← Autodidact Archive · Original Dissent · jamestown
Thread ID: 11955 | Posts: 2 | Started: 2004-01-19
2004-01-19 16:16 | User Profile
[SIZE=4]ONCE UPON A TIME IN AMERICA[/SIZE]
by Ron Morrison
[URL=http://www.prosperityuk.com/prosperity/articles/article-idx.html]Prosperity[/URL]
First printed in Prosperity, November 2003
Why is it that America seems to be able to afford anything its Government wants to do? The rest of us are never finished being told that we must become more efficient, tighten our belts, modernise and cut-back because there's no money.
If American industry was indeed so wonderful that the rest of the world is in serious debt to them, then perhaps this would be one explanation. But the converse is the case – the US balance of payments is the most atrocious in the world. In the EU our governments must not plan a domestic deficit of more than 3%, but in America they habitually run at 5% - probably considerably more. The rest of us must maintain a balance of payments between exports and imports or the IMF will intervene with their penal 'Adjustments' but not America, they consistently maintain a huge deficit – the US is the biggest debtor country in the world! How on earth do they get away with this?
At the beginning of 2002 foreign holdings of US Treasury Bonds totalled just over $1.25 trillion. At current levels, foreign investors own 36.7% of outstanding marketable Treasury securities. Foreign investors also held $745.6 billion of U.S. government agency issues, making a total of over $2 trillion – well over a third of the US National Debt. Like all National Debt, there is no possibility of repayment of principal, although these bonds do pay a modest return of interest (in more US dollars).
One might wonder therefore why America is the wealthiest country in the world when its Profit & Loss Account and Balance Sheet are in such condition. Why for instance don't the foreign creditors use their surplus dollars to buy up US industry and assets? Well, that's because these dollar IOUs are held by the exporters' Central Banks and they, as government agencies, are simply not able to use these to buy up assets. This is why there is no point in running a balance of payments surplus. This is more readily understood if we reduce the process of earning foreign currency to its basic elements.
For instance, a Chinese exporter might sell a boatload of tvs to America. He is paid in dollar credits which he pays into his bank. As his business accounts are denominated in Yuans, the foreign exchange dept. of his bank, which also works in Yuans, sends the dollars to the Chinese Central Bank which exchanges these for a credit in Yuans. The exporter is now happy, his clearing bank is happy, no 'new' money has been created because the 'new' Yuans are balanced by the incoming dollar credit. From an accountancy aspect the double entries are balanced and complete. America now has a boatload of tvs and the American Central Bank (the Fed) which guarantees the US dollar, is now indebted to the Chinese Central Bank.
Prior to 1971 when America was forced off the gold standard, the Chinese government would have asked the US government to transfer gold bullion to settle the debt, but post 1971 the US dollar was accepted as being 'as good as gold', and the best option in the circumstances to keep world trade moving. Now, whilst businesses and individuals possessing dollars can buy US stocks and properties, other governments may not do so. Their only option is to buy US Treasury Bonds and encourage their entrepreneurs and importers to start importing additional US goods and services to try and run down their surplus dollars. This latter option is not so easy.
Let us imagine that a prospective Chinese entrepreneur visits the US to see what importing opportunities he can find. Remember the only dollars he can lay hands on are by buying these for Yuans on the foreign exchanges. He will find most US goods expensive because labour and other costs are much higher there. It will be difficult to find anything which he can import profitably and sell in direct competition to Chinese home production.
He will therefore start looking at goods which are not yet produced in China but for which he believes there might be a demand. His choice will be narrow – some high tech electronic software (which the US government may well embargo to China), and very many luxury items which most Chinese people couldn't afford. Items like sophisticated medical equipment and civil aircraft yes, but they are already regularly exported to China. He could seek opportunities in other countries but the problem is twofold. First, China is building up a major domestic economy and fast becoming independent of many imports and secondly the bulk of the population is too poor to qualify as a lucrative consumer market.
A similar surplus of dollars exists in OPEC countries. Some years ago the Saudi Authorities suggested that they might apply their dollar reserves to buying up American corporations and properties. The US Congress told them that this would be regarded as a 'hostile act' and we all know what that means. The Saudis were doing pretty well anyway and decided not to upset the oil barrel. Other oil producers will be well advised to take note of recent events in Central Asia and the Middle East - Saddam who promoted the idea of denominating oil prices in Euros soon had his comeuppance.
Much U.S. debt is incurred by the huge expenditure on its military and diplomatic 'presence' in areas it wishes to influence. It is perhaps not surprising therefore that sophisticated European Nations have also built up virtually unusable dollar surpluses Рthe UK is the second largest holder of US debt certificates at $150bn (China holds some ̣125bn and Japan is the biggest at $450bn). ***
However, as we shall see, the greater the debt the greater the benefit to the US and incidentally, the international relationship aspect – it's always a good idea to be friendly with the biggest and strongest boy at school, and worth giving him a few sweeties from time to time…
As the world's largest net importer, America gains much wealth from this arrangement. Already powerful through its own successful domestic economy, it has become even more dominant by absorbing the economic strength of others. It uses this power to continually compound its influence. Power is exercised in two ways, first by military persuasion - no matter how good the intellectual argument (like running the world via the UN or having a 'neutral' currency expressly to maintain a balance in international trade), if the result is seen as reducing America's influence it will be regarded as 'a hostile act'. Secondly, financial pressure exerts much power – in short if you owe the Bank $100,000 you have a problem. If the Bank is owed $2 trillion the whole world has a problem.
Economic theory is quite incapable of dealing with such matters. Any attempt to construct academic mathematical models upon such unquantifiable criteria creates nothing but confusion – a confusion encouraged by the beneficiaries of the present system. Unfortunately most politicians go with the flow and have neither the time nor inclination to question the status quo.
The solution must lie with an updated United Nations. For as long as it resides in New York and depends upon America for its financing, it will remain a toothless dragon – a decoration obscuring natural democracy. It should be re-evaluating the International Currency system first mooted by Keynes at Bretton Woods in 1948. It should be trumpeting the stability this could introduce not only to genuine world trade, but to a United States facing a deepening identity crisis both inside and outside its borders.
The problem is not the American people who, by nature, are probably as democratic in outlook as any. It is the hi-jacking of their government by self-seeking individuals and groups bent upon using democracy as a euphemism for plutocracy – government by those who have most wealth. The solution lies with the people of America. They can choose to fight the rest of the world at terrible cost to us all, or they can lead with the statesmanship and probity defined by the Founding Fathers. But they will have to listen to the other 95% of the world's population, and they will need to use their vote.
Prosperityuk.com
*** When Saddam moved from the $ to the Euro as Iraq’s preferred hard currency the rest of OPEC also considered the option. Their thinking was that with another 10 countries joining the EU in 2004 almost half of their oil exports would be going to the EU and it seemed pointless to invoice the EU in dollars. The fact that the $ was losing value to the Euro was another incentive.
As Japan gets practically all of its oil from OPEC, the change in payment from $ to Euro would have meant disaster for the $.
Taking the above into consideration was it a coincidence that two weeks after Iran and North Korea adopted the Euro as its preferred hard currency, both countries made the axis of evil.-NT
2004-01-20 02:12 | User Profile
[QUOTE]Taking the above into consideration was it a coincidence that two weeks after Iran and North Korea adopted the Euro as its preferred hard currency, both countries made the axis of evil.[/QUOTE] I didn't realize that.
Good article.