Derec writes:
How do you propose the Russians will be able to do so? And even if they could, it would make US exports more competitive, acting as a bulwark against too much devaluation.
They've actually been working at it for a while. But now they have announced that they will sell oil for rubles or gold or you can buy Russian oil from China for yuan. So the petro-dollar is history. But if people don't need dollars to buy oil, they have no reason to hold them. It will take some time for Russia to pull this off however, because people still need dollars because of the financial infrastructure. When Russia sells gas to Ukraine, the account is still settled in dollars. But the Russians are opening up an exchange in Moscow and the Chinese are doing so as well in Shanghai. Meanwhile, Russia has just struck a deal to buy 500,000 barrels of oil a day from Iran. So in addition to Russian oil, they also have Iranian oil to sell. When the petro-dollar went into effect, Saudi Arabia was the world's largest oil producer but now Russia is and Saudi oil reserves are running out.
A decline in the dollar relative to other currencies will lower the American standard of living very considerably. Imports will go up in price, and everything we manufacture involves imports. Even our agriculture is heavily dependent on imported oil. About half of all US dollars are circulating overseas or are held as reserves by foreign central banks, but if you don't need dollars for international trade, they will have little incentive to use them or to hold them.
The price of US exports goes down in the currency of the country that we export too, but that means we get less money back. Yes, we get more dollars but we get less of the foreign currency, and it is the foreign currency that we need to use to buy imports. That's why currency devaluations have never worked. The dollar has already fallen from about 120 on the dollar index in 2000 to about 80 today, and we've seen a decline in the standard of living during that period. Gasoline was $.99 a gallon at the turn of the century.
Russia, China, and India will become the dominant countries in the world.
How do you figure? All three have very serious internal problems. Russia is pretty much a petrostate these days and it's leadership is stuck in the past (glories of the 19th century Russian Empire). India has ridiculous overpopulation (4 times US population in an area about 1/3 that of US) and many Indians still don't even have access to flush toilets (it's hard to take a country where UNICEF campaigns like
this one are necessary seriously as a budding "dominant country"). And China might have averted overpopulation but there are very high levels of pollution, draconian "one child" policy and an authoritarian government
.
China is expected to overtake the US in GDP within the next half decade or so. Sure, per capita GDP will still be a whole lot less, but total GDP will be higher. Russia is primarily a commodity country. The have some industry, especially high-tech weaponry, but they are dependent on the export of commodities. However, with 1/7 of the world's land mass, they can expect to discover new resources as the old ones run out. India is not as far advanced as China, but still has a lot of high-tech telecommunications manufacturing and, like China they have a lot of people, and those people contribute to the GDP. Most importantly, they are the new kids on the block in terms of international trade.
They will become dominant because of geography. They can influence world events without moving much beyond their borders. The US is heavily dependent on its navy to influence world events. Once we can no longer afford the kind of navy we have, they will become more dominant because they don't need large navies to exert their influence.
Europe, especially Germany, will look increasingly toward Russia and away from the US as an ally.
Europe currently needs Russian oil and especially gas, but Russia's authoritarianism and social conservatism is antithetical to Germany's values, and the values of many other European countries. After all, Germany had a foreign minister and Berlin has a mayor (who together with mayors of Hamburg and Bremen rank the same as state "Ministerpresidenten" or governors) who are openly gay. Furthermore, Germany prides itself on environmentalism which will make fossil fuel imports less relevant in the future. Sure, they have shot themselves in the foot with the counterproductive decision to prematurely turn off nuclear power plants (and not build any new ones) but still.
The need for oil and gas will be with us for a long time. Even nuclear power won't be enough to produce energy independence for Europe. Wind power is boondoggle from day one. There is some future for solar panels but probably to supplement the grid, not to replace it.
Europe does care in the slightest about Russia's laws on gay marriage. We're talking about economic and geo-political power. Russia's rebound may not last too long because their population is declining. So is Western Europe's. For that matter the birth rate has plummeted even in China and India, but they are so populace that it is seen a good thing there. But Russia will decline as its population decreases, but that just makes it less of a threat to Europe. German industry is heavily dependent on Russia, but they also have investments there. So it makes sense for Europe and Russia to get together to compensate for their declining populations.
So in conclusion, while EU and US do have some serious problems ahead of us, it's not like we are in danger of being steamrolled by these Asian powers because they are in many ways worse off.
Our standard of living will decline, but on a per capita basis, it will certainly remain ahead of the Asian countries. Moreover, although our birth rate is also low, we make up for a lot of it through immigration so our population is not expected to decline as much as Europe's. However, that may be optimistic since immigration slows to a crawl when economic times are hard.
Our problem will be that our finances will not permit us to maintain the kind global military force that we have now. So we will still be a power in the Western hemisphere although we may get a good deal of competition from Brazil and possibly even from Mexico.
However, I think there's a good chance that we can rebound in a decade or two. But mid-century we could be on the upswing again, but probably more chastened as we won't see ourselves as the indispensable country anymore.
Real problems would arise, however, if we try to move in an authoritarian direction. If we look to the government to organize the economy with price and wage controls and production quotas and other such gimmicks, we could waste decades trying to recover from our own recovery efforts.
Furthermore, it should be noted that if the US economy plummets, it will impact our major trading partners as well. So in some respects it will be a race to the bottom. But we have farther to fall, and global finances will have a greater impact on our economy than on others that are far less oriented toward banking and finance. So it will be a hard time world wide, but we will decline relatively as well as absolutely.
