What kind of system could prevent the world from getting into the jam a falling dollar may cause now? I've been reading about the World Trade Organization. In some ways they are the polar opposite of the UN regarding their relationship with the United States. We fight hard when we disagree about something, but rarely attack the organization wholesale. We tend eventually to comply with rulings that go against us.

The organization is surprisingly powerful, but it works around rather than against nationalism and sovereignty. It you break WTO rules, they give the people harmed permission to charge import taxes or other tariffs on your goods without being penalized as violators themselves. So they aren't ordering other countries around or trying to punish them themselves, but rather creating a set of rules so a consensus can be achieved as to what is a fair penalty vs an arbitrary tax war. Everything is done by consensus. This may make you think of UN veto power and nothing getting done, but ...

The Uruguay Round agreement also made it impossible for the country losing a case to block the adoption of the ruling. Under the previous GATT procedure, rulings could only be adopted by consensus, meaning that a single objection could block the ruling. Now, rulings are automatically adopted unless there is a consensus to reject a ruling — any country wanting to block a ruling has to persuade all other WTO members (including its adversary in the case) to share its view.

Although much of the procedure does resemble a court or tribunal, the preferred solution is for the countries concerned to discuss their problems and settle the dispute by themselves. The first stage is therefore consultations between the governments concerned, and even when the case has progressed to other stages, consultation and mediation are still always possible.

Although the rules and panels are created by consensus, once this is done a similar consensus is required to overrule them.

Right now this has no application to the dollar at all. There are no rules against one or more governments buying the currency of another government for any reason they choose. In fact, the WTO avoids ruling on internal issues, only ruling on the actual construction or content or products being imported and exported. Even if it didn't, the actions that got us into this situation were victimless crimes, neither the buyers of the dollar (who wanted to keep dollars strong so their own economies could look artificially strong in the short and medium term) nor the sellers (the USA, financing government debt by taking advantage of the former even while whining about it) would really have complained.

But this may be what we need to have a global economy which is sustainably prosperous for more than a few decades at a time. At least, the WTO is the only global organization not crippled by politics, perhaps because the 900 pound gorilla has a big stake in it.

Apocalypse Not Yet?

Debi White of Heart, Soul & Humor left a pointer in my comment section a couple of posts down. I've been thinking about this article for the past couple of days. Ultimately I think the falling dollar might be a greater danger for the United States than Iraq.

James K. Galbraith has many amazing ideas. I'm not sure I agree with all of them, but here's one we need to think about.

The big action, however, must come on the international side. My supply-side friends pine for the gold standard, and they make a serious point. The experiment of worldwide floating exchange rates, inaugurated by global monetarists in 1971, has failed disastrously. The world was better off when we had fixed exchange rates. Indeed, in the most successful arena of global trade and finance we have fixed exchange rates right now, thanks to the unappreciated but sensible dollar-pegging of the Chinese. Fixing exchange rates in Europe (through the extreme measure of creating a single currency) also proved a boon for the poorer countries of Europe, eliminating speculative currency risk. Even though, overall, European policy remains terrible, unemployment has dropped sharply in Spain and Greece since the euro came in.

Global fixed exchange rates would help developing countries, by sharply curtailing the destabilizing role of private currency markets. They would therefore also help us, by creating stronger and more stable markets for our exports. But there is no simple return to global fixed exchange rates. It would be a terrible mistake to create a system that imposed deflationary pressure on us and through us on the world as a whole—the problem of the classical gold standard. To get where we need to go, we must also recreate a global financial network oriented toward the support of development and growth. When we have that, growth policies around the world will help rather than hurt each other. At that point, we could profitably put real effort into reintroducing full employment economics to Europe and Japan.

A little shy on details, but you can't expect anyone to coherently describe a viable replacement for our current global economic system in a few sentences.

'we must also recreate a global financial network oriented toward the support of development and growth'.

That's the tough part. I can't help thinking it's only part of the problem too. As long as you only have engines to create growth, it seems the bubble economy will be recreated on a larger and larger scale. We need a way to regulate it as well, on a global level.

It's not Saddam I'm concerned for. It's just that we made such a big thing about giving him a trial when he was first captured. This article from the Scotsman is the first I've heard about him for a long time - although you sometimes hear about 'Saddam loyalists'. The only other mention I've seen so far is in the Washington Times from UPI, and they don't fully explain the last minute cancellation and the inference that Americans are behind it. I'm not sure you can take the latter to the bank, but if the Iraqi government is blaming all their unpopular decisions on Americans, that could be a problem too. Are we going to try him or not - with or without free and unfettered access to his lawyers? Either could create serious problems, given that he could become a focus for Sunni obstructionists.

Ziad al-Khasawneh said in an interview that the Iraqi Bar Association obtained court permission last week for defence team member Khalil al-Duleimi, an Iraqi, to meet with Saddam today.

“But the syndicate called the lawyer earlier today to say the meeting has been indefinitely postponed,” said al-Khasawneh, who heads the Jordan-based legal team appointed by Saddam’s wife Sajida.

“The abrupt cancellation indicates that there was a last-minute decision to ban the meeting,” he said. “That decision appears to have come from the top, neither from the court nor from the Iraqi government because both have no say in front of Iraq’s real ruler, the United States of America.”

The worst-case scenario is much less pretty: Foreign investors, losing confidence in the U.S. dollar's stability and increasingly doubtful that the American economy can absorb the current account imbalance, yank money out of U.S. government bonds, in favour of safer harbours.

This exodus sends the dollar off a cliff. Interest rates spike higher, reflecting plunging demand for U.S.-dollar debt and the rising risk perceived by investors.

Stock markets tumble, as investors flee U.S. stocks to avoid the currency losses tied to U.S.-dollar-denominated stock prices, as well as the rising interest rates that imply less competitive returns at current stock valuations and the drag on corporate profits from rising credit costs. Corporate and consumer spending slump under the weight of rising interest rates and import prices. The U.S. economy slows to a recession, dragging the rest of the world down with it. Policy makers stand by helplessly; if the Federal Reserve Board were to cut interest rates to stimulate the economy, it would only put more downward pressure on the dollar.

Far-fetched? Maybe. Martin Barnes, who described just such a chain of events in his independent research report The Bank Credit Analyst, acknowledges that the scenario — he called it his "ugly" case — is "overly gloomy." But it has happened before.

Many people have been talking seriously about major meltdowns in the system due to US debt, but of course many countries have a major stake in preventing them. Remember how many times various Cassandras said the tech bubble was going to burst - and it didn't - until nobody believed the warnings? Then it burst. Something major may happen as soon as everyone stops taking the periodic strident warnings seriously. It might well be more serious than the article above suggests. I keep meaning to write about it, but I don't know what to say, I don't know more than anybody else. It seems almost a game of chicken, with the United States trying to force other nations to allow the value of the dollar to fall by spending more and more of them, while other nations try to force us to accept a strong dollar and cut our spending to support it. It is a battle the United States cannot lose - which will start a war they cannot win. It is painless for Bush to spend and cut taxes, and buying dollars gets more and more expensive for everyone else. Supposedly the dollar will go down just enough to increase increase our exports and decrease our imports, but that seems less and less likely. The only reason all these nations spend money supporting the dollar is to export, and when they stop trying they may well stop.

I've been thinking about the oddities of this situation. All these countries have manufacturing capacity - and people who need things (especially China). Yet the world economy is structured so that they would rather trade goods for ledger deposits of dollars despite open concern about dollar denominated debt than give these goods to their own people. Of course, the redistributive economies that came before didn't work either, but there has got to be a way to do better than this.

What we need is to rethink the world economy from the ground up.