A remarkably thorough look and explanation as to why the US is past its prime as an economic power is available below. Be forewarned, the explanation is long, detailed, historical and economic.
If you want a better understanding of the world and future financial opportunities (and dangers), it is a must read. The read is technical in parts but it is important for anyone interested in history and economics, particularly in the rise and fall of nations. The article should not be confused with the 1970s hysteria that suggested Japan was going to surpass the US as a world economic power. Nor is it about China overtaking the US. It is about government policy that conflicts with economic principles.
Alistair McLeod shows the interaction of government and economics and how economic forces ultimately triumph over government policies when the two collide. The correction process is slow, but inevitable.
Savings are a vital component of any successful economy, and the foolishness behind the paradox of thrift is exposed in this article. It has been a huge error for Keynesian policy makers to discourage savings in the interests of temporary boosts to consumerism.
It is probably too late now but encouraging people to save by removing all taxation from savings makes an enormous contribution to reducing price inflation and trade deficits, while enhancing national wealth. This is evidenced empirically and demonstrated by reasoned theory.
Furthermore, there is an error in assuming that there is no alternative to Triffin’s dilemma, which posited that for a nation to produce a meaningful level of reserve currency for external circulation it must run trade deficits. Triffin was describing the problems the United States gave itself under the Bretton Woods agreement, leading to the failure of the London gold pool in the late sixties. It still informs US policy makers today, and wrongly leads American commentators to believe that the dollar cannot be toppled from its pre-eminent position.
But Triffin’s dilemma assumes that central banks must accumulate currency reserves. Unless a government has foolishly indebted itself in a foreign currency, there is no need for them to do so. Currency reserves add nothing to a domestic currency’s stability. Gold fulfilled this role successfully, and likely to do so again in future.
It is a savings ratio of 45% which is at the root of China’s power. The lack of savings in America and its western alliance is their Achilles heel.
If there was one taxation policy which would reduce consumer price inflation, stabilise a fiat currency, encourage capital allocation for productive purposes, and improve government finances for the longer-term, what would it be?
Remove all taxes from savings.
This is the lesson from past-war West Germany and Japan, both of which suffered absolute defeat and economic destruction in the Second World War. Their currencies were worthless. But they recovered to become economic powerhouses in Europe and Asia respectively in little more than two decades. Both implemented savings-friendly taxation policies, which made capital available at stable interest rates for new industries to invest in production. Germany developed its Mittelstand, and Japan built on her vertically integrated Zaibatsu.
Germany was fortunate in its Economy Minister, Ludwig Erhard. A free marketeer who on 20 June 1948 took the bull by the horns, Erhard unilaterally ended rationing on the same day as the new mark was introduced, presenting it as a fait accompli to the military governors in the British and American zones. In a week, shops had begun to reopen, and goods became widely available.
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