Tuesday, June 24, 2008

The Foreign Policy Implications of Stupid Money Policy

Short post. I just wanted to raise one issue, the incredible magnitude of destructive potential of stupid money policy, this time in relation to foreign policy.

Inflationary policy in the US helps anyone who holds large baskets of commodities. It's why your house is normally considered an inflation hedge. So the owners of the world's largest inflation hedges are countries owning oil reserves. As I mentioned in my previous post, those owners in many cases are not friendly to the US, and/or are blatant dictatorships.

So I did a little back of the envelope calculation. Take the several oil producing nations who have ill or mixed intentions to the US (Venezuela, Russia, Saudi Arabia, Iran, Iraq). Now since inflationary effects take time to trickle through an economy, those people who sell the base commodities that drive the economic cost structure get to spend inflated dollars before prices have all inflated to match, essentially getting free money.

So I took the oil production capacity of these unfriendly countries, assumed that the delta from $70 to $130 /bbl oil is due to inflation, and assumed that time delay in price increases would give them essentiall one year's worth of free money. The result: we just gave our enemies something in the range of $400-600 BILLION in free money. That's roughly equivalent to the total esimated direct cost of the Iraq War.

Stunning... and monstrously self-defeating.


Burgess Laughlin said...

Is the fundamental problem stupidity (which is the, usually physical, inability to integrate facts), or is the problem nonobjective ideas, that is, ideas not formed logically from the facts of reality?

If the problem is stupidity, the simplest solution would be to merely replace people in powerful positions with individuals who have a higher intelligence--such as Kant and Keynes were in their day.

Kendall J said...

Burgess, you're right of course. Identifying the actual cause of the issue is an interesting and critical piece. I used stupidity more as a general state of not seeing reality for whatever the cause. Not that I expect omniscience, but I expect more of seemingly intelligent people.

Don't think that your question, as well as the related questions you've posed on separate posts are lost on me. They're all related in a sense aren't they. How do such things arise, and how do ideas really influence history.

I'm noodling I promise! It seems to be my central thorny issue these days and keeps popping up. From analyzing China, to monetary policy to teasing out the influence of secularism vs. christianity on the Enlightenment.

I don't have an answer just yet, at least not one I can call anything other than ethereal. Objectivists want to say that ideas drive the world and history, but are some philosophical ideas more important than others, and do some concepts bring a modicum of stability where others do but less so?

My initial thoughts are that, before we get to discussion of ethics or politics, solid epistemological method is paramount. Is this why Aristotle's logic had such influence on the modern world, even if his ethics was thin and his politics not so pretty? I think this is what is missing in the FED issue. These are smart guys but using lousy methodology. So ideas that destroy epitemology regardless of their backing ethics are especially evil. I think this is why Kant is so pernicious.

In politics, I am starting to favor the idea that property rights are far more impactful than say free speech. That just based upon my observation of the current economic crisis here, and the economic powerhouse that is developing in China.

All for now, but I thought I'd at least toss out some beginning ideas.