lunes, diciembre 10, 2007

Impending Destruction of the US Economy

By Paul Craig Roberts

11/28/07 "ICH

--- Hubris 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.

Which will Washington sacrifice, the domestic financial system
and over-extended homeowners or its ability to finance deficits?
The answer 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.
China holds 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.

No country 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 admin.

Obviously, countries are not locked into accumulating dollars.
The reason 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.

Japan and 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 forthe 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.
Japan and 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.
The dollar’s 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.
If foreigners 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.Foreigners 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.
The sharp 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.
The budget 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 mobility.

The situation 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.

The falling 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.

This source 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.

Superpower 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.

By focusing 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.


Dr. Roberts was Assistant Secretary of the US Treasury f
or Economic Policy in the Reagan administration. He is credited
with curing stagflation and eliminating “Phillips curve” trade-offs
between employment and inflation, an achievement now on the verge
of being lost by the worst economic mismanagement in US history.

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