Currency trading worldwide totals about $1.4 trillion daily.  You will notice that the $1.4 trillion cited is in dollars, not euros or some other currency.  This is because the US dollar is the world’s base currency, not just one nation’s currency.   It is the currency every country and every corporation doing cross border business uses to mark their product’s price to market.   That’s why every 10 days or so there’s more dollars traded worldwide than the entire annual gross domestic product of the United States.

What does this mean in a practical sense?  First it means the value of the dollar is dependent not just on what the US is doing, or not doing, but is dependent on what the world’s doing.   It means there has to be enough of these dollars worldwide to grease the commerce of the globe, not just the 25% of worldwide economic activity represented by the United States.   It means there has to be enough dollars to support the transactions of all economic activity, which is four times what would be necessary if it was not the world’s base currency.

In short the dollar price is dependent more on what the other 75% of the world’s economic needs require than it is dependent upon domestic US needs.   If China needs $300 billion in international business being done on a particular day, then those transactions require that many dollars being available, even if all the parties need their own currency at the end of the transaction.  And of course, in many cases they won’t need their own currency at the end of the transaction because possessing dollars provides more flexibility in global business than any other currency.   A Czech bank can have an account at the Federal Reserve, which is the world’s bank because dollars are the world’s currency, where in our digital age dollars can be transformed instantaneously into the Czech currency, or any other currency for that matter.

Think of it this way.  If we were discussing the world’s energy needs, then the US would be the world’s transmission system, responsible not for all energy production but necessary for getting power from one spot to another, worldwide.  Seamlessly and without endangering commerce.   That’s what being the world’s base currency is like, with the Federal Reserve being control center for the transmission system.

Steve Rattner over at the New York Times cites the same studies cited by David Cay Johnston, an award winning journalist for Reuters, which we called attention to in a recent post.

In 2010, as the nation continued to recover from the recession, a dizzying 93 percent of the additional income created in the country that year, compared to 2009 — $288 billion — went to the top 1 percent of taxpayers, those with at least $352,000 in income. That delivered an average single-year pay increase of 11.6 percent to each of these households.

Still more astonishing was the extent to which the super rich got rich faster than the merely rich. In 2010, 37 percent of these additional earnings went to just the top 0.01 percent, a teaspoon-size collection of about 15,000 households with average incomes of $23.8 million. These fortunate few saw their incomes rise by 21.5 percent.

The bottom 99 percent received a microscopic $80 increase in pay per person in 2010, after adjusting for inflation. The top 1 percent, whose average income is $1,019,089, had an 11.6 percent increase in income.

Beezer here.  This is unregulated Capitalism folks.  Without rules and regulations Capitalists funnel income gains up to ownership.  Or they produce ‘pink slime’ for human food.  Or they pollute groundwater and the air.  Or they buy and sell our politicians and corrupt our government.  This is why we have an entire political party doing its level best to destroy labor associations, Social Security, Medicare, funding for education, funding for women and children, funding for environmental protection–in short a wholesale effort to turn our government into an organization indifferent to all but the desires of the already wealthy and powerful.

There are many ways individual countries can compete for export markets:  Currency manipulation, labor income differentials, regulatory laxity and tax policy including subsidies are just a few.

Subsidies are already part of ongoing trade relations and they are frowned upon.  But what’s keeping two countries from coordinating tax policies aimed at balancing tax incomes based upon export sales in their respective countries?  Right now in the US there’s a debate over whether or not the US should give US multinationals a ‘tax break’ aimed at encouraging these multi-nationals to repatriate back to the US profits made from export sales.  The amount of money involved is not trivial, it’s in the trillions of dollars.

Coordinated tax policies based upon sales, say between China and the US, would allow both countries to share proportionately in profits and remove tax barriers keeping multi nationals from freely shifting assets between countries.   Take Apple as one example.  This Cupertino, California based multi national makes all of its products outside the US.  While the US may still be Apple’s largest market, the Chinese market potential is huge and inevitably will become Apple’s largest market.

If the two countries coordinated their tax policies based upon sales in each country of Apple products, they could both reap higher revenues without distorting Apple’s business model or inhibiting Apple’s sales in either country.  And because Apple’s tax rate would be ‘equalized’ in both countries, again based on sales, the company would have zero incentive to retain profits in either country.   Apple would be free to shift assets between the two without the constraint of tax differences.

All economic activity is meant to satisfy today’s consumption or what is expected to be tomorrow’s consumption.  Incomes determine consumption.  Incomes lead consumption, in other words, up or down.  The two are never equal whether incomes are rising or declining.  Incomes will rise faster than consumption on the way up, and will decline faster than consumption on the way down.

For the past 30 years we’ve had stagnant or declining incomes for most Americans.  So far this century we’ve had absolute declines in incomes for the majority of Americans.   We have an ongoing, and apparently accelerating, deflation in incomes.   If this income deflation continues, at some not too distant point the income liquidation will force liquidation on the owners of capital.    This is the well understood sequence of events in a deflationary spiral.  Such spirals always create severe, lengthy Depressions.  Debt is liquidated by default, rather than being paid off the proper way, because incomes have declined too far for debt repayment.

The underlying income deflation of the past 30 years was papered over by easy central bank monetary policies.  Interest rates were kept artificially low for an extended time and these low rates encouraged private sector borrowing on consumables and housing but not on productive investments.   This period ended with the collapse in 2007 of the housing and financial sectors–not just in the US but across the North Atlantic economies in general.

If the central bank policies were easy leading up to the collapse, what followed was unprecedented, particularly in the US.  Federal Reserve Chairman Ben Bernanke, an economist who studied the Great Depression of the 1930s, pumped trillions of dollars into relieving bank balance sheets of shaky mortgages and other debt in a successful effort to avoid a complete banking meltdown.  Presidents George W. Bush and Barack Obama, along with Congress, passed $800 plus billion stimulus bills, extended Bush era tax cuts and under Obama twice passed additional payroll tax cuts in addition to 17 business tax cuts.  From both the fiscal and the monetary fronts leadership came out with guns blazing, in other words.

All of this activity had two effects.  One was that the banking system did not go into full cardiac arrest and a re-run of the Great Depression was avoided.  All the tax cutting on the fiscal side countered somewhat the previous 30 years of income loss by simply leaving more money in people’s pockets, even though their incomes were declining.

But almost four years later, unemployment is high (in the US it is reliably estimated that 14% of working age men and women are effectively unemployed) and incomes are still declining.  The largest portion of houshold debt, that tied up in home and credit card debt, stubbornly refuses to decline much if at all.   The nation’s economy still hovers perilously close to entering a debt deflation spiral despite all these efforts.

So what to do?  The ‘magneto’ refuses to fire in a way that would create a more rapid recovery of economic activity.  Jobs are being produced but at rates that will take a decade or more to put the unemployed back to work.  What’s missing?

What’s missing is real income growth that can only be acquired by putting people back to work in jobs that pay so-called living wages and benefits.    What’s missing are three words:  “You are hired.”

The problem here is that the private economy cannot profitably hire the millions of people that need to be hired.  They are ‘profit constrained.’  Private corporations exist to make profits.  No profit, no hiring.

There’s only one agent in the economy that can hire without regard to profit/loss bookeeping.  That’s the Federal government.  Building public works, whether it’s bridges and roads, or urban mass transit, or sewer lines, or energy and data infrastructures, do not book profits in private sector metrics.  But economist know such works do help future businesses book profits.  In fact history clearly shows that national economies cannot grow without a steady dose of these public investments.

This is the mis-firing magneto.  Instead of pumping trillions of dollars into so-called financial ‘liquidity’ the Federal government should be hiring literally millions of workers rebuilding, modernizing and expanding public infrastructures that will be critical to future economic success.  By doing this the income decline can not only be stopped, but reversed.

Real incomes will rise, as will consumption that will follow.  Incomes will rise faster than consumption because some of the income gains will go towards paying down debt (the right way, not by default) and even towards private investment.  Government revenue will increase as will overall private economic activity, spurred in part by the increase in consumption.   Unemployment insurance and other safety net spending created by economic contraction, will disappear as incomes and economic activity increase.   Income tax cuts can safely be reversed too, because their economic stimulus is no longer needed in a healthy economy where the income ‘magneto’ is firing properly.  Central bank easing can relax, thus allowing interest rates to rise which helps savers.  All the positive effects of a healthy economy go into action when incomes rise across a broad section of the nation’s population.

The only impediment to this course of action is politics.  The President and Congress need to understand why this Federal government action is necessary.   Waiting for the private economy to hire millions of the unemployed is a fools choice.   All the tax cuts and all the stimulus cannot make private corporations hire when such hiring is not profitable.  And it will always not be profitable until incomes rise.  And that takes jobs.

So let’s have a national “you are hired” program.

Central bankers this morning flexed a little muscle by, in effect, insuring money markets in Europe.  It was the collapse of money markets and short term interbank lending in 2008 that cratered the North Atlantic economies and brought on the Great Recession.   With that experience fresh in central banker’s minds, this morning’s action avoids a repeat of what happened in 2008.

Professional investors immediately bought equities which have been underpriced due to the anxiety created by Europe’s well chronicled sovereign debt struggles.

Being the lenders of last resort is good, but central bankers still need to attack the underlying problem of sovereign debt by, first, buying the debt en masse.  A couple trillion in sudden purchases, as in one or two days, would send the debt rocketing up in price as leveraged short sellers in the shadow banking system run to cover their shorts.  This would create huge losses in these synthetic markets (the markets use derivatives, not the underlying assets) not only for the shorts, but for the longs as well because counterparties would not be able to make good their side of the derivative contract.

After this ‘shock and awe’ bond purchase has killed the shadowy derivative based market, the central bankers can unwind their positions in the real bond market at their leisure.  And they will have few time constraints because most of the European bonds they bought will have been bought at huge discounts.  As for the derivative market, it won’t come back anytime soon due to the massive losses of its former participants.  These losses, by the way, will be matched in profits by central banks.

Equity and bond markets have evolved into pure casinos over the past couple decades.  The emergence of shadow banking, money markets beyond the reach of central bank supervision, has enabled huge leverage.  Central bankers were caught unawares in 2008 when this shadowy, synthetic derivative market collapsed because the underlying asset (housing) collapsed and central bankers discovered their regulated banks were participating in a big way.  To say these bankers were upset is a huge understatement.  They were, and remain, furious over the matter.

Central bankers have a monopoly on money and speculators in the shadow banking system need to be reminded in a very painful way about this fact of life.  It’s time for central bankers to take out the synthetic, inherently leveraged, markets–particularly in our current context the bond markets.  The same kind of power will need to be applied, sooner or later, to the commodity markets where speculative activity by non-producers/sellers has overwhelmed legitimate purposes and causes expensive and totally uneccessary short term price volatility.

The Republicans, in a shameless and self serving effort at re-branding the rich as ‘job creators,’  argue we shouldn’t raise the top marginal tax rates on the rich–or job creators as Republicans insist on calling the rich.

So let’s take the Republicans at their word.  Consider how well these job creators have been creating jobs the past three years.  Anyone who is still conscious knows that instead of creating jobs, the nation has 16 million effectively unemployed people.  No new jobs have been created for three years.  Instead, jobs have been destroyed.  According to the Republican definition, the job creators have done a stupendously lousy job.

When someone has been doing a lousy job, you fire them or at minimum, cut their pay.  Being a Democrat and therefore loath to fire anyone and put them on the unemployment line, we recommend that these job creators get a pay cut.  In a perverse sense, they’ve earned it.

So let’s raise their taxes, and thus reduce their pay.  Instead of rewarding them for not creating jobs, and the growing income inequality between these job creators and the rest of the country shows that’s what we’ve been doing, let’s tell them ‘use it or lose it.’  If they can’t manage to do their job, we’ll do it for them.  We’ll take the extra income from these higher taxes, and we’ll create jobs directly, primarily by improving the nation’s infrastructure.

Now that’s a common sense economic move that will make the nation healthier.  And once the job creators actually start creating jobs, we can take the extra revenue to stop running deficits and start paying down debt.