Everyone inside and outside the U.S. wants to figure this out, so they can "fix it" and/or get it right in the future.
Having lived in Canada for 25 years and the U.S. for 21 years, and having blogged on or about this subject for seven years with ~675 posts under my belt, I finally came to an epiphany around this all important question. If you'll excuse my presumed arrogance on this subject, I've been giving this thought for the better part of the past decade.
The Dollar as Global Reserve Currency
Let's face it, it's fun to blame everything on the Kardashians, but the reality is that dumbfuck culture is only a derivative aspect of a fundamentally deeper overall problem. And dumbfuck culture is by no means uniquely American although it is an extremely profitable export via "Hollywood". No, in my humble opinion, the fundamental root cause of latent U.S. decline is the dollar as reserve currency. Any country that can "print" money or monetize debt with impunity will have an inherent and deeply insidious lack of accountability. That lack of accountability will then manifest itself in many second derivative ways. Clearly something happened to the culture along the way - it became arrogant, complacent, and hubristic. "Exceptional", indeed. Pretty much all of which can be attributed to an inherent lack of overall economic accountability.
Land of the Setting Sun
The only other country that can and has monetized its own debt with impunity is Japan and we see where that got them for the past 25 years. They too have a unique situation in that the government borrows almost exclusively from its own citizenry and then everyone pretends that they will pay it back. Their debt to GDP is the highest in known world history at 200%. They spent their savings and left behind worthless IOUs. I don't know that much about Japan's culture only that it's an ageing society and it has made no meaningful reforms for two and a half decades. Every new Prime Minister is the next "great hope". We've only seen this movie about 10 times now. It's totally fucking ridiculous. The country is stuck in a constant state of inertia as the older generation clings to the status quo at all costs. The younger generations are a distant non-priority. Sounds vaguely familiar.
Getting back to the U.S., no country on this planet has a gold standard, so that condition alone has not led to the unique lack of accountability. Aside from Japan, any other country that tried to borrow or monetize with impunity would eventually get itself in big trouble with the almighty bond market. Credit ratings would be lowered, currencies would fall, capital would flow out of the country, interest rates would rise. The government would be forced to impose reforms and fiscal austerity or default on its debt.
The Double Standard
Having the reserve currency of course means a different set of rules apply. The rest of the world is essentially forced to park their excess currency reserves in dollars for liquidity purposes. That means that the U.S. has much freer reign to expand its monetary base, a well known process known as "seignorage". Sometimes called "printing money". As discussed on this blog a hundred times, reserve currency status plus ever-prevalent price/wage deflation keeps inflation under control even as inflationists warn us constantly that it's just around the corner.
Last year, in a little discussed story, one of the U.S. based bond ratings agencies came out publicly and said that the U.S. government needed to conclude a "fiscal cliff" deal sooner rather than later. They specifically advised that any deal should include raising the debt ceiling. Yes you read that right. At around the exact same time that every "peripheral" European country was being told to reduce debt and tighten fiscal austerity, despite having unemployment at depressionary 25% levels, the U.S. is told to do the exact opposite. Suffice to say it would be pretty hard for the U.S. to default on its debt when the Federal reserve has free rein to print the entire fiscal deficit and ratings agencies are encouraging them to do so.
The Trade Deficit Has Been the Largest Beneficiary of Reserve Status
Speaking of Faustian Bargains, any country that attempted to run trade deficits on a scale that the U.S. has run for thirty+ years would have seen its currency collapse a long time ago. Only because the mercantilist (export) nations were willing to hold trillions in excess dollars, was that wholly imbalanced trade situation sustained. Of course, there is serious long-term economic downside to running massive trade deficits for that long, all of which ultimately manifest themselves in a hollowed out economy. Inbound capital flows artificially propped up the dollar during this entire outsourcing era. At the same time, these capital flows (aka. debt) created artificial demand to prop up the pseudo-economy as the industrial arbitrage continued silently in the background. Thirty years ago, when the adults were running the U.S., there were these things called "anti-dumping" laws to prevent unfair foreign competition. To get around those, U.S. corporations merely moved their entire production operations overseas. Even though the product was 100% made in China, the company selling it was "American". Game show hosts in leadership looked the other way. Problem solved.
Competitive Advantage and the Wealth of Nations
The mercantilist nations played the long game while America's game show hosts played the quarterly profit game. The Asian nations realize that the long-term wealth of a nation is based upon its productive capacity, its engineering prowess, and its intellectual capital. Even gold and silver are merely transitory stores of value of relative insignificance next to the ability to produce goods and services. All wealth is ultimately consumed, therefore for wealth to have significance it has to be tied to something productive, otherwise it's merely a notional illusion. The Spanish had unprecedented amounts of gold, but it merely made them lazy and complacent. It was an illusion. The British came along and used mercantilist practices to bootstrap their economy to global dominance. What mattered in the end wasn't how many gold bars they had accumulated, it was the fact that their economy was the most advanced on the entire planet. They had achieved competitive advantage. Mercantilism in a nutshell is just predatory pricing on a national level. Like any predatory company would do, nation states just lower prices short-term to drive competing countries out of business. It can only occur if the competing nations stand-by and allow it to occur, obviously.
The Dollar As Reserve Currency Funded a Multi-Decade Vacation from Reality
In addition, the pervasive lack of accountability has caused many other undesirable side effects - it has sustained this morally bankrupt casino called Wall Street, it created and sustained a generation of overpaid country club CEOs with no regard for their own country, it has generated a complacent and morally vacuous culture, and it has turned the political process into a total circus replete with circus clowns. In every direction it has essentially "poisoned the well" by hampering efforts towards legitimate economic reform. Strategic overreach, military adventurism, hubris, depletion of the Treasury, stagnant R&D, failing academic achievement, over-consumption, these are all byproducts of an extremely complacent society that started believing its own "exceptional" marketing bullshit.
Necessity is the mother of all invention, and for the U.S. power elite, there has been absolutely no necessity for decades now.
Reserve currency status is a curse far more than a blessing. The problem has always been that the power elite have always craved it, because it was part and parcel of their global hegemony.
COMPETITIVE ADVANTAGE AND THE WEALTH OF NATIONS
The integrity of the currency is critical to the integrity of the economy, therefore the balance of trade is vital. Resisting the easy (and short-term profitable) temptation to trade openly with mercantilist nations, is critical. The theory of comparative advantage is specious alchemy that gives cover to export mercantilism.
Via Zerohedge:
