Saturday, September 22, 2007

The Crumbling Economic Empire

So long as the world accepts US dollars as money value, the US enjoys unique advantage as the sole printer of those dollars. The trick is to get the world to accept. The history of the past 30 years is about how this was done, using WTO, IMF, World Bank and George Soros to name a few.
The research I did for The Shaky Dollar opened my eyes to something I've always tried to ignore - US economic imperialism. The most important link in that article is Crisis of the U.S. Dollar System, from Global Research Canada. Frankly, I was afraid people wouldn't click on it, and would miss some essential (and believe it or not, fascinating) stuff. Some highlights:
The US position in the world since 1945, and especially since 1971, has rested on two pillars.. ..the superiority of the US military over all, and, the role of the dollar as world reserve currency. That dollar is the Achilles heel of American hegemony today.
After 1945, the US emerged from war with the world's gold reserves, the largest industrial base, and a surplus of dollars backed by gold.
That held until the late 1960's, when the costly Vietnam war led to a drain of US gold reserves. By 1968 the drain had reached crisis levels, as foreign central banks holding dollars feared the US deficits would make their dollars worthless, and preferred real gold instead.

In August 1971, Nixon finally broke the Bretton Woods agreement, and refused to redeem dollars for gold. He had not enough gold to give. That turn opened a most remarkable phase of world economic history. After 1971 the dollar was fixed not to an ounce of gold, something measurable. It was fixed only to the printing press of the Treasury and Federal Reserve.
OK, this is the crux of the situation - the American dollar used to represent something. It had intrinsic value. But that has changed. The dollar's value now rests almost entirely on its extrinsic qualities - the perception of the world's banking system.

It's interesting to note here that it was shortly after Nixon took the dollar off of the gold standard that the OPEC embargo happened. This led, ironically, to the emergence of the PetroDollar, based on an agreement between the US and OPEC that the latter would accept only US dollars in payment for their oil. This in turn led to the situation Robert Newman describes as 'the magic checkbook' in his amazing documentary The History of Oil.

The result of that was that countries around the world had to purchase US dollars in order to buy OPEC oil. Another result was that the US dollar became the preferred reserve currency worldwide. This may not have been a very good idea, and highlights the shortsightedness of the world's best and brightest bankers. Could it be that they were blinded by their own greed? "Given the general tendency for crude oil prices to rise and become more volatile in recent years, it may even be argued that crude oil trading may, in the long term, be a significant liability for the stability of the currency in which the trade is conducted." (Wikipedia: PetroDollar)

So, America has enjoyed significant temporary advantage as the issuer of the world's reserve currency. Other countries are willing to exchange real good to get paper dollars, far in excess of the goods they receive in return. I liken this to someone having a very good credit rating, but not enough income to pay back the money he or she borrows. Remember, "After 1971 the dollar was fixed not to an ounce of gold, something measurable. It was fixed only to the printing press of the Treasury and Federal Reserve." And did the US ever start printing (and spending) money! They were acting like a pimp who'd just found out he only had a week to live. Or more accurately, 300,000,000 such pimps.
What soon became clear to US Treasury and Federal Reserve circles after 1971, was that they could exert more global influence via debt, US Treasury debt, than they ever did by running trade surpluses.. ..demand for dollars would continue, even if the US created more dollars than its own economy justified.
In the years between 1945 and 1965, total supply of dollars grew a total of only some 55%. Those were the golden years of low inflation and stable growth. After Nixon's break with gold, dollars expanded by more than 2,000% between 1970 and 2001!

The dollar is still the only global reserve currency. This means other central banks must hold dollars as reserve to guarantee against currency crises, to back their export trade, to finance oil imports and such. Today, some 67% of all central bank reserves are dollars. Gold is but a tiny share now, and Euros only about 15%. Until creation of the Euro, there was not even a theoretical rival to the dollar reserve currency role.
Here's the sticking point. This situation has led to the establishment and acceptance of a myth - the myth of American competitiveness in the world's economy. The result on the ground of this is that American workers' wages have been higher than their counterparts in other countries, because they have actually been subsidized by those other countries. But by how much? "The total US debt—public and private—has more than doubled since 1995. It is now officially over $34 trillion. It was just over $16 trillion in 1995, and "only" $7 trillion in 1985. Most alarming it has grown faster than income to service it, or GDP." That's over $100,000 for every man, woman and child in the country! Can you say, 'fiscal responsibility?'

The US imports goods, but to some degree exports paper money that, as we have seen has little real value (or significantly less real value than one would think.) So the recent fall of the dollar is more of a market correction than anything, like the collapse of the housing bubble. The invisible hand making a fist and punching you, invisibly, in the face.

This punch could be read as an understandable reaction to the incredibly callous monetary policies of the Bush administration. One way the dollar has been deliberately destabilized was this move last year, as Sans-Culotte reported;
Let me interrupt you here to point out the Fed's recent announcement that it will cease publication of the M3 monetary aggregate March 23, 2006. For a great explanation what that means please read this diary over at Dailykos. It's no coincidence this will coincide with Iran's oil bourse, and I'll venture it played no small part in Greenspan's decision to retire either.
One of the things in the M3 is a disclosure to the banking world of just how many dollars are being printed and circulated. Without it the disconnect between the currency and anything real is complete and absolute.
It works so: A German company, say BMW, gets dollars for its car sales in the USA. It turns the dollars over to the Bundesbank or ECB in exchange for Marks or Euros it can use.

The German central bank thus builds up its dollar currency reserves.. ..But since the Bundesbank no longer could get gold for their dollars, the issue became what to do with the mountain of dollars their trade earned. They decided to at least earn an interest rate by buying safe, secure US Treasury bonds.
But THE TREASURY BONDS ARE JUST MORE PAPER!! The 'magic' of the magic checkbook is that there is no way to cash the check. Knowing this allows America's financiers to act, frankly, like thugs. Because other countries hold so much paper on America, allowing the dollar to fall is a way of threatening them. This is bewildering, a form of insanity - yet the entire world economy is apparently dependent on it.
What is perverse about this system is the fact that Washington has succeeded in getting foreign surplus countries to invest their own savings, to be a creditor to the US, buying Treasury bonds. Asian countries like Indonesia export capital to the US instead of the reverse!

The US Treasury and Greenspan are certain that its trade partners will be forced to always buy more US debt to prevent the global monetary system from collapsing, as nearly happened in 1998 with the Russia default and the LTCM hedge fund crisis.

Washington Treasury officials have learned to be masters at the psychology of "monetary chicken." Treasury Secretary Snow used an implied threat of letting the dollar collapse, after the Iraq war, to warn Germany about the risk of trying to be too close to France with the Euro. Some weeks after the dollar had fallen sharply, and German export industry was screaming pain, Snow reversed his stand and the dollar stabilized. Now the dollar again rises as foreign money flows back in.
This is a kind of Dollar Imperialism more slick than anything the British Empire even dreamed of.. .. Instead of the US investing in colonies like England to earn profits on the trade, the money comes from the client states into the US economy. The problem is that Washington has allowed this perverse system to get out of all control to the point today it threatens to bring the entire world to the point of collapse. Had the US instead promoted long-term policy of investing in the economic growth and self-sufficiency of countries like Argentina or Congo, rather than bleeding them in repayment of unpayable dollar debts, the world would look far less unstable today.
So the only question I have is should these bankers all be in jail, or locked up in a large rubber room? I've learned so much from this Global Research article because it explains so much, even of things it doesn't even mention. No wonder the American labor force has been so devalued over the last few decades, since the country's economic strength has been decoupled so far from productivity. And no wonder Alan Greenspan's recent revelation comes as no surprise to anyone who has been paying attention. The war in Iraq WAS for oil, or more accurately the right to maintain the petrodollar oil bourse.
The US waged war in Iraq not out of fundamental strength but fundamental weakness. It is economic weakness however, not military.. ..US economic hegemony in this distorted Dollar System increasingly depends on a rising rate of support from the rest of the world to sustain US debt levels.. ..That is the real significance of the US shift to unilateralism and military threats as foreign policy.. ..Even ordinary Americans have to give up their pension promises. If the Dollar System is to remain hegemonic, it must find major new sources of support. That spells likely destabilization and wars for the rest of the world.
The kicker for this post is the same as the kicker for my last economy post. Dick Cheney's investment portfolio shows he has been betting against American prosperity, perhaps from the beginning of his first term as Vice President. Traitorous bastard!

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