Post by DA Malatesta on May 14, 2005 1:17:06 GMT -5
The “Dollar” Crisis, and Us
By Loren Goldner
Incredible as it may sound, ever since the late 1950’s, the world economy has been tossing around a “hot potato” of an ever-increasing mass of “nomad dollars” (dollars held outside the U.S.) whose actual conversion into tangible wealth would plunge the world into a deflationary crash. Even now, few people are aware of the extent to which this “technical” question of “economics” (and in reality a profoundly social question) has in fact cadenced 45 years of world history, erupting into view in key years such as 1968 (dollar convertibility crisis), 1973 (end of the Bretton Woods System), 1979 (runaway global inflation, gold at $850 an ounce) 1990 (Japanese deflation) or 1997-98 (Asia crisis, Russian default, “hedge fund” crisis). We are clearly today at another key turning point, and perhaps (over the next few years) at the long-delayed culmination of the whole story, when that mass of dollars, now grown to gargantuan proportions (the $30 billion of 1958 have become at least $11 trillion today) will be deflated, one way or another. <br>
With the election safely behind it, the Bush administration in the U.S. can now get on with the world economic crisis that has been stalking it ever since it came to power, in the wake of the stock market crash of spring 2000. Bush and his people must move as quickly as possible to get the “worst” over with, in their own terms (terms distorted by their own illusions of being in control of events).before they have to face new elections or other political challenges. (Had Kerry won, his incoming government might well be facing a worse crisis, compounded by international “uncertainty” over various policies.) In recent weeks, the “dollar” crisis, which is merely the immediate visible face of a profound social and economic crisis in progress for decades, has moved (once again) from technical discussions of a marginal coterie of specialists to center stage in the media. Prominent pro-capitalist economists such as Steve Roach and Paul Krugman are now saying that a major crisis is almost inevitable, more a question of when than if. This is particularly revealing in light of the fact that in eight or nine months of almost constant media huffing and puffing about the election, this reality and the issues it raises were precisely nowhere in the discussion. Ever since the 1960’s, when the problematic international status of the dollar became an ongoing “policy” question (with its ebbs and flows) no mainstream American politician has ever gone anywhere near it. It is more of a political “third rail” than Social Security or Medicare (1) <br>
Unfortunately, the same thing can be said, with some honorable exceptions, about the radical left.in the U.S.
A capitalist crisis like the current one resembles a poker game where the table is swept clean and all cards and chips must be redistributed for the game to continue at all. This could happen as an “orderly bankruptcy proceeding” but it will most likely happen (as it has always happened in the past) chaotically, through economic blowout, class confrontation, and war. (Only the latter options create the momentum and the “constituency” for the necessary changes.) This crisis will in all likelihood not come in a “pure”, 1929-style form of abrupt deflation, stock market crash, and sudden mass unemployment (though some combination of these is a distinct possibility). What somehow has to happen, from a capitalist point of view, is a serious devaluation of the approximately $11 trillion dollars currently held by foreigners, and a simultaneous adjustment of major currencies to reflect new world economic realities. The dollar must be dethroned from its global reserve currency status (about 63% of all central bank reserves are currently denominated in dollars, down from 69% a year ago), or reduced to one among many alongside the euro, the yen, or possibly some “basket” of major currencies. The U.S. must stop running $600 billion in annual balance-of-payments deficits, drawing in 80% of the world’s savings to finance them. It must deflate the approximately (outstanding) $33 trillion of Federal, state, municipal, corporate and personal debt (3 times the dubious “GDP” figure) that has kept the economy going for decades. This will entail, among other things, a collapse of the huge mortgage bubble and the subsequent bankruptcy of untold millions of families and individuals. The U.S. must figure out a way to balance imports and exports, which, given the vast hollowing out of U.S. industry over the past 35 years, will above all entail a vast reduction of imports, and hence stringent austerity for American working people. <br>
The basic problem of every major crisis in capitalism’s history has been (as rapidly sketched here) that of destroying or deflating a “bubble” of fictitious or speculative claims on wealth (stocks, bonds, property titles) and bringing those claims back into rough correspondence with the “real” rate of profit available in production (speaking very schematically) and from“free inputs” available elsewhere (such as the looting of peasant labor and nature). Unfortunately, seeing this process at work today is greatly complicated by decades in which the U.S. has been fashioned into a rentier economy far beyond anything achieved by its predecessor, the British empire of 1815-1945. While the “story” of how that came about cannot meaningfully be sketched here (2), what has differentiated American world empire from the British since World War II has been America’s ability to force the rest of the world to hold its own debts as the major portion of international reserves in central banks (whereas the British, who could do this with their colonial empire, were globally constrained by serious rivals and the gold standard). Particularly after 1973, the U.S. succeeded in placing the rest of the world on a fiat dollar standard based on nothing but the financial credibility of the U.S. government. At the same time, the U.S. was dramatically de-industrializing, while pundits of the status quo hailed the proliferation of the “FIRE” (finance, insurance, real estate) economy as the coming of a new “service” “post-industrial” economy that would replace the old “smokestack” economy and the jobs lost through plant closings, restructuring, and down-sizing. (They did not then foresee the out-sourcing of such service jobs to such places as China and India.) Because the domestic U.S. economy depends less on international trade than that of most other major capitalist countries, scant attention was paid, outside the same marginal coterie of specialists, to the fact that already by the 1960’s the U.S. was dependent on the largesse of foreigners willing to recycle American balance-of-payment deficits back into U.S. government paper (e.g. Treasury bills) and capital markets (stocks, bonds) to permit this “service” economy to function. Foreign governments and private capitalists had to tolerate this situation because the alternative—the collapse of the huge American market for their exports—would have pulled them into the abyss as well. (During the Cold War, military pressure on Europe and Japan also helped make foreigners more pliable.) With the Cold War over, nothing in this economic arrangement has changed, and things have only gotten far worse, like a small tumor turning into elephantiasis. As U.S. Treasury Secretary John Connally in 1971 told Europe and Japan “it’s our currency, but it’s your problem”. Without the recycling of dollars by foreigners with (to date) little alternative back into the U.S., the driving pillars of the U.S. domestic economy, the consumer financing of auto and housing sales, would collapse overnight.
Read the rest of the article here
By Loren Goldner
Incredible as it may sound, ever since the late 1950’s, the world economy has been tossing around a “hot potato” of an ever-increasing mass of “nomad dollars” (dollars held outside the U.S.) whose actual conversion into tangible wealth would plunge the world into a deflationary crash. Even now, few people are aware of the extent to which this “technical” question of “economics” (and in reality a profoundly social question) has in fact cadenced 45 years of world history, erupting into view in key years such as 1968 (dollar convertibility crisis), 1973 (end of the Bretton Woods System), 1979 (runaway global inflation, gold at $850 an ounce) 1990 (Japanese deflation) or 1997-98 (Asia crisis, Russian default, “hedge fund” crisis). We are clearly today at another key turning point, and perhaps (over the next few years) at the long-delayed culmination of the whole story, when that mass of dollars, now grown to gargantuan proportions (the $30 billion of 1958 have become at least $11 trillion today) will be deflated, one way or another. <br>
With the election safely behind it, the Bush administration in the U.S. can now get on with the world economic crisis that has been stalking it ever since it came to power, in the wake of the stock market crash of spring 2000. Bush and his people must move as quickly as possible to get the “worst” over with, in their own terms (terms distorted by their own illusions of being in control of events).before they have to face new elections or other political challenges. (Had Kerry won, his incoming government might well be facing a worse crisis, compounded by international “uncertainty” over various policies.) In recent weeks, the “dollar” crisis, which is merely the immediate visible face of a profound social and economic crisis in progress for decades, has moved (once again) from technical discussions of a marginal coterie of specialists to center stage in the media. Prominent pro-capitalist economists such as Steve Roach and Paul Krugman are now saying that a major crisis is almost inevitable, more a question of when than if. This is particularly revealing in light of the fact that in eight or nine months of almost constant media huffing and puffing about the election, this reality and the issues it raises were precisely nowhere in the discussion. Ever since the 1960’s, when the problematic international status of the dollar became an ongoing “policy” question (with its ebbs and flows) no mainstream American politician has ever gone anywhere near it. It is more of a political “third rail” than Social Security or Medicare (1) <br>
Unfortunately, the same thing can be said, with some honorable exceptions, about the radical left.in the U.S.
A capitalist crisis like the current one resembles a poker game where the table is swept clean and all cards and chips must be redistributed for the game to continue at all. This could happen as an “orderly bankruptcy proceeding” but it will most likely happen (as it has always happened in the past) chaotically, through economic blowout, class confrontation, and war. (Only the latter options create the momentum and the “constituency” for the necessary changes.) This crisis will in all likelihood not come in a “pure”, 1929-style form of abrupt deflation, stock market crash, and sudden mass unemployment (though some combination of these is a distinct possibility). What somehow has to happen, from a capitalist point of view, is a serious devaluation of the approximately $11 trillion dollars currently held by foreigners, and a simultaneous adjustment of major currencies to reflect new world economic realities. The dollar must be dethroned from its global reserve currency status (about 63% of all central bank reserves are currently denominated in dollars, down from 69% a year ago), or reduced to one among many alongside the euro, the yen, or possibly some “basket” of major currencies. The U.S. must stop running $600 billion in annual balance-of-payments deficits, drawing in 80% of the world’s savings to finance them. It must deflate the approximately (outstanding) $33 trillion of Federal, state, municipal, corporate and personal debt (3 times the dubious “GDP” figure) that has kept the economy going for decades. This will entail, among other things, a collapse of the huge mortgage bubble and the subsequent bankruptcy of untold millions of families and individuals. The U.S. must figure out a way to balance imports and exports, which, given the vast hollowing out of U.S. industry over the past 35 years, will above all entail a vast reduction of imports, and hence stringent austerity for American working people. <br>
The basic problem of every major crisis in capitalism’s history has been (as rapidly sketched here) that of destroying or deflating a “bubble” of fictitious or speculative claims on wealth (stocks, bonds, property titles) and bringing those claims back into rough correspondence with the “real” rate of profit available in production (speaking very schematically) and from“free inputs” available elsewhere (such as the looting of peasant labor and nature). Unfortunately, seeing this process at work today is greatly complicated by decades in which the U.S. has been fashioned into a rentier economy far beyond anything achieved by its predecessor, the British empire of 1815-1945. While the “story” of how that came about cannot meaningfully be sketched here (2), what has differentiated American world empire from the British since World War II has been America’s ability to force the rest of the world to hold its own debts as the major portion of international reserves in central banks (whereas the British, who could do this with their colonial empire, were globally constrained by serious rivals and the gold standard). Particularly after 1973, the U.S. succeeded in placing the rest of the world on a fiat dollar standard based on nothing but the financial credibility of the U.S. government. At the same time, the U.S. was dramatically de-industrializing, while pundits of the status quo hailed the proliferation of the “FIRE” (finance, insurance, real estate) economy as the coming of a new “service” “post-industrial” economy that would replace the old “smokestack” economy and the jobs lost through plant closings, restructuring, and down-sizing. (They did not then foresee the out-sourcing of such service jobs to such places as China and India.) Because the domestic U.S. economy depends less on international trade than that of most other major capitalist countries, scant attention was paid, outside the same marginal coterie of specialists, to the fact that already by the 1960’s the U.S. was dependent on the largesse of foreigners willing to recycle American balance-of-payment deficits back into U.S. government paper (e.g. Treasury bills) and capital markets (stocks, bonds) to permit this “service” economy to function. Foreign governments and private capitalists had to tolerate this situation because the alternative—the collapse of the huge American market for their exports—would have pulled them into the abyss as well. (During the Cold War, military pressure on Europe and Japan also helped make foreigners more pliable.) With the Cold War over, nothing in this economic arrangement has changed, and things have only gotten far worse, like a small tumor turning into elephantiasis. As U.S. Treasury Secretary John Connally in 1971 told Europe and Japan “it’s our currency, but it’s your problem”. Without the recycling of dollars by foreigners with (to date) little alternative back into the U.S., the driving pillars of the U.S. domestic economy, the consumer financing of auto and housing sales, would collapse overnight.
Read the rest of the article here