Trouble for the Dollar

A MarketWatch headline reads: "Chinese official urges buying of gold, U.S. land: report". This is, of course, a recommendation to get out of US dollar denominated financial assets and is not the first indication that China and other foreign holders of such instruments are worried.

As "AdammSmith", (underscores not allowed in screen names at this site), I posted a reply which I will copy here:

Blame for the fate of the dollar may fall on the housing and mortgage banking industries, unregulated derivatives and government's "ownership society" social engineering that created a class of weak mortgagors. All that, however, is only responsible for determining the sectors in which extreme bubble conditions occurred. The more nearly correct explanation lies with the decades long excessive use of credit and lack of savings by households, businesses and government alike guaranteeing that a bubble of some sort would be inevitable. This was enabled by persistent monetary ease by the Federal Reserve, but that, in turn, was required to maintain labor employment in an economy which could not sustain acceptable employment levels on the basis of production for consumption alone. The ultimate cause of today's economic turmoil and the dollar's falling attraction is the decades of diversion of real resources to economically unproductive use -- specifically, maintenance of US military industrial global hegemony, a relatively subtle form of empire.

Arguably, this was a justifiable cost of winning the cold war up until the collapse of the Soviet Union but since then it has been nothing but blow-back producing geostrategic games playing for the satisfaction of politicians and citizens with a lust for meddling abroad with financial benefit concentrated in defense related companies and other industries helped by an internationally bullying government in the securing of cheap foreign resources, including labor.

Empires may be very profitable for the few in the short term but are not economically sustainable for the long term. The long term results are coming into view now.

Inflationary policies mask, for a time, but do not eliminate the cost of empire. The inflation itself need not appear as a large general price increase if it is concentrated in one commodity or class of commodities, such as financial assets. That is the essence of a "bubble". A general price increase in the aftermath of a bubble burst can be avoided by a sharp monetary contraction but won't be because that is the formula for a deep recession. It can also be avoided by funds finding a speculative investment to inflate into a new bubble. This could happen with gold if there is a panic flight to perceived safety in that commodity. To some extent, not very much I think, real estate values might be re-inflated. Most likely, however, there will be inflation in prices generally. Right now this is being delayed by a classic liquidity trap. That is the meaning of the reports you see that banks are not lending. They are unintentionally preventing general price inflation by hoarding massive quantities of essentially idle funds. In time they will start to invest, since they aren't totally stupid, in inflation hedges -- mainly companies that produce basic commodities. Then excess liquidity will begin to spread to the broader economy.

What's in "Green Dam Youth Escort"?

According to a report from PC World, the makers of "Green Dam Youth Escort", a porn-filtering software system mandated for use in China by the government, are being accused of illegal lifting of code from a U.S.-based product made by Solid Oak Software. The company denies the charge but there appears to be persuasive evidence that the accusation is true.

Let me guess what has happened here: some programmer(s) at the Chinese company, Jinhui Computer System Engineering, copied code from Solid Oak Software's product, CyberSitter, without being asked by their management to do so. It was an easy thing to do and there were no safeguards in place to prevent it. Why was there no strong management oversight? I see a clue in the fact that Green Dam not only filters porn but also blocks access to sites mentioning Falun Gong, a "spiritual", (and perhaps political), movement banned by the Chinese government. I suspect some manager at Jinhui Computer System Engineering ordered the Falun Gong censoring but wanted to avoid being caught up in possible consequent controversy about it. Relations between managers and programmers will have been kept purposely informal to allow for plausible deniability.

Personally, I do not believe in the legitimacy of government prohibitions against the free use of any type of information gathered or composed in any non-violent and non-fraudulent way. China should not ban information about Falun Gong. Software is not like tangible property and should not be protected from unlicensed use as if it were. Information that escapes from official or proprietary bondage, i.e., secrecy, is in the public domain by nature and it would be better if it were so in law as well.

The law is the law, however much we may disapprove, so unless and until it is changed -- or unless it becomes so unbearable as to justify revolution -- I say conform to the law. Even official Chinese censorship must be respected as law even as we properly criticize its wisdom -- and so it is with software copyrights and patents too. I have stated some of my criticism on this blog and expect to say more as time goes on. For the record, let me explicitly state that all my opinions expressed on this blog I consider to be in the public domain. Anyone may copy or quote them freely but a link to my blog, although not required, would be appreciated.

As sleazy as 123

Indian election results to help activate Indo-US nuke deal

New York, May 16 (PTI) Indian-Americans for Democrats today described as "fantastic" the results of general elections in India, saying it will help in full "activation" of the nuclear deal with the US and further strengthen bilateral ties. ...

That's too bad really. The nuclear deal, the "123 agreement.", railroaded through with maximum avoidance of debate and deliberation by the Bush Administration is an evisceration of the Nuclear Non-Proliferation Treaty (NPT). That Administration pretty much gave away the store in negotiating the deal. India agreed to not spread nuclear weapons technology to other states which it wasn't about to do anyhow. In return it gets to import dual use nuclear technology and nuclear fuel for its civilian power reactors which frees up supplies for its not subject to inspections military reactors. These reactors provide fissile material for expanding India's nuclear weapons arsenal in an arms race with Pakistan. The nuclear sanctions on India were on the verge of working. The Indian economy is in desperate need of more civilian nuclear power. Without the 123 deal India would have had to starve its nuclear weapons program to meet that need. With India's forced restraint pressure could have been brought to bear on Pakistan to reduce its own stockpiles and for both countries to disarm and join the NPT as non-nuclear weapons states

The neocon dominated Bush Administration was allergic to most international law. (excluding certain international laws that are advantageous to US corporations such as the WIPO Copyright Treaty snd the Agreement on Trade-Related Aspects of Intellectual Property Rights). Whether it is the UN Charter, the Geneva Conventions, or the NPT, however, non-commercial international law is generally seen as a nuisance interfering with the right of the world's one remaining superpower to shape the world according to its own design. For the Bushies, undermining the NPT with the 123 Agreement was more of a plus than a minus.

The main foreign policy reason for the 123 agreement from the Bush Administration side lies in setting India up as a more powerful competitor to China for regional influence. It's all geostrategic gamesmanship. Why is it so important to counter the "threat" of rising Chinese influence? To some extent it must be residual cold war hostility to a formally communist state even though China seems focused on trade and economic growth and to have abandoned any idea it may have had of exporting revolution. That was more of a Soviet thing to begin with anyhow. Beyond that it is just on general principle, apparently. The countries of the region might be less subject to US diplomacy if they aren't divided and vulnerable to being played off against one another. India is being lured into being a US stooge, but is in denial about it and doesn't care.

It will be interesting to see how Obama plays the India-China hand passed to it by the Bush Administration.