American Monetary Policy Will Ruin the Economy of the EU

The FED has been engineering the continuance of a strong dollar and the EU has been forced to follow suit although both countries are facing an ongoing or incipient recession. This article will explain why this policy will fail with the ultimate effect of impoverishing the working classes in both the US and the EU. In the interest of the rich in the US, the FED has pursued monetary policies designed to keep them rich but will ruin the working classes (and ultimately ruin the rich as well.) The foreign trade deficits which are the result of this policy will, within a short period, cause a catastrophic fall in the value of the dollar resulting in a worldwide financial implosion and worldwide recession. First it is necessary to explain the history of the economic policies which caused these deficits.
When the Second World War ended the US was producing approximately seventy percent of the manufactured goods in the western world. The manufacturing capability of the countries comprising the current EU and Japan had been ruined by the war and these countries initially needed modest exchange rates in order to maintain their money supplies as they competed with US manufacturers. As these countries recovered their manufacturing capabilities their exchange rates should have been adjusted to reflect their increased competitiveness with the US. Absent an appropriate adjustment in exchange rates, manufacturing shifted to the EU and southeast Asia and the US began experiencing ever-increasing trade deficits. Until 1970 the US was on the gold exchange standard which meant that current account balances were to be resolved by an exchange of gold between central banks when these balances were not offset by net foreign investment. This mechanism was designed to correct trade/current account balances by a decrease in the money supply of a deficit country resulting in lower prices and wage levels. In practice, because of wage inflexibility, a decrease in the money supply actually caused a corresponding decrease in production/employment resulting in a recession. So President Nixon took the US off the gold exchange standard by refusing to transfer gold to resolve the current account deficit, and implemented a managed float of the dollar. Under this system the dollar was allowed to float within a severely restricted range, which in effect allowed ever-increasing trade deficits to continue. Foreign dollar holders were forced to buy other US assets such as real estate and stocks and bonds, including the purchase of US government securities. Because the mechanism to prevent/alleviate large trade deficits was insufficiently adjusted, the trade deficits actually increased as foreign products increased in sophistication. To make matters worse, the western governments and the IMF sat mutely by as western hedge funds ruined the money supplies of the developing countries of Southeast Asia resulting in even lower (unjustified) wage levels for workers in these countries and making western worker's wage levels even less competitive. The result was that no one wanted to hire western workers, and white collar as well as blue collar manufacturing jobs began moving to Southeast Asia.
As a result, US and EU workers have little chance of finding work, and wages in these countries will have to fall perhaps as much as eighty percent before they again become competitive. Given the costs of living in the US, it is unlikely that US workers will agree to a wage decrease of this amount. Because the western governments have chosen to "free" the movement of capital and labor, their worker are competing against similarly trained workers whose mean wages are about fifty cents per hour. In this "free trade" environment the only way for western workers to compete will be for their governments to allow their exchange rates to fall to a level where their workers' wages are competitive with worker's wages worldwide. Under these conditions, the trade deficit could be resolved as US made goods again became competitive. This would require, for long term viability, a reduction in the annual trade deficit by one trillion dollars, involving a substantial decrease in the current dollar exchange rate.
Many policy-makers as well as economists believe that the US can continue these trade deficits by means of offsetting investment flows into the US by foreign dollar holders. If US citizens had unlimited assets perhaps this would be a valid option. But investment flows simply amount to the transfer of US assets such as stocks, bonds, and real estate from US citizens to foreigners. No country/population has unlimited assets. Most people want to hold onto their assets(which are a source of their income.) When foreign dollar holders have finally purchased from American citizens all assets which are offered for sale, what will foreign dollar holders do with their trade proceeds? They will have to be resolved by a draining of assets from the American banking system and a dumping of these dollars on the foreign currency exchanges. When this happens the dollar will fall, ultimately stabilizing at a level in which US worker's wage level are competitive in worldwide manufacturing. This will have the same outcome as allowing a true float of the dollar's exchange rate until trade balances are reestablished. The predominant differences will be that, if the western governments fail to act now, this adjustment will occur only after foreigners have gained control of most of the wealth in the US and EU and the US working classes will have experienced another seven/ten years of underemployment. With the current account deficit now approaching one trillion dollars, and profitable and purchasable US assets available for sale of ten trillion dollars at the most, a fall in the dollar will occur within the next seven years to ten years. The IMF may alleviate the situation but not avoid it by the issuance of mammoth tranches of special drawing rights. They will quickly tire of this when they will have to do this annually and at a level which will cause inflation problems in the other hard currency countries of the world.
All that will be necessary to start a run on the dollar is for any one of the players holding large dollar denominated assets to panic, realizing that to continue supporting an overvalued dollar will only result in greater loses down the pike. These include the petrodollar crowd, foreign central banks, foreign investors, foreigners holding large balances in US banks, and Eurodollar account holders, among others. There is no longer a question of "if" but "when" this will occur and how far the dollar will fall. The British pound experienced a drop in value relative to the dollar of about seventy percent over a fifty year period, and it's deficits were miniscule compared to those of the US today.
Having explained the history of what has compromised the US economy and the future of the workingman in the US, I can now get around to explaining how current monetary policy in the US will ruin the EU. To begin with, US policymakers are claiming the dollar to be undervalued based upon its purchasing power. The purchasing power of the dollar is undervalued only because of infrastructure and marketing advantages available in the US. These factors result in a high level of market competition and in lower prices generally on foreign tradable goods at the retail level. Any halfway competent economist looking at the trade deficit knows that the dollar is tremendously overvalued on the basis of the wage levels of US workers, which determine the employment and production of a country. The IMF, the worldwide "expert" in foreign currency values, is well aware of the "structural" problem in the value of the dollar and the fact that it is seriously overvalued. If any country currently under it's supervision were to experience similar trade deficits the IMF would force it to devalue it's currency. The bogus claim of an undervalued dollar gives the policymakers an excuse to hold the dollar at an unsuitable level, and is causing the ruination of the manufacturing workers in the US. Jobs of white collar and tech workers will soon be affected as well.
Now for the real folly(and betrayal.) The FED has been raising interest rates for the past year or so claiming that it is "fighting inflation". The inflation that the FED wants the public to believe it is referring to is one of increased prices of consumer goods sold in the US. But this kind of inflation is not present and is unlikely to reappear again soon because of some very fundamental changes in the US economy. Tariff reductions, transportation efficiencies, and a shift away from union membership and a decrease in union bargaining power have made "cost push" as well as administered inflations increasingly unlikely. The increasing number of competitive foreign goods for sale in the US will inhibit stateside price increases indefinitely and will continue as long as 200 million skilled workers in southeast Asia remain unemployed.
Currently, the "inflation" claimed by the FED simply doesn't exist. The federal reserve people are using the word "inflation" as an excuse to do what the rich want them to do, namely to support the dollar's value even while it is ruining the American workingman. The rich call a decrease in the value of the dollar "inflation" because it increases the prices of imported goods. But a decrease in the value of the dollar won't necessarily increase the prices of local-made goods and therefore needn't cause the inflation which the Fed is pretending to be so concerned about. Based upon this pretence, the FED has been raising the interest rate not in order to control inflation but solely to keep the dollar from falling in value. This increase in interest rates will encourage foreign dollar holders to keep their money in savings accounts in American banks (in the US money markets). This "investment" will decrease pressure on US international bank reserves thereby avoiding any U. S. balance of payments problems which may arise.
The FED are effecting the increase in interest rates by means of a decrease in bank reserves. This will result in a decrease in the money supply driving the US economy into recession.
The EU is in even worse shape employment-wise. At a time when it is facing an ongoing recession EU policymakers are compelled, by increases in US interest rates, to raise their interest rates in order to avoid losing bank assets. In other words, the US interest rate policy forces the EU to do the same, ensuring a drop in production and employment there as well. As the FED continues to raise interest rates, the EU will follow suit going further and further into recession. They will continue to lose jobs to Southeast Asia, unemployment will continue to increase, and their high standard of living will slowly disappear. Until the US government decides to support its working classes, the EU governments will be unable to support theirs as well.