Archive for July 3rd, 2020

Late Soviet America

July 3, 2020

Prof Harold James in this damning Proj Synd piece:

Like the Soviet Union in its final years, the United States is reeling from catastrophic failures of leadership and long-suppressed socioeconomic tensions that have finally boiled over. For the rest of the world, the most important development is that the hegemony of the US dollar may finally be coming to an end.

Further:

In fact, many aspects of America’s current annus horribilis recall the final years of the Soviet Union, starting with the intensification of social and political conflict. In the Soviet case, long-suppressed ethnic rivalries and competing national aspirations quickly bubbled to the surface, pushing the entire country toward violence, secession, and disintegration. In the US, Trump’s response to nationwide protests against racism, police brutality, and inequality has been to stoke further the country’s historic racial divide. And, like statues of Lenin during the collapse of the Soviet empire, statues of Confederate leaders are being toppled just about everywhere.

Another parallel concerns the economy. The Soviet Union had a large, complicated planning and resource-allocation apparatus that attracted the society’s best-educated people, only to consign them to unproductive and frequently destructive tasks. The US has Wall Street. To be sure, America’s vast financial-services sector is not the equivalent of Gosplan (the Soviet State Planning Commission), but it does frequently extract value rather than create it, and thus will inevitably be part of any debate about the allocation of resources.

Up until the moment the Soviet system collapsed, very few thought it could actually happen. In assessing the state of the American system, it is important to remember that economists are not very good at prediction. The entire discipline relies on extrapolating from contemporary conditions on the assumption that the underlying fundamentals of what is being analyzed will not change. Knowing full well that this is an unrealistic and absurd assumption, economists often emulate medieval theologians by dressing up their prognoses in arcane language and jargon. One doesn’t need to know Latin to invoke ceteris paribus (“other things being equal”) as the premise of one’s forecasts.

US Dollar hegemony is under question mark:

Given this standard practice, we should pay close attention to long-run counter-intuitive forecasts that actually are borne out. In the late 1960s, the economist Robert A. Mundell made three predictions: that the Soviet Union would disintegrate; that Europe would adopt a single currency; and that the dollar would retain its status as the dominant international currency. Considering that the par-value system (gold standard) collapsed soon thereafter, triggering a depreciation of the dollar, these looked like wild predictions. But Mundell turned out to be right on all three counts.

But the circumstances to which the dollar owes its longstanding hegemony are now changing. The COVID-19 pandemic is driving a more digitalized form of globalization. While the cross-border movement of people and goods plummets, information is flowing like never before, ushering in an increasingly weightless economy.

Moreover, for the past three and a half years, the Trump administration has been inviting an eventual backlash against its weaponization of the dollar for political ends. Financial and secondary sanctions were highly effective in their original form, when they were directed against small, isolated bad actors like North Korea. But their more extensive deployment against Iran, Russia, and Chinese companies has proved counterproductive. Not only Russia and China but also Europe have quickly taken steps to develop alternative mechanisms for international payments and settlement.

Non-state digital payments systems are also undergoing , particularly in places where the state is weak, distrusted, or otherwise lacking credibility. The payments revolution will likely occur fastest in poor countries, such as in Africa or some former Soviet republics. New digital technologies already offer these societies the means to move from poverty and institutional underdevelopment to institutional complexity and the chance of innovation and prosperity.

 


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