Dollar Decline Blues

[Be afraid, be very afraid of what the crash of the dollar will mean to the United States and to your personal finances, although some hedging can be acquired by investing in precious metals. This story explains in understandable terms the dollar’s devaluation and the seemingly infinite fiat currency shell game that centralized financial systems have been playing and will continue to play until the only light in a darkened room will be the one that says, “Game Over”.—CB]

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Orthodox economic theory cannot explain the shrinking of American industrial activity nor the transformation of the United States into a country whose specialty is consumption and one that relies on foreign imports to carry out that role. However, an imperial model of the Roman type does allow one to understand this process, namely as the economic consequences of a specific political and military organization.

August 25th 2006, 3:12PM [PST] - The U.S. economy is barreling downhill. Consider these three charts. In the first one, “U.S. Trade in Goods and Services: Balance of Payments,” the only important columns are the first two on the left: “year” and “total.” As your eye moves down the chart, the values (in millions of dollars) move up and down in a wave pattern, with the negative numbers getting very large in the late 1980’s and the late 1990’s. But then the real trouble starts, and the turn of the millennium marks a new acceleration in the trade gap. We consume far more than we produce.

So the U.S. is not bringing in much foreign money through the international trade of real goods and services. Then where does our money come from? We borrow it:

Other countries buy U.S. debt, in the form of Treasury Bills, for several reasons:

To protect their own currencies from “speculative attack” by large U.S. investors. George Soros crashed the British pound in 1992 with such an attack. You buy up a huge quantity of the victim’s currency, pulling it off the market and making it scarce and therefore more valuable. Then you dump it all back onto the market at that higher value, reaping a large profit while driving the value down again. If a country’s central banks hold enough dollars, other holders of dollars will be reluctant to crash that country’s currency, since it has enough dollars to dump on the market in retaliation. And if the country’s own currency weakens to an uncomfortable point, it can use its dollar reserves to pull some of its own currency off the market, driving its value back up.

To avoid getting bombed into the Stone Age. See Peter Dale Scott, “Unpublished Letter to San Francisco Chronicle concerning the Web, Euros and the Iraq War.”

To preserve the value of the huge dollar reserves they’re already stuck with

China wants its own currency to remain weak and cheap so that consumers in the U.S. and elsewhere will be able to afford Chinese exports priced in yuan. If a widget costs 1 yuan, a weak yuan means a cheaper widget. And the cheaper the Chinese widgets on the shelves of Wal-Mart and Target, the more of them will get consumed, and the more of them will be produced. But that enriches the Chinese, hastening the day when they will achieve enough individual income per capita to afford the fruits of their own labor. At that point, it will no longer be crucial to the Chinese interest to have a cash-liquid America clamoring to buy Chinese goods. Until then, however, the economies of the big holders of U.S. Treasuries, especially China, Japan, and South Korea, need to make sure America has a pocketful of dollars with which to pay for their exports. By purchasing U.S. debt, they are loaning money to Uncle Sam so that he can keep paying for what they sell to him. That’s perverse, since it amounts to an admission that this “debt” is really a permanent structural relationship, not an outstanding loan that might ever be repaid.

From the American side, the weak dollar is supposed to make U.S. exports attractively inexpensive, narrowing the trade deficit. But while the dollar continues to weaken, the trade deficit just keeps growing (with minor fluctuations). That may have less to do with the competitiveness of American prices, and more to do with an outright lack of American goods. That’s especially inconvenient at home, because the imported goods on our shelves become more expensive as the dollar weakens, and there aren’t enough domestically manufactured goods available as alternatives.

As you might expect, the rightist / libertarian Cato Institute takes issue with this picture:

Let’s hear that again: “It is the flow of foreign investment dollars (the capital account) into the U.S. economy that drives the trade deficit.” So the U.S. is able to afford foreign imports because foreign investors lend us the money. Cool! Why do they do it? “The U.S. economy’s higher return on capital than Europe or Japan for the last 20 years caused private foreign investors to buy U.S. stocks and bonds and other assets.” Yes, but that “higher return on capital” is dependent on an expanding manufacturing infrastructure which is choking on high commodity prices (for copper, iron, cement, etc.) and on productivity growth, which has stagnated. Today the productivity growth rate of the U.S. is around 1.8%, while China’s figure has averaged 8.7% per year since 2000.

As the military adventurism of the United States alienates the world’s peoples, families, investors, and governments, it will become more and more attractive for them to endure the economic hardship of a dollar collapse if that will buy them a new freedom from dollar hegemony. Already it is increasingly possible to buy oil without the U.S. dollar. Soon it may be possible to operate the world financial system without the ocean of greenbacks currently draining into the great black hole of history.