The Ricardian theory of free trade has dominated economics philosophy for good reason. It has a sound basis in common sense and offers a theoretical guide to understand the nature of exchange from a systemic standpoint. It does not, however, cover all such basis for all such manner of trade. Comparative advantage is somewhat straightforward where nations exchange goods, but what happens when the advantage is not goods but finance?
This question applies especially to the world under the eurodollar standard because credit-based currency follows far different rules of the game. Until 2007, that didn’t seem to matter because ‘dollars’ flowed freely and made the world look as if it had found enduring prosperity through free trade. This other side of the eurodollar divide, however, increasingly reveals that goods for ‘dollars’ trade was never free, nor did it benefit anyone outside of the money sector (so long as eurodollar banks would be made whole by TBTF).
These longer-term shifts are much harder to appreciate when everything is supposed to be condensed into at most a single business cycle. China is a perfect example of that not just from the perspective of the prosperity illusion, but in how their own redistributive connection to the ‘dollar short’ transforms others. For its own part, its economic ‘miracle’ only continues to unwind as the growth of the 2000′s comes apart and leaves the country with only debt, not created wealth. Because of this internal/external imbalance of the credit-based eurodollar (and the PBOC’s first policies to get out of the Great Recession), the Chinese have plied the rest of the world in search of them – or better.
This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ May 25, 2016.
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