This is the guest post made by Andy Bebut from the Yellow Brick Road blog

For about two years I'm writing about Kondratieff wave. This theory must be familiar to any inquiring mind, essentially it boils down to the huge credit cycle that takes a generation to build and unwind.

My posts posts on the topic are organized in this table of content: Kondratieff wave.

While my previous postings were made in an attempt to abstract the theory to the extend it works equally well for any advanced economy it just doesn't work this way. The cycle is the most pronounced in few economies, like USA, Japan and soon to be China, while other countries are synchronizing in "sympathy" with the one of them.

My latest post, however, is made specifically on the US economy in an attempt to explain why the Kondratieff Autumn in US was so especially enjoyable and how it is related to the global trade.

There are many bubbles that inflated and popped all around the globe, but there is one bubble that rules them all, the dollar bubble.

 The world trade

How the world trade works, just in a simplest form? Suppose there is a big cargo ship moving from China to Brazil. It has maybe $2 bln of goods onboard. The resources to produce those goods were paid a while ago, the labor is paid, almost all of the other expenses are paid too. So far Brazil paid nothing. All the required capital was provided by the banking system and it’s probably over a billion. Some of this credit is nominated in yuan, some in dollars.

How Brazil will pay for those goods? They will be sold for reals, can Brazil pay in reals? I guess not. Brazil can pay in yuans or dollars or both. But it’s very unlikely that Brazil can pay in yuans - where it’s gonna get them? Brazil certainly can pay in dollars, because they sell plenty of coffee to Starbucks and got paid in dollars, even for those Starbucks that are located in China.

Would China prefer Brazil to pay in yuans? Yes. They are definitely unhappy that there is a third party involved, US economy, doing absolutely nothing except providing money. US is not even directly providing the capital, because at the micro level the capital is provided by Chinese banks. The US banking system is providing capital at macro level, with large multi-billion chunks. As the largest holder of dollar reserves out there China can essentially mediate the whole flow of the world trade but still use foreign currency to do that.

The call for dollars

The communism (centralized non-market economy) crashed in 1991 and that triggered the growth of the world trade at the unprecedented pace. If you recall, 1000 years ago 50% of the world economy was India and China, while Europe was ruled by barbarian warlords. Now they are simply taking that back. But as in 1950 50% of the world economy was United States it was only natural to extend the dollar into universal currency that is providing a fast and convenient way to nominate the global transactions.

Essentially the world was pulling $800 bln per year of new dollars just to run its normal trade operations. As any fiat currency is backed by debt essentially new dollars were printed by US by expanding its debt.

 

 

 

The rest of this post is here: The Master Bubble

Just to turn few pages forward I want to steer to the very unexpected conclusion: the US economy is slowly heading toward 10%+ savings rate and trade surplus.

However impossible it sounds to have a trade surplus, especially a day before the expected General Motors bankruptcy, it will happen. Sometimes the industry is pushing the finance, sometimes the world monetary system is pushing the industry. The US exporters will be forced to export, while US consumers will be forced to save. About inflation: we have deflation now but we'll have inflation when the time comes, all according with the Kondratieff wave.