Saturday, October 24, 2009

Failed State Update with Krugman and Roberts

by Len Hart, The Existentialist Cowboy

In theory, a near worthless dollar is great for American manufacturers, American jobs. Lower costs for American goods means US exports should rise, reducing our trade deficit and helping pay off the national debt! That's the theory, the rationale behind Richard Nixon's decision to take the US off the so-called 'gold standard' back in the 70s.

The reality is this: despite the right wing's subversion of the dollar, despite the deals Nixon and subsequent GOP regimes cut with China, US exports have decreased, US jobs have decreased, the US standard of living has decreased as just one percent of the population has prospered at everyone else's expense. That has been the case at least since Ronald Reagan's tax cut of 1982, a tax cut which benefited only this rich base of GOP/right wing supporters. These downward trends have defined US history since the 1970s despite temporary gains made during the Carter and Clinton years. I have previously posted the key 'stats' which prove this to have been the case.

Check out the CIA's World Fact Book which lists the US at the very bottom of the list with the world's largest negative Current Account Balance. China, which pegs the Yuan to the dollar, is at the top of the list with the world's largest positive Current Account Balance. If the GOP had been correct, US exports should have risen! The 'balance of trade deficit' i.e, the NEGATIVE Current Account Balance would have been reduced! If the GOP had been correct, the US could have paid off huge amounts of national debt run up in incompetent and dishonest GOP regimes. The US might have survived decades of conservative budgets which forced the US to borrow from other countries. But --not surprisingly --things have not worked out as the GOP would have you believe.
Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.
But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.
--Palin vs Krugman On The Dollar -- Who Is Right?
Foreign Policy magazine goes on to say that, as dismal as the effects of Chinese policy on the US and US consumers, 'It's the rest of the world -- particularly Europe and the Pacific Rim -- that are getting royally screwed by China's policy.' FB claims these countries now suffer because their products are 'less comptetive' in the US vis a vis Chinese exports.

Keep in mind, that it was Nixon who took the dollar off the gold standard because of 'pressures' on the value of the dollar. Simply, had there been a run on the buck, the gold in Fort Knox would not have covered it. The question is: is there any gold in Fort Knox?

Secondly, it was hoped that by removing the dollar from an unrealistic standard, US products would enjoy greater sales abroad. So what happened? Someone please tell me what the US produces? Cars? Nope, it imports them! Take a look at Flint Michigan if you are interested in knowing the effects this has had! Electronics? Nope! Since the early 1960s, it is Japan that has flooded the US market with transistor radios, calculators, etc! Aerospace? Nope! Ask a Californian! The Aerospace industry which had driven the SOCAL boom, is but a shadow of its former glory. What of 'Silicon Valley'. What of it? IT is outsourced to India!
The enormous scale of foreign borrowing and money creation necessary to finance Washington’s wars are sending the dollar to historic lows. The dollar has even experienced large declines relative to currencies of third world countries such as Botswana and Brazil. The decline in the dollar’s value reduces the purchasing power of Americans’ already declining incomes.

Despite the lowest level of housing starts in 64 years, the US housing market is flooded with unsold homes, and financial institutions have a huge and rising inventory of foreclosed homes not yet on the market.

Industrial production has collapsed to the level of 1999, wiping out a decade of growth in industrial output.
--Paul Craig Roberts, "The US as Failed State"   
If the US is a 'failed state', it is because it has been impoverished by at least two trends: 1) the transfer of US wealth upward to just one percent of the US population which now owns more than 95 percent of the rest of the nation combined; 2) the decline of the US dollar, a trend begun when Richard Nixon eschewed the Bretton-Woods agreement.

Richard Nixon Takes U.S. Off Gold Standard
The United States now no longer controls many of its domestic industries. Over the last 10 years alone foreigners have spent $1.2 trillion to acquire more than 8,000 key US companies. As of 2002, foreigners owned fully 20 percent of American manufacturing. In many high-tech and defense-related industries, the proportion is far higher. Such US industries as mining, cement, publishing, engine and power transmission equipment, rubber and plastics, and sound recording and motion pictures are now largely foreign owned. Even in industries like pharmaceuticals, chemicals, industrial machinery, transportation equipment, electronics, metal industries, and coal and petroleum industries, foreign ownership has recently become very high.
Increasingly therefore profits and technological secrets in such industries accrue to foreign owners. Moreover many of the key jobs (in research and development, for instance) go to foreign workers, while the profits that accrue to foreign holding companies boost the tax revenues of foreign governments. We are no longer capable of producing many critical components needed in our high-tech and defense industries. 
--Foreign Ownership of U.S. Industries
I tried to learn the truth about those GOP/China deals back in the late seventies when I had a rare opportunity to put a microphone in front of George H.W. Bush in the Grand Ballroom of the Hyatt-Regency in downtown Houston. Had I known then, what I know now, it might have been a much, much better interview. I left unhappy with getting Bush's goofy story about eating "aeromatic meats" (dog lip) in the Forbidden City.

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