Friday, September 18, 2009

Historical Inflation Wave: From Spain to the Middle East

So I was contemplating the decline of the Ottoman Empire. Not ordinarily a thing one contemplates, but I'm taking a class on contemporary Middle East history, and I discovered a rather interesting theory. The influx of gold and silver from American through Spain (as they thoroughly looted the civilizations discovered there) resulted in an immense price rise throughout Europe. However, this price rise was not immediate and uniform, but proceeded, as it does, as the money moved through the economy of Europe. The following is just a speculative model, but it makes sense to me.

The Spanish government would have first tapped local market, and the influx of new money would have risen prices there. Merchants, recognizing the price differences between Spain and other places, would have taken to importing goods into Spain in order to profit from these price differences. Buy low in France, England, Germany, Italy, or wherever, and sell high in Spain. As a result, the areas from which the imports came would have developed export industries to take advantage of this opportunity, while Spain, though temporarily benefiting, would have developed a dependency on these imports.

The result would have been that the second tier of nations would now have well developed export industries, enabling them to profit from trade not only with Spain, but also each other once Spain's money ran out, more throughly. However, they would have also had higher prices than the next set of neighbors, which would have included the Austro-Hungarian Empire, the Ottoman Empire, and, with improved navigation, India, China, the American colonies, and the rest of the world. While having good export industries of their own, they would now be able to import other things they needed from these third tier countries... while Spain, now lacking either a price advantage or export industries, would go into a decline from which it would never fully recover.

The third tier, being pretty much the rest of the world, would have ended up developing some level of exports to the second tier countries, but would not have the opportunity to export their own increased price level to a fourth tier, there being no fourth tier. So rather than an outflow stimulating the development of exports, followed by an inflow as they stimulate someone else's exports, they would mostly just experience the outflow, but find that their newly earned money doesn't buy as much as it did when merchants brought it in.

Spain founded an empire on this flow, but became dependent on it when the money ran out. England, France, Germany, and the United States founded industrial economies on it to absorb currency from Spain, and then spent it out to the third tier, developing a balance of both export industries and import dependencies. The final tier would mostly just experience asymmetrical exports, but not have the opportunity to benefit from similarly asymmetrical imports. The inflater, Spain, was destroyed by this wave. The final absorber was similarly damaged.

At present, the United States is increasingly dependent on imports, without developing similar levels of exports (and going further and further into debt), all based on a globally dominant inflationary currency. Will the US go the way of Spain? Will US importers, such as China, Japan, Korea, India, and such go the way of England and the United States? Is the Third World even more screwed than they already are?

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