Liquidity and being Superpower: Money! Money! Money!

The Rise of the United States as a Superpower

Being a Superpower means, first of all, enjoying immense liquidity, and this liquidity must be almost "unlimited".

The rise of the United States as a Superpower established an important milestone in world finance, as this concept of North American market liquidity established an almost "unlimited" capacity to generate resources towards its financial system and, therefore, in the ability of its economy to move continuous flows of monetary resources capable of constantly driving up its growth.

All the countries that were once Superpowers had in their glorious past this ability to obtain, in one way or another, immense liquidity, from the British and Spanish Empires to the European countries that pioneered the industrialization of the 19th century such as Germany. However, the difference between these old Empires and the "new" "American" Empire lies in these mechanisms installed at the center of the U.S. economy that is capable of generating liquidity, as observed above.

If the old Empires based their liquidity capacity on colonial exploitations such as gold for the Iberian Peninsula, and the agricultural colonies and cheap raw materials for the industrialization of the British and German Empires, the case of the new American Empire is different.

The apparent illiquidity of the U.S. economy, demonstrated by its huge deficits and the size of its debts, elusively hides another face, paradoxically, of immense liquidity. So, the ability to generate debt, generates liquidity for the Americans! How is this possible?

Debt is liquidity! This is the genius behind the economic machine that drives this new American Empire as never before seen in the economic history of the rise of the superpowers.

Is Debt Liquidity?

Debt is liquidity "only" for the conditions of the rise of the American Empire. It doesn't apply to anyone else. Don't even think about trying!

To understand this question, it is important to understand how, in the end, the United States emerged as a Superpower, already with this immense capacity to have liquidity in relation to the world as a whole, and how this "process" continued and has been developing to this day.

Two world wars beginning in 1914 exhausted the liquidity capacity of the former British and German Empires, and to a much lesser extent France. By the end of 1945, the world, and especially Europe, was devastated, and the American economy was booming. The crisis of 1929 had exhausted itself, coinciding with the end of World War II, and the American industrial park was rapidly demobilizing to serve the growing postwar American economy.

However, the Americans worried that the demobilization capacity of that impressive war industry of that impressive war effort would end up generating an equally impressive spare capacity in their industrial park. The U.S. market was not sufficient to absorb this immense demobilization of the war industry into a civilian consumer industry within the United States only.

Do what? Europe was devastated and its capacity to consume was none. The world as a whole even less so. So what?

The New Midas: The Magic of Converting Debt to Liquidity

By the end of 1945, the U.S. economy desperately needed to sell in order to be able to convert war surpluses into consumption surpluses, and thereby increase its industrial capacity from tanks, ammunition, planes, and warships to automobiles, housing construction, interoceanic and land travel. The challenge was immense.

What became known as the "Marshall Plan" was the answer. Europe would be rebuilt, almost from scratch, to become an economy of scale comparable to that of the United States itself. Then, U.S. dollars would enter the European continent to generate exportable surpluses for the consumption of the United States itself, which would pay, of course, in U.S. dollars. Surreptitious? Ponse scheme? Not so much!

Obviously, the external accounts of both the United States and Europe as a whole would not add-up in this way. It was necessary to wipe these U.S. dollars into the hands of the Europeans so that they would not compete with the monetary policies of the U.S. government, and bring them back to the United States without generating inflation, but rather liquidity. The solution was to exchange these European exportable dollars for U.S. Federal Bonds.

The magic was this: European exportable were leaving for America; dollars came in and were exchanged for U.S. Federal Bonds; and returned dollars to the U.S. financial market. Europeans increased their production, and printed local currencies, which generated liquidity for their economies torn apart by two World Wars.

In this way, the U.S. government printed dollars that generated production and liquidity in devastated Europe, while generating consumption in the United States. In order to prevent this scheme from generating inflation, the surplus was stored in the form of debt, which the U.S. government used to collect surplus dollars generated by the rebuilding European economy.

The Bretton Woods agreements that created the World Bank to rebuild infrastructure, and the International Monetary Fund to manage the borrowing capacity generated by this scheme, also defined a pattern of exchanging dollars for gold, which was ultimately fictitious, since no one was interested in exchanging dollars for gold.  but dollars per production and thus rebuild the economy not only in Europe, but throughout the world. Bretton Woods expanded the Marshall Plan schemes from Europe to the whole world. 

Beginning in 1971, the needs of continued growth of the U.S. economy that must be guaranteed by this fixed pattern of exchange of dollar per gold was eliminated. In this way, the current monetary system was formed, in which countries exchange exportable for Federal Bonds, print local currency, and return the dollars back to the American financial system.

The Liquidity Capacity of the United States

A country's liquidity capacity, what makes it a superpower, is its ability to interfere in the internal affairs of other countries, and to wage wars without affecting or requiring economic containment measures within the United States. Thus, the U.S. government can wage wars for long periods of time without it hurting its economy. This measures the liquidity capacity of a superpower.

On the other hand, in order for this role of the American Superpower to be fulfilled, there must be only one currency on the world market, that is, the US dollar. All the others are just "currency boards". That is, currencies backed by "Federal Bond" through international trade, and convertible only into dollars. The same scheme used by the Argentines in the times of "Convertibility". Even the Euro, it's a kind of currency board," since European countries don't accumulate liquidity through that currency, or any currency at all.

In this way, by this current international financial scheme, no country is able to accumulate liquidity through its currencies, all of them are in some way "currency boards" of the dollar, which causes countries to accumulate Federal Bonds, which are promises to pay debts with restricted liquidity, or even none, depending on the goodwill of the American Government and subject to the management of its monetary policies.

The demobilization of these U.S. Federal Bonds into liquidity (dollars) can only be carried out according to the convenience of the monetary policies of the United States, otherwise, the accumulation of reserves in dollars by countries, or even in euros, that had liquidity capacity equal to that of the United States, would compete with this same capacity of American Central Bank, for example,  the European Central Bank would be responsible for setting its own monetary policies, issuing and draining dollars and euro at the same time for the same local monetary system, regardless FED’s  monetary policies. That would be confusing.

There is only one currency in the world today capable of generating liquidity, and that is the dollar! There is only one country in the world capable of freely accumulating liquidity (dollars), and that is the United States! All countries in the world today depend on the monetary policies of the Federal Reserve to convert Federal Bonds (debts) into dollars (liquidity).

This financial scheme capable of generating almost unlimited liquidity for the United States began with the Marshall Plan, and has evolved to the current situation, where all World Foreign Trade is established by these conditions described above without any possibility of viable alternatives.

“La” China

China's dizzying growth was part of this expanded scheme of a huge American Marshall Plan that transformed the backward economy of Communist China into the second world economy today with a GDP (Gross Domestic Product) the size of the United States, thus defining three major markets of equivalent sizes: the United States, Europe and China, but that are able to "freely" generate liquidity for the United States only. Everything else is currency board!

One can see the enormity of this scheme of making the dollar a currency of guaranteed liquidity for the U.S. Government, "only." And obviously this has had important consequences, let's see below:

1-      This immense liquidity of the Americanized world (United States, Europe and Communist China) based on this immense equivalent capacity of production produced an exhaustion of the world process of industrial development which stopped growing and began to regress;

2-      This immense liquidity progresses, in spite of the reduction in the growth of industrial production, leading to a paradoxical situation of growth of the money supply without the corresponding growth of the mass of tradable industrial production, producing as a consequence an immense stranding of industrial products, and consequent dangerous increase in inventories;

3-      Monetary policies lose their effect since they were designed to issue and dry up liquidity from a continuously growing market, which is no longer true; Inventories are high, consumption is very low, and liquidity is high with highly valued currencies. Inflation increases as a result of these processes that generate liquidity, and no longer due to the exuberant consumption of the 1970s;

4-      The restrictive policies since the beginning of the 1980s, in order to reduce the inflationary process resulting from this global financial architecture of the dollar (liquidity), have exchanged high wages for credit card debts, substantially reducing the consumption capacity of the middle class and its productivity;

5-      The reduction in the consumption of the middle class substantially reduced the inflationary process of the 1970s, but also ended up generating low-productivity jobs, which were complemented by credits (credit cards), which, as they reached their limits, stopped economic growth due to default, generating what in Brazil became known by the name of the economy that grows like a chicken's flight;

6-      There is a tremendous current mismatch between liquidity, consumption and production, forcing companies to liquidate inventories at prices below their production costs, especially in Communist China, compromising the financial health of companies that opt for such a ruinous practice;

7-      There is a rupture between liquidity, inflation and money supply circulating in the economy that mainly affects retail and the real estate market, due to the excessive appreciation of currencies, which have become the preferred tangible assets due to the better guarantees that their present values offer;

8-      There is now a very large dichotomy between present and future value of investments due to the excessive preference for maximum liquidity, reducing investment options in the here and now;

9-      The two points of greatest weakness in this current world economic panorama are: on the one hand, the retail and wholesale market, and on the other, the real estate market, due to these characteristics described above. Retail-wholesale; due to the preference for maximum short-term liquidity; and the real estate market due to the market's lack of interest in the medium or long term. The first case generates price inflation that is continuously marked down accompanied by a corresponding reduction in consumption, in an arm wrestle that wholesalers end up losing due to the instability of having to manage very high inventories. In the second case, the dizzying increases in real estate inventories are due to this immense saturation in the production market, especially in Communist China, raising serious doubts in the minds of investors about the ability to recover their real estate investments in the medium and long term. Supermarket prices go up and property prices go down!

Russia and Argentina

 The case of both the Russian Federation and the Argentine Republic is interesting to comment on. The first was the attempt of the Russians to try to create a "currency" of their own liquidity as an alternative to the dollar. In the second case, according to rumors, there are almost USD 300 billion in the hands of companies and households in Argentina, which generates an alternative liquidity that I believe no country currently has, with the potential to compete with the monetary policies of the American Central Bank (FED) if they are dumped on the market, which invalidates any possibility, present or future,  dollarization of the Argentine economy, hence its current economic and inflationary crisis.

The Russian Federation's attempt to establish a kind of gold standard for its ruble, and to use its powerful market for petroleum and agricultural commodities as a trump card for the country to become liquid and therefore a superpower was not realistic.

The impact that Russian commodities have on generating alternative liquidity to the economic power of the United States as described above is none. Generating revenues from exportable through trading schemes on the world market is no guarantee of continued liquidity. Continued liquidity, which turns countries into superpowers, requires monopolistic measures that guarantee themselves liquidity, and no one else. After all, many countries produce oil, and none of them are superpowers.

It is good to say that Russia, from the constitution of its Romanov Empire to the formation of the Soviet Union, was never able to constitute itself as a superpower as were the British and Spanish Empires, or even the current United States.

Russia's military capacity throughout its recent history has led to economic constraints that have broken its superpower aspirations. The Soviet Union is a good example. The present-day Russian Federation is the heir of the Soviet rupture that annihilated its production and consumption of what we might call the Soviet market. This market was artificially defined for military reasons, rather than for a genuine ability to generate continuous liquidity for this Soviet Empire. That's why it broke!

This apparent resurgence of Russia as an apparent superpower is all only apparent. Its recent military adventures in both Syria and Ukraine are very short-lived, since without continuous liquidity, sooner or later it will have to define serious restrictive measures of war economy and therefore it is a matter of time and it will break as was the case in the former Soviet Union.

Its market for agricultural and oil commodities is not enough and is giving an illusion of world power that Russia no longer has, in fact never had. Russia, along this path, is burning important resources that it will lack in the future.

The case of Argentina is peculiar! Throughout its last 80 years, it has invested in the dollar not as a reserve currency, a product of world trade, but as domestic savings, resulting in a monetary policy, obviously, in local currency (pesos) that is impacted by the dollars existing in the "mattresses" of both Argentine families and companies. Add to this the frequent defaults against foreign loans made in dollars, and the conclusion is that the Argentine Government itself is the one that encourages the use of dollars as a currency for internal savings, exchanging pesos for dollars, running out of monetary reserves in its Central Bank.

In the end, Argentina has large amounts of dollars that do not reflect liquidity, paradoxically, although they generate internal liquidity by becoming a parameter for measuring prices, generating inflation in pesos. As the amount of dollars in the hands of households and businesses in Argentina is so large, any attempt by their government to establish a local monetary standard is subverted by those who keep dollars in their mattresses.

This plot of the Argentine economy is dangerous and irresponsible, it gives the illusion of liquidity to the local society that cannot become liquid with its dollars without creditors going after its losses. For its part, the Argentine government is unable to impose a monetary standard in local currency (pesos) without being compromised by this immense local liquidity in dollars. This plot has been going on for almost 80 years, without paying attention to what the concepts of liquidity, dollars, as well as the role of the dollar and the United States in the world economy since 1945 mean.

That was Argentina's problem. By the end of 1945, it had many assets accumulated in gold due to the War, and the local society, as it did not need any Marshall plan, thought that it could follow on the margins of the constitution of the international monetary standards of Bretton Woods, accumulating dollars, in the illusion that it could compete with the United States in its liquidity capacity by printing dollars. Since 1945, the Argentine governments have not understood well this issue of the dollar and the liquidity power of the United States economy.

The conclusion is this: Argentina has accumulated a "false" liquidity, which has become, paradoxically, in fact, a real illiquidity. The country's economy gets tangled up in this narrative without bothering to put an end to it. The main reform that Argentina needs is this: to put an end to this accumulation (savings) in dollars, and to establish a local monetary standard, thus redesigning the entire configuration of a new Argentine national financial system. Time will tell...

The problem, paradoxically, is what to do with the USD 300 billion accumulated by Argentina so far. The point is that this amount of dollars is impoverishing the Argentine economy, and it is not generating liquidity and never will.

Argentina's past history doesn't help. Everyone agrees on monetary reforms, until the government begins to establish a monetary standard in pesos, accumulating dollars, which quickly fades into formidable speculations against the local currency, which causes the Central Bank to throw dollars accumulated by exports into the market. And the old litany begins again... Inflation! Inflation! Inflation!

One thing has to be made clear to Argentines that there is no possibility of dollarization of an economy the size of Argentina, as this would compete with the monetary policies of the Federal Reserve. If this were possible, it would be the first country to share the ability to generate liquidity with the United States. Don't believe it! It's silly!

By Professor Ricardo Gomes Rodrigues

São Carlos, SP December 25th, 2023