Secretary John Kerry on Climate Change

October 9, 2014

(Excerpt of his complete remarks)
…the gathering storm that Sir Winston also warned about. And there is no element of that gathering storm more critical than climate change.

Together, both of our countries recognize that never before has a threat like climate change found in its solution such a level of opportunity – the opportunity to unleash the clean-energy economy that will get us out of this mess but also take us forward towards a safer, more sustainable future.

Now I know that climate change to some people can just seem like a very distant, future prospect, maybe even a future challenge. That’s dangerous, falling prey to that perception, because it’s not. And it would be very dangerous to lull ourselves into believing that you can wait with respect to any of the things that we need to do to meet this challenge.

Climate change is already impacting the world in very real and significant ways. This past August was the hottest August the planet has ever seen in recorded history. And each year of the last ten years, a decade, has been measured as being hotter than the last with one or two variations of which year followed which, but as a decade the hottest in our recorded history.

There are now – right now – serious food shortages taking place in places like Central America because regions are battling the worst droughts in decades, not 100-year events in terms of floods, in terms of fires, in terms of droughts – 500-year events, something unheard of in our measurement of weather.

Scientists now predict that with glaciers and melting of the ice at the current rates, the sea could rise now a full meter in this century. A meter might not seem like a whole lot, but let me tell you, think about it just in terms of Boston. It would mean about $100 billion worth of damage to buildings, to emergency costs, and so on.

And thinking about climate change as some distant challenge is dangerous for other reasons too. We still have in our hands a window of opportunity to be able to make the difference. We don’t have to face a future in which we’re unable to talk about anything except adaptation or mitigation, already present in our planning. But the window is closing quickly. That’s not a threat; that’s a fact. If all of us around the world do not move to push back against the current trend line of what is happening in climate change, we will literally lose any chance of staving off this threat.

The good news is that we actually know exactly how to do it. This is not a challenge which has no solution. This is not a challenge that’s out of our reach. The solution is staring us in the face. It’s very simple: clean energy. The solution to climate change is energy policy. And the best news of all is that investing in clean-energy economy doesn’t just mitigate the impacts of climate change and make our communities cleaner and healthier. It actually also reinvigorates our economies and creates millions of good jobs around the world.

Let me just share with you something. We in Massachusetts ought to be particularly tuned into this. In the 1990s, America created more wealth than at any other time in our history, more even than the famous 1920s and ’30s, when people read about the history of the Carnegies and the Mellons and the Rockefellers and the Fricks and so forth. We created greater wealth in the 1990s in America than we did when we had no income tax in the 1920s.

And the truth is that that came about as a $1 trillion market with 1 billion users – remember the one for one – in technology, in personal computers, in communications. And guess what? Every single quintile of income earner in America saw their incomes go up. Everybody did better. Well, the energy market that we are looking at today, in a nation that doesn’t even have a national grid, a nation that has an east coast grid, a west coast grid, a Texas grid, and a line that goes from Chicago out into the west towards Dakotas – that’s it. We have a huge, gaping hole in the middle of America. We can’t take energy from solar thermal in the Four Corners down there by New Mexico and Colorado and California and bring it to the northeast where we need it. We can’t take energy from those wind farms of Minnesota or Wisconsin or Iowa and sell it south, or our wind ultimately from Cape Wind because we don’t have a transmission system.

Guess what? $1 billion of investment in infrastructure is somewhere between 27,000 and 35,000 jobs. And if we were to do what we know we need to do to build the energy future of this country, we’ll put millions of people to work, and here’s the kicker: The market we’re looking at is a $6 trillion market with four to five billion users today, climbing to a potential 9 billion users by the year 2050. It is literally the mother of all markets. Governor Patrick understands that. Massachusetts has understood that. But we have not yet been able to translate that into our national policy.

So once again, I’m proud Massachusetts is setting the trend. Massachusetts is leading by example. And that’s why many in the United States and the UK who are leading by example. And as the governor said, we’re a little behind them in terms of some of the things we ought to be doing, behind Europe in some respects. But in the United States we’re now targeting emissions from transportation and power sources, which are 60 percent of dangerous greenhouse gases. And at the same time, we bumped our solar energy production on a national basis by ten times and we’ve upped our wind energy production on a national basis by more than threefold thanks in large part to facilities just like this one.

So because of the steps that we’re now taking, we’re in a position to put twice as many people to work in the energy sector, nearly double the amount of people currently employed by oil and gas industry. This is the future. It’s already a $10 billion chunk of the Massachusetts economy and growing; 90,000 – almost 100,000 – people employed here in Massachusetts; 6,000 companies statewide are defining this future. And the Massachusetts wind testing center that we’re in now helps ensure that the global wind power industry is deploying the most effective land-based offshore wind turbine technologies to be used around the world.

This is global, what’s happening here, and that’s why Philip Hammond and I wanted to come here today, to underscore not just to Massachusetts but to America and to the world what these possibilities are. And the fact is that there is a lab not unlike this, a Narec blade testing facility in the United Kingdom city of Blyth. So we share this vision in very real ways.

I’d just say to all of you here that people need to feel the pressure from you. You all know what politics is about. I’m not in it now, but I’m dependent on it to help make the right decisions so that we move in the right direction. A clean energy future is not a fantasy. Changing course and avoiding the worst impacts of climate change is not a fantasy. And supporting healthier communities and ecosystems and driving economic growth and job creation – none of that is a fantasy. And for those people who still stand in the way, for those people who even still today want to try to question whether or not their science is effective or not, I’d just ask you – ask a simple question: If we’re wrong about this future, what’s the worst that could happen to us for making these choices?

The worst that could happen to us is we create a whole lot of new jobs, we kick our economies into gear, we have healthier people, healthier children because we have cleaner air, we live up to our environmental responsibility, we become truly energy independent, and our security is stronger and greater and sustainable as a result. That’s the worst that happens to us.

What happens if they’re wrong? (Applause.) If they’re wrong – catastrophe. Life as you know it on Earth ends. Seven degrees increase Fahrenheit, and we can’t sustain crops, water, life under those circumstances.

So I know, with Philip Hammond and I and President Obama and Prime Minister Cameron and a whole bunch of leaders around the world know, we need to go to Lima, Peru this year and we need to push forward on an agreement, and next year in Paris we need to reach an agreement where we live up to our responsibility to future generations and make all the difference in the world.

John Kerry
Secretary of State
Wind Technology Testing Center
Boston, Massachusetts

Debt, Taxes, Banks, And Paper

Thomas Jefferson

…It is a wise rule and should be fundamental in a government disposed to cherish its credit, and at the same time to restrain the use of it within the limits of its faculties, “never to borrow a dollar without laying a tax in the same instant for paying the interest annually, and the principal within a given term; and to consider that tax as pledged to the creditors on the public faith.” On such a pledge as this, sacredly observed, a government may always command, on a reasonable interest, all the lendable money of their citizens, while the necessity of an equivalent tax is a salutary warning to them and their constituents against oppressions, bankruptcy, and its inevitable consequence, revolution. But the term of redemption must be moderate, and at any rate within the limits of their rightful powers. But what limits, it will be asked, does this prescribe to their powers? What is to hinder them from creating a perpetual debt? The laws of nature, I answer. The earth belongs to the living, not to the dead. The will and the power of man expire with his life, by nature’s law. Some societies give it an artificial continuance, for the encouragement of industry; some refuse it, as our aboriginal neighbors, whom we call barbarians. The generations of men may be considered as bodies or corporations. Each generation has the usufruct of the earth during the period of its continuance. When it ceases to exist, the usufruct passes on to the succeeding generation, free and unencumbered, and so on, successively, from one generation to another forever. We may consider each generation as a distinct nation, with a right, by the will of its majority, to bind themselves, but none to bind the succeeding generation, more than the inhabitants of another country…

Letter to John Wayles Eppes
Monticello, June 24, 1813

Might Makes Right

John Locke

It having been shown in the foregoing discourse,
1. That Adam had not, either by natural right of fatherhood, or by positive donation from God, any such authority over his children, or dominion over the world, as is pretended:
2. That if he had, his heirs, yet, had no right to it:
3. That if his heirs had, there being no law of nature nor positive law of God that determines which is the right heir in all cases that may arise, the right of succession, and consequently of bearing rule, could not have been certainly determined:
4. That if even that had been determined, yet the knowledge of which is the eldest line of Adam’s posterity, being so long since utterly lost, that in the races of mankind and families of the world, there remains not to one above another, the least pretense to be the eldest house, and to have the right of inheritance:
All these premises having, as I think, been clearly made out, it is impossible that the rulers now on earth should make any benefit, or derive any the least shadow of authority from that, which is held to be the fountain of all power, Adam’s private dominion and paternal jurisdiction; so that he will not give just occasion to think that all government in the world is the product only of force and violence, and that men live together by no other rules but that of beasts, where the strongest carries it, and so lay a foundation for perpetual disorder and mischief, tumult, sedition and rebellion, (things that the followers of that hypothesis so loudly cry out against) must of necessity find out another rise of government, another original of political power, and another way of designing and knowing the persons that have it, than what Sir Robert Filmer hath taught us.

TWO TREATISES OF GOVERNMENT – 1690 Edition
Book II, Chap. I. Sect. 1.

Attack on Paper Money Laws

Paper money, paper money, and paper money! Is now, in several of the states, both the bubble and the iniquity of the day. That there are some bad people concerned in schemes of this kind cannot be doubted, but the far greater part are misled. People are so bewildered upon the subject that they put and mistake one thing for another. They say paper money has improved the country – paper money carried on the war, and paper money did a great man other fine things.

Not one syllable of this is truth; it is all error from beginning to end. It was CREDIT which did these things, and that credit has failed, by non-performance, and by the country being involved in debt and the levity and instability of government measures.

We have so far mistaken the matter that we have even mistaken the name. The name is not paper money, but Bills of Credit: But it seems as if we are ashamed to use the name, knowing how much we have abused the thing. All emissions of paper for government purposes is not making any money, but making use of credit to run into debt by. It is anticipating or forestalling the revenue of future years, and throwing the burden of redemption on future assemblies. It is like a man mortgaging his estate and leaving his successors to pay it off. But this is not the worst of it, it leaves us at last in the lurch by banishing the hard money, diminishing the value of the revenue, and filling up its place with paper, that may be like something today and tomorrow nothing.

So far as regards Pennsylvania, she cannot emit bills of credit, because the assembly which makes such an emission cannot bind future assemblies either to redeem them or receive them in taxes. The precedent of revoking the charter of the bank, established by a former assembly, is a precedent for any assembly to undo what another has done. It circumscribes the power of any assembly to the year in which it sits; that is, it cannot engage for the performance of anything beyond that time. And as an assembly cannot issue bills of credit and redeem them within the year, and as it cannot by that precedent bind a future assembly so to do, it therefore cannot with the necessary security do it at all; because people will not put confidence in the paper promises or paper emissions of those who can neither perform the engagement within the time their own power exist nor compel the performance after that time is past. The politicians of the project for revoking the bank charter (and it was besides most wantonly done), to use a trite saying, aimed at the pigeon and shot the crew – they fired at the bank and hit their own paper.

As to making those bills what is called legal tenders, we have no such thing in this state, which is one reason they have not depreciated more: But as it is a matter which engrosses the attention of some other states, I shall offer a few remarks on it.

The abuse of any power always operates to call the right of that power in question. To judge of the right or power of any assembly in America to make those bills a legal tender, we must have recourse to the principles on which civil government is founded; for if such an act is not compatible with those principles, the assembly which assumes such a power, assumes a power unknown in civil government, and commits treason against its principles.

The fundamental principles of civil government are security of our rights and persons as freeman, and security of property. A tender law, therefore, cannot stand on the principles of civil government, because it operates to take away a man’s share of civil and natural freedom, and to render property insecure.

If a man had a hundred silver dollars in his possession, as his own property, it would be a strange law that should oblige him to deliver them up to anyone who could discover that he possessed them, and take a hundred paper dollars in exchange. Now the case, in effect, is exactly the same; if he has lent a hundred hard dollars to his friend, and is compelled to take a hundred paper ones for them. The exchange is against his consent, and to his injury, and principles of civil government provides for the protection, and not for the violation of his rights and property. The state, therefore, that is under the operation of such an act, is not in a state of civil government, and consequently the people cannot be bound to obey a law which abets and encourages treason against the first principles on which civil government is founded.

The principles of civil government extend in their operation to compel the exact performance of engagements entered into between man and man. The only kind of legal tenders that can exist in a country under a civil government is the particular thing expressed and specified in those engagements or contracts. That particular thing constitutes the legal tender. If a man engages to sell and deliver a quantity of wheat, he is not to deliver rye, any more that he who contracts to pay in hard money is at liberty to pay in paper or in anything else. Those contracts or bargains have expressed the legal tender on both sides, and no assumed or presumptuous authority of any assembly can dissolve or alter them.

Another branch of this principle of civil government is, that it disowns the practice of retrospective laws. An assembly or legislature cannot punish a man by any new law made after the crime is committed; he can only be punished by the law which existed at the time he committed the crime. This principle of civil government extends to property as well as to life; for a law made after the time that any bargain or contract was entered into between individuals can no more become the law for deciding that contract, than, in the other case, it can become the law for punishing the crime; both of those cases must be referred to the laws existing at the time the crime was done or the bargain made. Each party then knew the relative situation they stood in with each other, and on that law and on that knowledge they acted, and by no other can they be adjudged – Therefore all tender laws which apply to the alteration of past contracts, by making them dischargeable on either side, different to what was the law at the time they were made, is of the same nature as that law which inflicts a punishment: For in all cases of civil government the law must be before the fact.

But was there no illegality in tender laws, they are naturally defective on another consideration. They cannot bind all and every interest in the state, because they cannot bind the state itself. They are, therefore, compulsive where they ought to be free; that is, between man and man, and are naturally free where, if at all, they ought to be compulsive: for in all cases where the state reserves to itself the right of freeing itself, it cannot bind the individual, because the right of the one stands on as good ground as that of the other.

Thomas Paine
Philadelphia, Nov. 3, 1786

Southern Oceans Warmer Than First Thought

The world is warming faster than we thought

October 2014
by Michael Slezak
New Scientist

It’s worse than we thought. Scientists may have hugely underestimated the extent of global warming because temperature readings from southern hemisphere seas were inaccurate.

Comparisons of direct measurements with satellite data and climate models suggest that the oceans of the southern hemisphere have been sucking up more than twice as much of the heat trapped by our excess greenhouse gases than previously calculated. This means we may have underestimated the extent to which our world has been warming.

Link to the complete, original article

Universal Value Standard For All Currencies

Little did President Richard Nixon know, as he announced on television that fateful Friday, August 13th, 1971 the unilateral cancellation of the direct convertibility of the United States dollar to gold, that within just two generations his own words would epitomize the root cause of the American economy’s predicament:

“But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.”

Caught in the unrelenting vise of federal overspending, stagflation, and strong Japanese competition, “opening” China, half of a two-pronged solution, seemed logical: (a) (among other reasons) absorb the world’s largest pool of cheap labor and potential future consumers into a captive market for American-owned industry, and (b) enshrine the dollar as the de facto global reserve currency by securing Saudi Arabia’s agreement to price oil exclusively in dollars in return for American protection of the regime.

But things did not quite work out as anticipated. Whether by design or coincidence, the advent of a global economy centered on Chinese manufacturing dissolved the glue that had held the admittedly antagonistic but certainly reliable symbiotic relationship between American big business and organized labor, the former mainstay of American prosperity. Simultaneously, aided by massive western investment, China’s Peaceful Rise turned the tables and transformed the U.S. into a captive market for Chinese-made products.

Slowly, inevitably, well paying man-jobs in the U.S. were replaced with low-paying jobs with fewer and costlier benefits and nonexistent job security in the retail and service sectors.

Labor Participation - Men 2014

The result: a plunging male labor participation rate;

Student Debt

a runaway increase in student debt;

a steep decline in the number of first-time home-buyers and the rate of household formation (almost inversely proportional to student debt),

and a complete lack of new construction of entry-level homes for the working and middle classes. Banks cannot be blamed for their reluctance to lend to these prospective borrowers. Their income is too low relative to the median price of real estate, and job security is virtually non-existent. And why should builders risk building homes for people who cannot afford to buy? Better to buy Treasuries.

The situation is unsustainable and much worse than in 1971. Our infrastructure is crumbling –water pipes, roads, bridges, declining water resources.

America’s Trade Deficit With China 1985-2013

Trade With China 1985-2013

Our chronic runaway trade deficit with China, a consequence of disinvestment in America, continues to add exponentially to the already enormous gap in the distribution of wealth;

GDP vs Nat Debt

and the accumulated federal deficit, currently at $17 trillion, is still growing, albeit at a reduced rate.

Nixon’s solution is unavailable as there are no more untapped markets to absorb, and perpetual economic growth in a finite planet is unrealistic and unsustainable. As for oil, at once a finite asset and a major contributing factor to climate change that does nothing to solve the growing global water crisis and the yawning gap in the distribution of wealth, it can no longer be counted on to perpetuate the dollar’s hegemony.

The dollar’s current strength relative to the euro and the pound is due largely to European internal problems.

However its value relative to the yuan/renmibi is another matter, a reflection of two things: (a) other countries can use the Yuan to buy anything made in China, which is almost everything, and (b) China’s dwindling need or appetite for dollars.

Incidentally, China does not benefit from a decline in America’s purchasing power –its best client. The dollar’s situation is a direct consequence of the actions or inaction, as the case may be, of our elected officials. It means they can fix it.

The U.S., and indeed the world cannot depend on oil for economic/financial reasons and simultaneously repudiate it to combat climate change. Therefore, the dollar’s incipient transition is also a perfect opportunity to usher in, gradually and imperceptibly, a new world order designed to address the needs of the vast majority of people, not just a tiny minority. Given today’s weapons, there’s no real alternative.

Today’s population is 7 billion, projected to increase to 9 billion by 2050. Unless one believes that most will meekly accept a life of abject poverty, each and every one will require some wealth. Here’s the problem. Since time immemorial mankind has used finite materials such as gold, silver, and more recently, otherwise worthless paper as fiat money. One of the reasons for Nixon’s Shock was that there is not enough gold to support the global economy. Accordingly, what’s needed is a sufficiently abundant, recyclable value standard that, over time, with effort and adequate investment will yield enough income to support everyone, promote trade, back all currencies, and end the production of greenhouse gases.

The obvious answer is that hydrogen and solar-generated electricity (specifically earmarked for the production of hydrogen in landlocked countries), or both should be primary criteria to acquire special drawing rights. The world is literally awash with hydrogen. However one does not just go to the beach to fill a container with seawater and expect it to materialize. It requires a profitable, viable scheme, technology, currently in its infancy, and time. But it has advantages that no other element or compound can match.

It’s fully recyclable. We’ll never run out of it.

Its byproduct is pure water, the obvious solution to the global water crisis and the only way to manufacture water to irrigate deserts, expand the production of food, and plant trees to help recycle the excess carbon dioxide already in the atmosphere.

It’s nature’s battery; its potency does not decline when stored.

There’s enough of it to replace nuclear and fossil fuels to generate all the electricity we’ll require for the foreseeable future.

Production can be quantified and tracked. No nation would be able to claim higher than actual production figures and use them to boost or diminish the value of its currency.

It’s an equalizer of wealth. Smaller nations would be able to produce as much as they can to help meet the needs of more populous countries. They would be able to trade on equal terms for the benefit of all.

The time to give this thoughtful consideration and begin discussions is now, while it’s still possible to do so imperceptibly and seamlessly; that is, assuming we really want to avoid unnecessary wars, hot or cold, and make headway with climate change for the benefit of future generations.

New Solar Tracking System Improves Production by 22 to 28%

Mass Megawatts recently announced the company’s entry into the $12 billion, US solar power market with the development of a new solar tracking technology that significantly increases the level of energy produced by solar power systems. This innovative design, combined with substantial government incentives, has created an unprecedented opportunity for residential and commercial electric users.

The patent pending, Mass Megawatts ‘Solar Tracking System’ (STS) is a complete solar power system that’s designed to continually adjust the position of solar panels to receive the optimal level of direct sunlight throughout the day. Unlike other solar tracking technologies, the Mass Megawatts STS utilizes a low-cost structure that adds stability to the overall system while improving solar energy production by 22 to 28%.

In addition, substantial federal, state, and local incentives are available that can significantly reduce the total cost of a solar power investment. With these favorable government incentives, a large percentage of capital costs can be recouped in the first year of service, and can exceed 50% of total investment expenditures. Combined with the ongoing energy savings and revenue from the STS, an excellent return on investment can be realized with payback projected to occur within the third year for many customers.

Starting at 5 kW rated units, a Mass Megawatts STS system is appropriate for home and small business locations, and can be scaled to meet capacity requirements at commercial installations. Mass Megawatts coordinates all aspects of system delivery, including permitting, installation, and working to obtain any available tax incentives. They monitor the performance of each system, and provide a full, performance guarantee.

Original article

Trade Deficit With China

U.S.-China Trade Facts

U.S. goods and private services trade with China totaled $579 billion in 2012 (latest data available). Exports totaled $141 billion; Imports totaled $439 billion. The U.S. goods and services trade deficit with China was $298 billion in 2012.

China is currently our 2nd largest goods trading partner with $562 billion in total (two ways) goods trade during 2013. Goods exports totaled $122 billion; Goods imports totaled $440 billion. The U.S. goods trade deficit with China was $318 billion in 2013.

Trade in private services with China (exports and imports) totaled $43 billion in 2012 (latest data available). Services exports were $30 billion; Services imports were $13 billion. The U.S. services trade surplus with China was $17 billion in 2012.

Exports
China was the United States’ 3rd largest goods export market in 2013.

U.S. goods exports to China in 2013 were $122.1 billion, up 10.4% ($11.5 billion) from 2012, and up 330% from 2003. It is up 536% since 2001 (when China entered the WTO). U.S. exports to China accounted for 7.7% of overall U.S. exports in 2013.

The top export categories (2-digit HS) in 2013 were: Miscellaneous Grain, Seed, Fruit (soybeans) ($13.8 billion), Aircraft ($12.6 billion), Machinery ($12.2 billion), Electrical Machinery ($11.4 billion), and Vehicles ($10.3 billion).

U.S. exports of agricultural products to China totaled $25.9 billion in 2013, the largest U.S. Ag export market. Leading categories include: soybeans ($13.4 billion), cotton ($2.2 billion), hides and skins ($1.7 billion), and distillers grains ($1.4 billion).

U.S. exports of private commercial services* (i.e., excluding military and government) to China were $30.0 billion in 2012 (latest data available), 10.9% ($3.0 billion) more than 2011 and 418% greater than 2002. It is up 455% since 2001. Other private services (education and business, professional and technical services), travel, and the royalties and license fees (industrial processes, trademarks) categories accounted for most of U.S. services exports to China.

Imports
China was the United States’ largest supplier of goods imports in 2013.

U.S. goods imports from China totaled $440.4 billion in 2013, a 3.5 % increase ($14.9 billion) from 2012, and up 189% since 2003. It is up 331% since 2001. U.S. imports from China accounted for 19.4% of overall U.S. imports in 2013.

The five largest import categories in 2013 were: Electrical Machinery ($117.5 billion), Machinery ($100.4 billion), Furniture and Bedding ($24.1 billion), Toys and Sports Equipment ($21.7 billion), and Footwear ($17.0 billion).

U.S. imports of agricultural products from China totaled $4.4 billion in 2013, the 3rd largest supplier of Ag imports. Leading categories include: processed fruit and vegetables ($973 million), fruit and vegetable juices ($542 million), fresh vegetables ($214 million), and snack foods (including chocolate) ($195 million).

U.S. imports of private commercial services* (i.e., excluding military and government) were $13.0 billion in 2012 (latest data available), up 12.3% ($1.4 billion) from 2011 and up 222% from 2002. It is up 268% since 2001. The other private services (business, professional and technical services), the other transportation (freight services), and travel categories accounted for most of U.S. services imports from China.

Trade Balance
The U.S. goods trade deficit with China was $318.4 billion in 2013, an 1.1% increase ($3.3 billion) over 2012. The U.S. goods trade deficit with China accounted for 46.3% of the overall U.S. goods trade deficit in 2013.

The United States has a services trade surplus of $17.0 billion with China in 2012 (latest data available), up 9.9% from 2011.

Investment
U.S. foreign direct investment (FDI) in China (stock) was $51.4 billion in 2012 (latest data available), a 7.1% decrease from 2011.

U.S. direct investment in China is led by the manufacturing, wholesale trade, banking and finance/insurance sectors.

China FDI in the United States (stock) was $5.2 billion in 2012 (latest data available), up 38.2% from 2011.

China direct investment in the U.S. is led by the banking and wholesale trade sectors.

Sales of services in China by majority U.S.-owned affiliates were $35.2 billion in 2011 (latest data available), while sales of services in the United States by majority China-owned firms were $1.4 billion.

*Note: Refers to private services trade not including U.S. military sales, direct defense expenditures, and other miscellaneous U.S. government services.

4/4/2014

Source: Office of the United States Trade Representative

The Nixon Shock

The Nixon Shock was a series of economic measures undertaken by United States President Richard Nixon in 1971, the most significant of which was the unilateral cancellation of the direct convertibility of the United States dollar to gold.

While Nixon’s actions did not formally abolish the existing Bretton Woods system of international financial exchange, the suspension of one of its key components effectively rendered the Bretton Woods system inoperable. While Nixon publicly stated his intention to resume direct convertibility of the dollar after reforms to the Bretton Woods system had been implemented, all attempts at reform proved unsuccessful. By 1973, the Bretton Woods system was replaced de facto by a regime based on freely floating fiat currencies that remains in place to the present day.

Background
In 1944 in Bretton Woods, New Hampshire, representatives from forty-four nations met in order to develop a new international monetary system that would later come to be known as the Bretton Woods system. Conference members had hoped that this new system would “ensure exchange rate stability, prevent competitive devaluations, and promote economic growth.” It was not until 1958 that the Bretton Woods System became fully operational. Countries now settled their international accounts in dollars that could be converted to gold at a fixed exchange rate of thirty five dollars per ounce, which was redeemable by the U.S. government. Thus, the United States was committed to backing every dollar overseas with gold. Other currencies were fixed to the dollar, and the dollar was pegged to gold.

For the first years after World War II, the Bretton Woods system worked well. With the Marshall Plan Japan and Europe were rebuilding from the war, and foreigners wanted dollars to spend on American goods – cars, steel, machinery, etc. Because the U.S. owned over half the world’s official gold reserves – 574 million ounces at the end of World War II – the system appeared secure.

However, from 1950 to 1969, as Germany and Japan recovered, the US share of the world’s economic output dropped significantly, from 35 percent to 27 percent. Furthermore, a negative balance of payments, growing public debt incurred by the Vietnam War and Great Society programs, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s.

By 1966, foreign central banks held $14 billion, while the United States had only $13.2 billion in gold reserve. Of those reserves, only $3.2 billion was able to cover foreign holdings as the rest was covering domestic holdings.

By 1971, the money supply had increased by 10%. In May 1971, West Germany was the first to leave the Bretton Woods system, unwilling to revalue the Deutsche Mark. In the following three months, this move strengthened its economy. Simultaneously, the dollar dropped 7.5% against the Deutsche Mark. Other nations began to demand redemption of their dollars for gold. Switzerland redeemed $50 million in July. France acquired $191 million in gold. On August 5, 1971, the United States Congress released a report recommending devaluation of the dollar, in an effort to protect the dollar against “foreign price-gougers”. On August 9, 1971, as the dollar dropped in value against European currencies, Switzerland left the Bretton Woods system. The pressure began to intensify on the United States to leave Bretton Woods.

The Event

At the time, the U.S. also had unemployment and inflation rates of 6.1% (Aug 1971) and 5.84% (1971), respectively.

To combat these issues, President Nixon consulted Federal Reserve chairman Arthur Burns, incoming Treasury Secretary John Connally, and then Undersecretary for International Monetary Affairs and future Fed Chairman Paul Volcker.

On the afternoon of Friday, August 13, 1971, these officials along with 12 other high-ranking White House and Treasury advisors met secretly with Nixon at Camp David. There was great debate about what Nixon should do, but ultimately Nixon, relying heavily on the advice of the self-confident Connally, decided to break up Bretton Woods by suspending the convertibility of the dollar into gold; freezing wages and prices for 90 days to combat potential inflationary effects; and impose an import surcharge of 10 percent. To prevent a run on the dollar, stabilize the US economy, and decrease US unemployment and inflation rates, on August 15, 1971:

1. Nixon directed Treasury Secretary Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold.
2. Nixon issued Executive Order 11615 (pursuant to the Economic Stabilization Act of 1970), imposing a 90-day freeze on wages and prices in order to counter inflation. This was the first time the U.S. government enacted wage and price controls outside of wartime.
3. An import surcharge of 10 percent was set to ensure that American products would not be at a disadvantage because of the expected fluctuation in exchange rates.

Speaking on television on August 15, the Sunday before the markets opened, Nixon said the following:

“The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world.
In the past 7 years, there has been an average of one international monetary crisis every year…
I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States. Now, what is this action — which is very technical — what does it mean for you? Let me lay to rest the bugaboo of what is called devaluation. If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to stabilize the dollar.”

The American public felt the government was rescuing them from price gougers and from a foreign-caused exchange crisis. Politically, Nixon’s actions were a massive success. The Dow rose 33 points the next day, its biggest daily gain ever at that point, and the New York Times editorial read, “We unhesitatingly applaud the boldness with which the President has moved.”

By December 1971, the import surcharge was dropped as part of a general revaluation of the Group of Ten (G-10) currencies, which under the Smithsonian Agreement were thereafter allowed 2.25% devaluations from the agreed exchange rate. In March 1973, the fixed exchange rate system became a floating exchange rate system. The currency exchange rates no longer were governments’ principal means of administering monetary policy.

Later Ramifications
The Nixon Shock has been widely considered to be a political success, but an economic mixed bag in bringing on the stagflation of the 1970s and leading to the instability of floating currencies. The dollar plunged by a third during the ’70s, and in 1997 several Asian and Latin countries faced currency crises. According to the World Trade Review’s “The Nixon shock after forty years: the import surcharge revisited”, Douglas Irwin reports that for several months, U.S officials could not get other countries to agree to a formal revaluation of their currencies. German mark appreciated significantly after it allowed the mark to float in May 1971. Also, the Nixon Shock unleashed enormous speculation against the dollar. It forced Japan’s central bank to intervene massively in the foreign exchange market to prevent the yen from increasing in value. Within two days August 16–17, 1971, Japan’s central bank had to buy $1.3 billion to support the dollar and keep the yen at the old rate of 360 Yen. Japan’s foreign exchange reserves rapidly increased: $2.7 billion (30%) a week later and $4 billion the following week. Still, this large-scale intervention by Japan’s central bank could not prevent the depreciation of US dollar against the yen. France also was willing to allow the dollar to depreciate against the franc, but not allow the franc to appreciate against gold (Page 14 Douglas). Even much later, in 2011, Paul Volcker expressed regret over the abandonment of Bretton Woods: “Nobody’s in charge,” Volcker said. “The Europeans couldn’t live with the uncertainty and made their own currency and now that’s in trouble.”

In 1996, liberal economist Paul Krugman (Nobel Prize in Economic Sciences, 2008) summarized the post-Nixon Shock era as follows:

“The current world monetary system assigns no special role to gold; indeed, the Federal Reserve is not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate. There are powerful advantages to such an unconstrained system. Above all, the Fed is free to respond to actual or threatened recessions by pumping in money. To take only one example, that flexibility is the reason the stock market crash of 1987—which started out every bit as frightening as that of 1929—did not cause a slump in the real economy.”

While a freely floating national money has advantages, however, it also has risks. For one thing, it can create uncertainties for international traders and investors. Over the past five years, the dollar has been worth as much as 120 yen and as little as 80. The costs of this volatility are hard to measure (partly because sophisticated financial markets allow businesses to hedge much of that risk), but they must be significant. Furthermore, a system that leaves monetary managers free to do good also leaves them free to be irresponsible—and, in some countries, they have been quick to take the opportunity.

Debate over the Nixon Shock has persisted to the present day, with economists and politicians across the political spectrum trying to make sense of the Nixon Shock and its impact on monetary policy in the light of the financial crisis of 2007–08. Conservative columnist David Frum sums up the situation this way:

“The modern currency float has its problems. There is no magical monetary cure, monetary policy is a policy area almost uniquely crowded with trade-offs and lesser evils.
If you want a classical gold standard, you get chronic deflation punctuated by depressions, as the U.S. did between 1873 and 1934.
If you want a regime of managed currencies tethered to gold, you get regulations and controls, as the U.S. got from 1934 through 1971.
If you let the currency float, you get chronic inflation punctuated by bubbles, the American lot since 1971.
System 1 is incompatible with democracy, because voters won’t accept the pain inherent in a gold standard.
System 2 is incompatible with the free market economics I favor.
That leaves me with System 3 as the worst option except for all the others.”

From Wikipedia

The Petrodollar

Petrodollar refers to United States dollars earned through the sale of its petroleum (oil) to another country.

Origin

In 1971 Richard Nixon was forced to close the gold window taking the U.S. off the gold standard and setting into motion a massive devaluation of the U.S. dollar. In an effort to prop up the value of the dollar Nixon negotiated a deal with Saudi Arabia that in exchange for arms and protection they would denominate all future oil sales in U.S. dollars. Subsequently, the other OPEC countries agreed to similar deals thus ensuring a global demand for U.S. dollars and allowing the U.S. to export some of its inflation. Since these dollars did not circulate within the country they were not part of the normal money supply, economists felt another term was necessary to describe the dollars received by petroleum exporting countries (OPEC) in exchange for oil, so the term petrodollar was coined by Georgetown University economics professor, Ibrahim Oweiss.

Because the United States was the largest producer and consumer of oil in the world, the world oil market had been priced in United States dollars since the end of World War II. International oil prices were based on discounts or premiums relative to that for oil in the Gulf of Mexico.[4] But, although oil sales prior to 1973 were denominated in U.S. dollars nothing precluded settlement in local currency.

In October 1973, OPEC declared an oil embargo in response to the United States’ and Western Europe’s support of Israel in the Yom Kippur War and this tension (and new power of OPEC) led to fear that the dollar would become insignificant in the oil trade.