External Expansion Limited

Wednesday, 30 April 2014

UNRAVELING THE INS AND OUTS OF INTERNATIONAL TRADE

Analyzing the origins of the expansion of International Trade, U.S. forces see how prefix your currency as a mechanism for international payment and then, with the unilateral breaking of the gold standard, the rest of the world embarks on credit expansion until the global financial crisis interrupted stage making a dent in the global economy. From this new situation, arise new approaches, which come from the hand of Russia, with the purpose of changing the dollar standard that prevails at present; and we wonder what will happen.


In this article we dare to make an analysis of how it has been rising increasingly inequalities between human beings themselves and the developed and developing countries. While international trade dating from hundreds of years ago, which initially benefited all countries and citizens equally through the exchange of goods, has been distorting and more markedly in the last century. The reasons are rooted in the Treaty of Bretton Woods, whose previous conference was attended by 44 nations and were the main promoters of the treaty the UK and U.S.. Back then, most of the Third World Nations were still European colonies and thus had no real own representation. The assistants countries from Latin American had representatives regimes or permeable people down the control of U.S. and European, and we should not forget that these regions at the same time have their main cultural roots in the old continent, so the nationalism or the real interest in the homeland by their citizens were incipient or zero. India was still not independent, so traveled to the conference in conjunction with the British delegation. Communist countries of the former Soviet Union who were present not ratified the agreements. China, who also participated, not ratified the agreements, and retired in advance, since the triumph of the Communist revolution. Germany, Japan, Italy were being defeated in World War II, and they and the rest of the nations of Western Europe were still being battlefields, were being bled dry and required an important total reconstruction, requiring the aid of a country like USA which was strong economically, so influenced them and made them to influence those countries that controlled in Latin America, Asia and Africa. These conditions facilitated the U.S. had complete control over the final decisions of the conference, which ended up imposing its design undoubtedly was more beneficial to them than the British proposal designed by John Maynard Keynes, more democratic and equal for all.

The idea designed by Baron Keynes was that the creditor and the debtor countries would be obliged to maintain a favorable balance of trade, and in case of default, would pay interest on the difference. Under this design, the governments would develop measures to maintain equilibrated trade balances to zero. In this way the most powerful business interests could not distort trade balance and the citizens of a country whose productive sector was strong would not lose the material results of their efforts caused by an uninterrupted export of products manufactured. However, the U.S., which at that time produced the half world's coal, two-thirds of oil, more than half of the electricity required globally, building ships, automobiles, machinery, military weapons with which was proving to win the war and mainly owned 80% of global gold reserves, was a creditor country that was unwilling to expend its surplus in the debtor countries, so this democratic plan was not convenient for their interests.

Therefore, the U.S., due to its greater political influence, its supremacy compared to the rest, to the vulnerability of their British and European allies which were needy of loan in order to overcome the war, took advantage of this and pressure for the British plan was rejected. Other circumstances that favored this were that the rest of the participating countries were manipulated by not having a true representation, had patent representatives to the influences of these, the losers of the war were susceptible to them and who were against were a minority who might oppose in this regards. Is why, that the main objective of the Treaty of Bretton Woods was launch a new international economic order and give stability to commercial transactions through an international monetary system with a solid and stable exchange rate, based as it could not be otherwise on the dollar. This system consisted adopt a gold-exchange standard, in which the U.S. were obliged to keep the price of gold at $35 per ounce and could thus exchange dollars for gold at that price without restrictions or limitations. Once referenced the dollar to gold, other countries set the price of their currencies relative to the dollar, intervening if necessary in currency markets to keep the exchange rate within a range of fluctuation of 1%. With that USA won a significant competitive advantage over the rest, because imposed their own currency as a means of international payment and were the only one who could pay their debts by printing their own money. It should be noted as significant events, which together with this treaty were constituted the International Monetary Fund (IMF) and other body that bit later was called the World Bank, also strongly influenced by U.S. economic interests.

Since the signing of this agreement, the dollar was the closest thing to gold, and all nations were trying to maintain a constant balance between exports and imports. However, most countries devised alternatives to export more than it imported, and thereby accumulate gold reserves or equivalent in dollars, which according to obviously the Treaty of Bretton Woods in 1944 could be exchanged for gold. Due to the risks and costs inherent in the movement of gold reserves, most countries accumulated dollar reserves instead of gold without knowing that the U.S., being the owner of printing its own currency, flooded the markets worldwide for decades stockpile raw materials and technology from other countries to become even more relevant in the international environment with the growth of their industries. That is why unlike the rest of the world, to the U.S. were not worried about maintain a balance between exports and imports, because according to the agreement could pay its export deficits sending more dollars to its creditors to be the owners of the only international currency, something that the rest of the world it mattered little, because dollars were a line of credit seductive and easy exchange, which allowed them to access international markets and supposedly could turn to gold, without knowing that this situation would have its limit. At the same time, after the Second World War, there were countries that insisted on changing the dollars obtained of world trade for gold (eg France among others), which made 20 thousand tons of gold that the U.S. had will erode some gradually without apparent control. This new situation together with the crisis of 1970 caused by two phenomena unexpected by the U.S. government as were the arrival of the oil pick (which not only forced the U.S. to cut oil exports but also to import it) and the adverse outcomes of the Vietnam War, further contributed to raze its gold reserves and consequently to bankrupt its economy, which managed to hide it printing money. The strong industrialization and internal growth of the U.S. increased energy consumption without be enough for them the self-sufficiency, so, they embarked in the printing of its currency to import oil; until it became unsustainable to hide what really happened, which consisted on the impossibility of convert $35 to an ounce of gold.

In the early months of 1971 and due to these new developments, Henry Hazlitt and Paul Samuelson, recommended the government of Richard Nixon devalue strongly the dollar to gold, because it would be necessary to increase the number of dollars it would take to obtain an ounce of golden by the Treasury of the United States and continue to keep the convertibility according to Treaty of Bretton Woods. However, Nixon followed the directions of Milton Friedman, who suggested the idea of leaving flow freely the dollar between other currencies and eliminate the dollar's convertibility to gold given the international currency was worth at the backrest offered by USA Government, known at that time as the global economic locomotive, due to its resources and strong industrialization; In addition, most of the world had its currency instead of gold and would have no other option to accept it. From the abandonment of the gold standard and the Treaty of Bretton Woods in August 15, 1971, begins the origin of the International Trade expansion since Richard Nixon prevented the conversions of dollar to gold, devalued regarding to other currencies making U.S. exports cheaper and thus relieve the trade imbalance. In turn, imposed a temporary 10% tariff on imports, forcing the other countries to revalue their currencies without creating a new system of stable exchange rates but from this time would be fluctuating, ending unilaterally as agreed in Bretton Woods.

As explained above, we know that many countries had dollar reserves, which until then were worth the equivalent in gold; but with the unilateral breach by the U.S., the vast majority were also forced to abandon the gold standard and the dollar standard now eligible to continue as they had been doing before, immersed in world trade and benefit from this. Since that time, all world trade were carried out using printed dollars by the U.S. Treasury, which has not ceased to be fiat money or rather simple roles, already that since that time stop having gold backing, but despite this, the U.S. continued exploiting their competitive advantage that consisted printing dollars to help hide their bankruptcy and expand internationally. The consequence of this development was that all the countries that already had or could get to hold dollars, began to accumulate them as U.S. credit expansion that advanced without brake and restrictions. The rest of the world also began to gather dollar reserves, and these should always be growing, because due to fluctuating exchange rates, at the slightest signal that a country reserves fell, currency speculators appeared to attack currency of that country and destroy it with a sharp devaluation, and this result was repeated on several occasions in most Latin American countries, sowing the distrust of its citizens on their own currencies and an ever increasing dependence on the dollar.

There is no doubt that global trade was, is and will be beneficial for all humanity as it allows us to buy goods more convenient price and exchange practice. It's brilliant the doctrine that each country has their own advantages, which should strengthen in order to produce something that is more efficient and has greater comparative benefits; long as should continue being practiced in a world where the medium payment be gold and trade balances are kept balanced. Because free trade was established under that principle where existed the gold standard that required keeping the structural of trade balances, as it was not possible to sell to a country that not buy and so it naturally balanced. By breaking U.S. the Treaty of Bretton Woods began structural imbalances, which in the first instance were camouflaged with access to credit provided by the great American printing dollars, the country embarked on a major expansion which also played a trick on the long term because the International American Banking were always looking for new mechanisms for more money and for it, expanded the credit by investing abroad because their currency was internationally accepted continue to finding their employers that they could produce the same in foreign countries as well as in its country but at a lower cost primarily by the cheaper labor. Consequently, their industry began to destroy jobs, but the financial sector that allowed access to credit was camouflaged stagnation and stimulating foreign imports which further accentuated the collapse of their own industry.

Until the 70s, a poor country like China, under communism and who remained out of the Bretton Woods agreement without interference in world trade because bought and sold little, were finally tempted in the globalization of the '80s s by the access to American credits, so many companies looking for cheap labor settled their factories there. At the time, economists like Milton Friedman, the output promoter of the gold standard, look kindly credit expansion because the structural imbalances would only be temporary. For many this started a path of no return to the destruction of American and European industry that contributes to the massive unemployment that industrialized countries lived, stopping the flow of dollars to anywhere in the world powered by global credit expansion in August 2007. Once more, we clearly see how the U.S. has returned to overcome the problem through the monetary stimulus by the FED, printing dollars, because they are like a drug to the world economy or as many also call it, "Ponzi scheme" or "pyramidal", that applied to the rest of the world is irreversible. Analysis of the data has shown that in the early 20th century, the per capita income in terms of purchasing power parity of the richest countries were twice as than poorest countries and thanks to the policies applied in the past 40 years this gap has increased 60 times evidencing that the free trade agreement implemented by the United States not generate benefits that have spread to all countries, but rather that it tended to benefit primarily them and a few others.

Another notable issues between all these events, is that being U.S. the initial promoter of the international payments system, finally the dollar has been the currency in which all countries of the world gave value to their raw materials, and where the principal raw material marketed has been the oil, giving denomination to what today we know as "petrodollars". Due to this resource is valued in dollars, the U.S. can accumulate huge debts without anything punishes their defaults, giving equal the merits of the recourse, because buying a barrel of oil in Kuwait, Venezuela, Iraq, Russia and Saudi Arabia, even without participation of U.S. companies: their value is always referred in dollars. This remains a key reason that allows to U.S. overcome crises quickly despite they originate this situation, as happened in 2007 with the "financial crisis". Already in 2000 Saddam Hussein and Muammar Gaddafi were the harbingers of change the game rules looking for facilities that oil could be marketed in other currencies, proposing marketed its oil in euros and that this currency competed with the dollar. It is well known for all the international community and it is demonstrated that the U.S. invented that Iraq had weapons of mass destruction which never existed, to hunt for Saddam, to control Iraq and to appropriate of its oil.

Time now return the tensions in this connection, since the economic and financial boycott against Russia (or sanction as it is usually called in the media) generates that Russia gives impetus to a long-awaited plan to negotiate all its energy exports (oil and gas) in a different currency to the dollar. The week of late April 2014, we heard President Vladimir Putin announced that face of these new sanctions, which strongly affect the country's economy and population, will take them time and pain overcome, taking in hand promoting the use of the ruble, the euro or the yen to negotiate their energy instead of the dollar; and only need to establish mechanisms for exchanges to carry it out. Russia is a country that can mark the turning point to dollar hegemony which requires a rate higher than the global GDP growth to subjugate the rest of the world at ease. It is known that Rosneft oil company owned by the Russian government, has already signed large contracts for its oil exports to China and India in a currency where the dollar is not involved. The same Russian company has signed an agreement with Iran to negotiate 500 thousand barrels per day of Iranian oil in the global market. It is clear that due to the statements and positions of both countries, this will not end up in good omens. Russia is not Iraq. Russia since the fall of the Berlin Wall and the dissolution of the Soviet Union which contributed to the end of the Cold War with their eternal rival USA, has played a low profile while understood that they have much potential as Americans once learned how capitalism works, and this will allow them to become more relevant in the international trade gaining a better global positioning. Not will we know if this opens the stage to a Third World War, but are giving many bases which could cause it, but this time Russia is not alone as in the Cold War and has on their side to China and Iran. In turn this opens up serious scenarios for the U.S. and their petrodollar hegemony, accelerating the decline of the dollar as the universal currency, driving the U.S. to a slow but steady recoil, as well as to those countries heavily dependent on its currency. Is said that if the U.S. loses control over energy costs, sooner rather than later, will lose control of food prices.

We think that to some extent and following the idea in which we begin this article, countries should be rich for their resources because this is their patrimony that has real value, as when the Bretton Woods Agreement was signed and the U.S. had the highest gold reserves to anchor their currency to this and expand international trade. The world has changed; we are increasingly globalized and every time more countries are marketed with each other, having operations absent of U.S. interests. So, why not make a fairer standard which will provide greater stability to many countries now in developing that avoid exposing themselves to speculative capitals that always remain in precarious situations? If Latin America trades 80% of its resources to Europe, why the bulk of transactions are not performed in euros, fostering a fairer exchange where both regions benefit from each other and will grow in wealth equally? It is becoming increasingly necessary to implement changes that allow the countries to addressed towards more egalitarian conditions without this meaning that the effort of a few citizens, given their greater capacity, cleverness, preparation or other attribute that has, not allow it to have more than others, but since now, should never exist large inequalities that are living today. This principle should prevail not only among citizens but also among different nations. The tendency should go towards equality for all human on the basis of their own sacrifice with the freedom to live doing what they like. This is the premise why a worker of the same sector in a country should have the same purchasing power and access to the same things that a worker from another country, always safeguarding the possibilities for place where they are; but should not occur as happens today in some countries, mainly from the so-called underdeveloped, is that dictators, leaders or economic interests that interact in it, can appropriate the country's resources for their own benefit while maintaining the population below their true potential. Why agencies established by American interests have always been those who gave the prescriptions to developing countries and never just been developed (IMF)? Why are there international consultants such as Fitch, S&P and Moody's that negatively rate the debt of a state that have their own resources as back, forcing them to pay more interest on their debt despite having mistakes on many ocations? To prevent this happening, many countries need to fight the interests inside them who not even have a national feeling, and on the contrary correspond with outside interests to one's country in which they operate. Surely, underdeveloped countries owners of commodities could become with time and work like Russia. Undoubtedly time will give answers and solutions to many of these questions, but knowing how it worked so far we can keep them in mind, just need to carry them out clearly will end dollar hegemony.

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Until the next article...

Leonardo Dufau
LinkedIn

Also read the following related article: HOW THE CONFLICT OF UKRANIA AFFECT INTERNATIONAL TRADE?

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