Three years ago, I wrote an article advising readers to “avoid transacting in the American dollar. It is a seriously overvalued currency that gets half its value from being an accepted international means of exchange.” To back up my advice I pointed to “the size of American trade deficits and the serious irregularities that have plagued the American stock market”. I also wrote that readers should invest their money “in other more fairly valued markets. This is easily done with ADRs that are traded as shares on American exchanges. Also check foreign Bonds. The Australian and New Zealand markets offer excellent alternatives. And their currencies are at historic lows.”
Since then, America’s trade deficits have continued to balloon. This year alone, they are projected to amount to 650 billion dollars. That amounts to almost two billion dollars a day.
The prospects of any near term improvement in America’s trade balance are minimal. According to the Wall Street Journal (11/08/2004), “the agricultural-trade surplus is evaporating so quickly that some economists in the Bush administration are quietly speculating that the sector might generate an annual trade deficit as soon as the fiscal year ending September 30, 2005. That would be the first since 1959, when postwar Europe re-emerged as a major farm power.” Along with arms, high tech, commercial airplanes and pharmaceuticals, the agricultural sector is one of the few arenas where the United States continues to maintain a trade surplus.
The rapid decline of the dollar is an indication that the world is getting wise to the fact that America’s chief export commodity is currency. America gets containers of goods and services and sends back containers loaded with newly minted hundred dollar bills.
If America were Argentina, the world would never accept dealing with a country that consistently generates such massive trade deficits. But the United States has a unique comparative trade advantage. Unlike Argentina, it is the only country that can export currency backed by the ‘good faith and credit’ of the American government.
The demand for the US dollar is not a result of a lust for American goods. In fact, a casual walk through almost any major city on the planet reveals a noticeable absence of goods made in the USA. With the exception of Canada and Mexico, you rarely see an American car dealership outside the United States. Even in the United States, most non-edible products on consumer shelves seem to be imported from China and other Asian producers.
So why the hunger for the American dollar? If consumers around the world have no appetite for American gadgetry, why are they chasing the almighty buck? This paradox is easily explained. China and India need American Federal Reserve Notes to buy things like oil from the Gulf. And other nations need dollars to buy Chinese and Japanese products. Argentina uses dollars to purchase Brazilian made products. And Egypt uses dollar to buy wheat from Australia. Almost every country in the world, with the exception of those in the Euro Zone, maintains huge dollar reserves for the purpose of purchasing non-American products and services. Some economies like Panama have been “dollarized” to such an extent that they have done away with a national currency.
The dollar has become a very unique currency. Money is money -” but the dollar no longer possesses all of the classical attributes of money. Like other currencies, it still functions as a means of exchange and a measure of relative value. What makes it very special is that it no longer performs the most vital function of money – being a store of value for purchasing goods and services in the near or distant future from the locale where the currency was printed. Foreigners no longer hold dollars to finance anticipated future imports of American goods. They covet dollars because -” until now – they are readily accepted as an international means of exchange in every corner of the planet.
Until recently, Germans would transact their business with Italy and France using dollars. Japanese and European tourists favored the dollar as their favorite currency away from home. At some point, the Europeans got wise to the fact that the United States was exporting funny money in exchange for very real goods and services. So, they decided to muscle in on this lucrative racket by creating their own super currency. The reasoning behind the Euro was very simple – if you don’t intend to stock up on American products why horde American dollars.
Today, a German tourist no longer needs dollars to travel to Spain because both countries use the same currency. Contracts between Belgium and Austria are now transacted in Euros -” not dollars. Many countries outside the Euro Zone are now diversifying their foreign currency reserves. Most recently, Russia decided to do more business in Euros. And China, which is sitting on a 500 billion dollar reserve, is heading in the same direction.
The growing acceptance of the Euro as an international means of exchange has seriously eroded the demand for the dollar -” at a time when the American appetite for imports has reached alarming levels. Even Steven Roach, the chief economist at Morgan Stanley, is warning of an economic Armageddon. A recent article reported on Roach’s negative assessment: “To finance its current account deficit with the rest of the world, America has to import $2.6 billion in cash. Every working day. That is an amazing 80 percent of the entire world’s net savings. Sustainable? Hardly.” (Brett Arends, The Boston Herald, 11/23/2004)
In classical trade theory, the decline in the value of the dollar should motivate American consumers to avoid the purchase of foreign made products. And foreign countries should develop a new taste for cheaper American produced goods and services. But classical trade theory is as dead as Adam Smith. It simply no longer applies.
For one thing, the massive disparity in labor costs between China and America is a trade disadvantage that is unlikely to vanish because of a decline in the value of the dollar. Any substantial increase in the cost of Chinese products would be met with the increased production of competitively priced products made in India or Brazil -” not by a sudden mushrooming of plants in the American rust belt. Environmental laws in the United States are another challenge that will prevent a rapid build up of new infrastructure for producing domestic consumer products.
Moreover, Americans are now accustomed to working in white-collar jobs or in the service industries. The typical worker is not inclined to seek a career as a factory worker and would need substantial training to get up to assembly line speed. American ‘know how’ is now widely disseminated. When it comes to the production of most consumer products, the United States has very few advantages in technology, management expertise and marketing strategies. With the gradual but steady improvement in the quality and reputation of Chinese, Mexican, Brazilian and Indian products, America will lose other vital advantages -” like branding and licensing.
China and India are becoming very competitive in high tech products and are now venturing into the pharmaceutical sector. They are also making strides in the manufacture of arms. If the Chinese or Indians manage to develop effective ground to air technologies to counter stealth air power -” they will not only make a huge dent in the arms market but will also challenge American military dominance.
My point is that the decline in the dollar is likely to generate even bigger trade deficits. Even if foreign products get more expensive, the American consumer will not have the option of switching to competitively priced domestic substitutes. So, he will be forced to part with more dollars to satisfy his craving for goodies from China and India. The only significant change in American consumer habits might be a reluctance to travel to Europe. The Sterling and the Euro have become mirror images of the dollar -” and are now obscenely over valued. The seemingly irrational demand for both currencies is due to a panic flight from the dollar. But the Euro continues to qualify as a safe haven from the tumbling dollar because it still retains the characteristic of being a store of value. People actually hold Euros with the intent of buying European products. Germany, for example, does a robust trade selling machine tools and capital equipment to China.
At the time I projected the decline of the dollar, I also counseled Arab governments to “diversify their hard currency holdings so as not to be hurt by the inevitable decline of the dollar. They can start accepting Euros instead of dollars for their oil.”
While that advice proved to be right on the money, it failed to take account of the nature of America’s intimate relationships with the Arab sheiks that run the oil plantations in the Gulf as a family business. At first, I was confounded that the Gulf Arabs continued selling their oils for dollars -” even at a time when the administration in Washington was formulating stridently anti-Palestinian and anti-Iraqi policies.
Since then, I have come to realize that America and the Gulf Arabs have a gentleman’s agreement to price oil in dollars and accept only dollars in exchange for black gold. The dollar revenues from the oil – so-called petro-dollars – are then repatriated to the United States and invested in American capital markets. This arrangement creates an enormous international demand for the dollar and generates capital inflows to the United States that help offset monstrous trade deficits. An added benefit is that the capital inflows from the Gulf also help finance the 500 billion dollar domestic budget deficit.
The Saudi royal family is estimated to have 900 billion dollars invested in America -” much of it managed by folks like the senior Bush, James Baker and John Major, the ex-prime minister of England. These figures do not account for the investments of the Sabah clan in Kuwait or other Gulf monarchs. Neither does it account for the European holdings of these Arab tribal chiefs. Everybody gets something out of the deal. The United States gets to indulge its appetite for imported goods by exporting massive amounts of currency to an oil starved world. And the gluttonous Arab sheiks get the privilege of expatriating their people’s wealth to safe havens on foreign shores.
Many anti-war activists have long assumed that America’s military adventures in the Gulf are motivated by a desire to grab the oil. This simplistic analysis fails to take into account that American consumers and manufacturers pay the same price for a barrel of oil as their economic rivals in Japan, China and Europe. Every dollar spent in military operations in the Gulf is a premium that Americans pay for oil that can freely be purchased at the same price as their major competitors. But it’s not about the oil, stupid. It is about the oil revenues. America’s strategic interest in Gulf is to keep oil priced in dollars and to have a final say in production levels and pricing. The cozy relationship with the Saudis also insures that a good portion of proceeds from oil land right back in the USA. A good slice also ends up in the United Kingdom -” which might explain why British forces team up with the US army in every military expedition to the Gulf.
Notice that the Bush administration has demonstrated little concern that oil prices have tripled since the Iraq war. Washington might very well be satisfied with the increase in energy prices. It creates an even greater demand for the dollar from oil consumers in China, India, and Europe. This increased demand for American currency comes at an opportune time when the world is saturated with dollars.
The bottom line is that America is raping the world with the dollar. We have made our currency the number one export commodity in the world. In the process, we have launched wars of aggression to prop up the international demand for American legal tender. Our devil’s deal with the kleptocrats of the Gulf has pauperized the people of the region. Keeping the region politically unstable and economically stagnant has become a national priority. True enough, our adamant refusal to resolve the Israeli-Palestinian conflict is primarily motivated by appeasing a domestic constituency of militant Likudniks and neo-cons. But the conflict also gives a cloak of legitimacy to the kleptocrats that operate the oil plantations in the Gulf. They can posture as allies of the Palestinians while systematically looting their people’s wealth.
The dollar might be coming down to earth -” but not before severely scorching the planet. Idle plants litter the rust belt with few prospects of ever becoming productive again. Millions of Americans have lost their jobs and thousands have been killed and wounded protecting our dollar racket in the Gulf. The dubious credit and good faith of the United States of America rewards the sweat and tears of millions of workers in the third world with a currency that lacks the most vital attribute of money -” because the dollar no longer qualifies as a store of value.
We control the oil to make the world safe for the export of dollars -” not for the export of democracy. We impose ourselves in the Gulf to finance our budget deficits with the illicit gains of gluttonous Arab sheiks. As a result tens of thousands of Iraqis lie in freshly dug graves so we can protect our partners in crime -” the Saudis and the Al Sabahs. When Saddam made noises about selling his oil for Euros -” he put one final nail in his coffin.
As things turned out, the Iraq war was not the cakewalk projected by the War Party. It turned out to be infinitely more expensive in blood and treasure. The resulting exponential increases in both budget and trade balance deficits occurred in an international economic environment saturated with green backs. With the resulting inevitable decline in the value of the dollar, millions of business and individuals around the globe feel that they have been severely burned by America’s dollar exporting racket.
In the process of propping up the international demand for our currency, we have become an avaricious nation of paper pushers addicted to foreign products. We don’t care about trade deficits because we can inflate our way out of our troubles and put up trade barriers whenever it suits us. When push comes to shove, we will still have the last laugh and abandon the world to drown in an ocean saturated by green paper symbolizing the lack of good faith and the abysmal credit of the American people. Neither do we care about budget deficits because we can pass the tab onto future generations of Americans.
The world is onto us. They are discovering that we support globalism only because it increases the demand for the almighty buck. History will show that one of the reasons we wreak havoc in the Middle East is to prop up our currency. We, the Currency Exporting States of America, have resorted to mass murder to finance mass consumption. We cannot be accused of spilling blood for oil -” because we are innocent of such inflammatory charges. We spill blood to keep the world in love with our freshly minted hundred dollar bills. So, drop everything. Wal-Mart has a few Christmas specials made in China. And may each and all have a happy gluttonous New Year.