Why democracy is bad for the US

Have recently moved to London from India and have been reading a lot about the global asset bubble. The story about how the world moved away from gold in its currency structure and how the US dollar is the "new gold" of today. The way it works is that the dollar (and now increasingly the euro and to a small extent the yen) is the recognized currency of the world. Under this system, all countries in the great global bazaar need to produce and sell their wares to earn the dollars so that they can buy what they need. The classic protestant work ethic.

But what about a country which actually owns the global currency - the world's super investor - The US. To be able to buy stuff off the global bazaar, the US does not need to produce anything to attain its dollars. All that it has to do to buy anything it needs from the rest of the world is just print off more dollars.

Right - so the first conclusion is that the US has to produce nothing in return for goods it needs from the rest of the world.

But how does it go around ensuring that the rest of the world just sits back and watches this show. Two ways of doing that

1. By ensuring that the rest of the world needs its dollars
2. By ensuring that it continues to consume enough to be an attractive market for the rest of the world

Now if the US is to ensure that the rest of the world needs its dollars - what should it do - (it is the global currency of exchange, remember) - it must ensure that it is mandatory to price a very very essential product in dollars. Something which everybody needs must be priced in dollars to ensure that people continue to accept its currency. That something is oil.

By providing millitary and political assistance to the world's largest oil producers, the US ensures point 1.

On point 2 - by keeping its own consumption high, the US remains an attractive market for the world's producers (read China). To retain their market shares, the world's producers must continue to accept the dollars and keep printing more of their own currencies to keep them attractive.

So globally, as the US prints off more of its money, ensures pricing of oil in dollars and retains its share as a large, attractive global market it ensures that everybody else needs and accepts its dollars and the world too is forced to print more of its currencies to keep them attractive.

The result - a global growth in money supply. And the US system depends on this for its very survival. But this global growth is divisive - only those already in possession of assets will prosper. The average man on the street is not likely to participate in this.

A derivative of this - the global asset bubble. Now the big question - How long will this last ----

Theoretically, asset prices depend on two aspects -

1. Real inflation in assets governed by laws of supply and demand
2. Money supply
3. People's risk appetite

The latest asset bubble has seen such high numbers for so long because all three of these factors have grown.

On point 1 - more people have joined the world economy making the supply situation tighter. So its logical that asset prices have risen

On point 2 - as demonstrated money supply has grown

On point 3 - Global risk appetites have also grown. Which means people are willing to wager on stuff which they wouldnt have done in the past.

Now given these factors, the global asset bubble could continue indefinitely!! Technically an asset could have any value which consumers want to give to it as long as its acceptable to all. (People have bigger risk appetites now remember). Also this continued asset bubble could continue to absorb all the liquidity the world can throw at it ad infinitum.

Except there is one small hitch - somewhere down the line - perceived asset prices relate back to the real world - If properties and land is more and more expensive on account of the asset bubble - retail infrastructure is more costly - which means that retail prices should also be higher and rising. Which means that the average man on the street needs to pay a higher price for items of daily needs.

Now this average man on the street may not have the money to fund these rising prices. So he protests. In a democratic setup he boots out the government and elects people who oppose this system.

In a democratic system, therefore, people without the assets have a say as strong (or perhaps stronger) than those with assets. They have the power to destroy this system (on which the US depends for its survival today).

Thus a true democracy - has the potential to destroy this system - by corollary - is bad for the US.

What else is bad for this system then - go back to the first two points discussed -

1. Mandatory to price oil in dollars
2. Retain america's status as the world's largest and most attractive consumer market.

If any of these parameters change, the system collapses. (Iraq was attacked after it started pricing its oil in euros). The rise of China as the world's largest consumer market makes the US less important and so again threatens the system. Again a new fuel to power the world could threaten it as well.

So what can be expected from the US going forward

Political Actions

Ensure "NO PEACE" in the middle east and keep propping up non-democratic governments in the middle east - (Cannot afford to lose control over oil and the way it is priced)

Economic Actions

Lower interest rates going forward - (Cannot afford to lose most attractive market status)