing even greater quantities of dollars.  China now holds over 1.95 Trillion dollars in its foreign reserves, most of it denominated in US dollars.  They are worried that the US will simply print itself out of debt, rendering its hard earned savings worthless.

We saw how extreme debt and leverage destroyed the big investment banks.  I am worried that the US is in a similar situation.  The national debt is currently $11.2 trillion dollars, or $36,000 per man, woman and child in America.  We pay $3.6 billion dollars per day in interest.  It is compounding at its worst.

If China decides that it no longer wants to continue purchasing US paper, the dollar will decline precipitously and interest rates will rise.  There even could be a run on the dollar.  This would be disastrous for the United States.

China and Russia have already started to push for a new global reserve currency, either backed by gold or backed by a basket of currencies at the United Nations or the World Bank.  China’s equivelant to Ben Bernanke recently posted an essay advocating a new reserve currency.  I fear that the US dollar will lose its reserve status, as the rest of the world has grown tired of watching America print prosperity.  Its not logical that these countries will continue to allow this to happen.  They know that they cannot defeat US hegemony in a military war, so they realize that if they wish to dislodge the US as the hegemonic power, they must use a different strategy.  I believe it will be attacking the US where it is weakest: the reserve status of the US dollar.  It is our Achilles Heel.

There really is only one conclusion to this story: the standard of living in the United States is fated to fall.  Nobody knows how far it may fall, but there is no way that the last twenty years of prosperity, brought to you by leverage and the printing press, is sustainable.  At some point, China and the rest of the world will say enough is enough and will demand real, tangible payment for their hard work.  This will be disastrous for the average US citizen and for US power in general.

Unintentional Comedy from the Treasury Department

On February 10th, Treasury Secretary Timothy Geithner gave an interview where he began to lay out some of the Obama Administrations plan to help fix the economy.  He said that the Treasury would create a website called FinancialStability.gov to keep the public apprised of the situation.

Its now March 23rd and the top of the website currently reads:



How Much is Fair to Tip a Tour Guide?

My friend (I can’t use her real name because her company does not like employees to talk about tips) graduated from UW-Madison this past May and decided to take a different path than most graduates.  Instead of setting for a 9-5 desk job, she decided to travel and get jobs wherever she ended up.  I truly admire her decision and hope I am able to do something similar at some point.

She is currently living in London working as a tour guide for free walking tours in central London.  She is paid a small wage per tour, but the bulk of her compensation comes from tips from tourists on her guided tours.

When she first began giving tours, she would wait until the end of the tour and then say “If you had fun, I will graciously accept tips.”  Some people would tip, but many would not and her Pounds per person rate was rather low.

Last week, she changed her pitch at the end of tours to “I work on a tips only basis, so if you had fun, I will graciously accept what you think this tour is worth.”  When she took a tour group past one of the many bus tours of central London, she would say “look at all of those lazy people on the buses.  They paid 30 pounds for their trip and all they do is sit.”

Her tips have increased by over 50%.

Her story is an interesting case of how small changes in messages to create a large change in viewer reaction.  The Nudges Blog talks about these types of issues every day.  She also uses anchoring to get people to think about what her tour is worth.  By letting her tourists know that people who are on the bus tours pay 30 Pounds, she is giving them an idea of what other tours are worth.  She is setting a high anchor for people so that when they are asked to tip, they base their tips on a known commodity.

Although her tips have increased, she is still looking for other nudges that will increase them even more.  See if you can help her out by posting your ideas in the comments.

Is 30 Minutes of your Time Worth $5.95?

In “Why You’ll Love Paying for Roads that Used to be Free,” Eric A. Morris delivers a compelling arguement for setting up variable toll rates for public highways that are currently free to reduce congesting.

It’s a really hard sell to politicians and citizens alike, but he argues:

Variable tolling is an excellent public policy. Here’s why: the basic economic theory is that when you give out something valuable — in this case, road space — for less than its true value, shortages result.

Ultimately, there’s no free lunch; instead of paying with money, you pay with the effort and time needed to acquire the good. Think of Soviet shoppers spending their lives in endless queues to purchase artificially low-priced but exceedingly scarce goods. Then think of Americans who can fulfill nearly any consumerist fantasy quickly but at a monetary cost. Free but congested roads have left us shivering on the streets of Moscow.

In a study done in Seattle, the highest anyone ever paid for a toll was $5.95.   The time saved by using the toll was 27 minutes.  Depending on where I had to go, I would make my decision on whether or not to pay the toll.

This article is similar to the book Traffic, by Tom Vanderbilt, which is next on my reading list after Gladwell’s new book, Outliers, which I am almost done with.