Of The US Economy
By Paul Craig Roberts
29 November, 2007
and arrogance are too ensconced in Washington for policymakers to be
aware of the economic policy trap in which they have placed the US economy.
If the subprime mortgage meltdown is half as bad as predicted, low US
interest rates will be required in order to contain the crisis. But
if the dollar’s plight is half as bad as predicted, high US interest
rates will be required if foreigners are to continue to hold dollars
and to finance US budget and trade deficits.
Washington sacrifice, the domestic financial system and over-extended
homeowners or its ability to finance deficits?
seems obvious. Everything will be sacrificed in order to protect Washington’s
ability to borrow abroad. Without the ability to borrow abroad, Washington
cannot conduct its wars of aggression, and Americans cannot continue
to consume $800 billion dollars more each year than the economy produces.
A few years
ago the euro was worth 85 cents. Today it is worth $1.48. This is an
enormous decline in the exchange value of the US dollar. Foreigners
who finance the US budget and trade deficits have experienced a huge
drop in the value of their dollar holdings. The interest rate on US
Treasury bonds does not come close to compensating foreigners for the
decline in the value of the dollar against other traded currencies.
Investment returns from real estate and equities do not offset the losses
from the decline in the dollar’s value.
over one trillion dollars, and Japan almost one trillion, in dollar-denominated
assets. Other countries have lesser but still substantial amounts. As
the US dollar is the reserve currency, the entire world’s investment
portfolio is over-weighted in dollars.
wants to hold a depreciating asset, and no country wants to acquire
more depreciating assets. In order to reassure itself, Wall Street claims
that foreign countries are locked into accumulating dollars in order
to protect the value of their existing dollar holdings. But this is
utter nonsense. The US dollar has lost 60% of its value during the current
administration. Obviously, countries are not locked into accumulating
the dollar has not completely collapsed is that there is no clear alternative
as reserve currency. The euro is a currency without a country. It is
the monetary unit of the European Union, but the countries of Europe
have not surrendered their sovereignty to the EU. Moreover, the UK,
a member of the EU, retains the British pound. The fact that a currency
as politically exposed as the euro can rise in value so rapidly against
the US dollar is powerful evidence of the weakness of the US dollar.
China have willingly accumulated dollars as the counterpart of their
penetration and capture of US domestic markets. Japan and China have
viewed the productive capacity and wealth created in their domestic
economies by the success of their exports as compensation for the decline
in the value of their dollar holdings. However, both countries have
seen the writing on the wall, ignored by Washington and American economists:
By offshoring production for US markets, the US has no prospect of closing
its trade deficit. The offshored production of US firms counts as imports
when it returns to the US to be marketed. The more US production moves
abroad, the less there is to export and the higher imports rise.
China, indeed, the entire world, realize that they cannot continue forever
to give Americans real goods and services in exchange for depreciating
paper dollars. China is endeavoring to turn its development inward and
to rely on its potentially huge domestic market. Japan is pinning hopes
on participating in Asia’s economic development.
decline has resulted from foreigners accumulating new dollars at a lower
rate. They still accumulate dollars, but fewer. As new dollars are still
being produced at high rates, their value has dropped.
were to stop accumulating new dollars, the dollar’s value would
plummet. If foreigners were to reduce their existing holdings of dollars,
superpower America would instantly disappear.
have continued to accumulate dollars in the expectation that sooner
or later Washington would address its trade and budget deficits. However,
now these deficits seem to have passed the point of no return.
decline in the dollar has not closed the trade deficit by increasing
exports and decreasing imports. Offshoring prevents the possibility
of exports reducing the trade deficit, and Americans are now dependent
on imports (including offshored production) for which there are no longer
any domestically produced alternatives. The US trade deficit will close
when foreigners cease to finance it.
deficit cannot be closed by taxation without driving up unemployment
and poverty. American median family incomes have experienced no real
increase during the 21st century. Moreover, if the huge bonuses paid
to CEOs for offshoring their corporations’ production and to Wall
Street for marketing subprime derivatives are removed from the income
figures, Americans have experienced a decline in real income. Some studies,
such as the Economic Mobility Project, find long-term declines in the
real median incomes of some US population groups and a decline in upward
may be even more dire. Recent work by Susan Houseman concludes that
US statistical data systems, which were set in place prior to the development
of offshoring, are counting some foreign production as part of US productivity
and GDP growth, thus overstating the actual performance of the US economy.
dollar has pushed oil to $100 a barrel, which in turn will drive up
other prices. The falling dollar means that the imports and offshored
production on which Americans are dependent will rise in price. This
is not a formula to produce a rise in US real incomes.
In the 21st
century, the US economy has been driven by consumers going deeper in
debt. Consumption fueled by increases in indebtedness received its greatest
boost from Fed chairman Alan Greenspan’s low interest rate policy.
Greenspan covered up the adverse effects of offshoring on the US economy
by engineering a housing boom. The boom created employment in construction
and financial firms and pushed up home prices, thus creating equity
for consumers to spend to keep consumer demand growing.
of US economic growth is exhausted and imploding. The full consequences
of the housing bust remain to be realized. American consumers lack discretionary
income and can pay higher taxes only by reducing their consumption.
The service industries, which have provided the only source of new jobs
in the 21st century, are already experiencing falling demand. A tax
increase would cause widespread distress.
As John Maynard
Keynes and his followers made clear, a tax increase on a recessionary
economy is a recipe for falling tax revenues as well as economic hardship.
America is a ship of fools in denial of their plight. While offshoring
kills American economic prospects, “free market economists”
sing its praises. While war imposes enormous costs on a bankrupt country,
neoconservatives call for more war, and Republicans and Democrats appropriate
war funds which can only be obtained by borrowing abroad.
America on war in the Middle East, the purpose of which is to guarantee
Israel’s territorial expansion, the executive and legislative
branches, along with the media, have let slip the last opportunities
the US had to put its financial house in order. We have arrived at the
point where it is no longer bold to say that nothing now can be done.
Unless the rest of the world decides to underwrite our economic rescue,
the chips will fall where they may.
Craig Roberts was Assistant Secretary of the Treasury in the
Reagan Administration. He is the author of Supply-Side Revolution :
An Insider's Account of Policymaking in Washington; Alienation and the
Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author
with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors
and Bureaucrats Are Trampling the Constitution in the Name of Justice.
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