Article: Giant In Decline

[Dover]

Jan 25, 2005



Giant in decline
By Marshall Auerback

In his 1849 novel Les Guepes, Alphonse Karr penned the classic line: "The more things change, the more they stay the same." In the case of the United States in 2005, however, the opposite might be true: The more things stay the same, the more they are likely to change ... for the worse. In that regard, compiling a list of potential threats to the US this year has a strangely deja-vu-all-over-again feeling. After all, such a list would represent nothing more than a longstanding catalogue of economic policymaking run amok. Virtually the same list could have been drawn up in 2004, or 2003, or previous years.

Such threats would include: a persistent and increasing resort to debt-financed growth and a concomitant, growing imbalance in the trade deficit, leading the US ever further into financial dependency and so leaving it dangerously indebted to rival nations, which could (at least theoretically) pull the plug at any time. This, in turn, is occurring against the backdrop of an increasingly problematic, Vietnam-style quagmire in Iraq, against imperial overstretch, and against a related ongoing crisis in energy prices, itself spurring an ever more frantic competition for energy security, which will surely intensify existing global and regional rivalries.

Just as a haystack soaked in kerosene will appear relatively benign until somebody strikes a match, so too, although America's long-standing economic problems have not yet led to financial Armageddon, this in no way invalidates the threat ultimately posed. For economy watchers in 2005, the key, of course, is to imagine which event (or combination of them) might represent the match that could set this "haystack" alight - if there is indeed one "event" which has the capability of precipitating the bursting of a historically unprecedented credit bubble...cont'd

http://www.atimes.com/atimes/Global_Economy/GA25Dj01.html

[PROGRESSIVE1]

1. kick

[happyslug]

2. First the US decline is relative

Remember the US nearest Competitors (Europe) made a serious effort to kill each other off between 1914 and 1945. Except for the US NONE of the combatants of WWI recovered from WWI before the Great Depression started. Come WWII the US actually GAINS in economic power while Europe again goes down in flames. By 1945 HALF of the GNP of the World is made in the US. THE US IS THAT DOMINATE. The Marshall plan is not only an effort to defeat the Soviet Union, but an effort to relieve the huge US trade SURPLUS of the late 1940s that offered to send Europe back even further (and into the Soviet Camp so the two were related).

Come the 1960s Europe had finally caught up with the US vis a vis what both had been in 1914 (Through in 1914 Europe was bigger than the US and in the 1960s the US was Bigger but dependence Europe had on the US 1945-1960 was over). Into this new reality the US went into Vietnam. That war used up more and more US Resources. Finally to avoid an economic collapse Nixon in 1971 floated the Dollar rather than cut back spending on Vietnam and the Cold War. In 1970 the US started to import more oil than it exported, this change along with the growth of Europe and Japan caused the US to go from a net exported to a net importer. This was another factor in floating the Dollar.

Finally in 1973 the Arab embargo oil, and unlike the Arab Oil Embargo of 1956 and 1967 (which had no effect for the US was a net Exported of oil prior to 1970) the 1973 embargo had a heavy effect on the US Economy already weaken by excessive inflation do to the cost of the Vietnam War. The Democratic Congress stepped in and tried to straighten out the Mess, told the Pentagon to plan for only 1 1/2 war instead of he pre-1970 planning for 2 1/2 wars, pulled out of Vietnam cutting out losses there, and tried to avoid domestic problem by trying to solve the high unemployment of the time period while controlling inflation. Congress did a good job of balancing these two and was assisted by Carter when he became President in 1976. The problem was the costs to balance the Inflation caused by the increase in oil prices, the cost of rep-financing the Vietnam debt (and to continue to fight the Cold war And reduce unemployment) was 21 % inflation. With inflation as a threat Reagan defeated Carter and also won a working "Majority: in Congress (The House was still Democratic but enough Democrats would vote for Reagan's policies to get them passed). Do to the Baby-Boomers finally all having jobs and you had the lowest number of new workers coming into the work force since the 1950s, Reagan was able to reduce inflation by causing acceptable unemployment (again the unemployment was acceptable for you had the smallest number of new employees entering the market since the 1950s).

Reagan claimed he defeated inflation, but it was a steady 5-6% during both his and Bush's Sr's Presidency. Inflation was only controlled with the Collapses of the Soviet Union in 1991 which permitted the US to cut Defense Spending AND go back to a 2 1/2 war posture. Finally with Clinton you had a boom in the economy with low inflation and low unemployment (Through to be honest the Inflation was kept in check by keeping wages low and that was done be permitting in more and more immigrants that kept demands for wages increases low, even in the 1990s economist where asking where was the wage inflation? The answer was in off-shoring, and immigration both undercut demands for wage increases.).

While Clinton almost balanced the Budget (It was balanced if you include Social Security, it was not if you exclude Social Security), Clinton also permitted the bubble of the net boom (and in this he was assisted by the GOP Congress and the Federal Reserve, both deserve more blame than Bill). While the Budget had been balanced, no excess income came to the Government so that the Government could start to pay off the debt built up since Kennedy's administration (Since 1961 only LBJ in 1969 and Bill Clinton in 1999 balanced the Budget). That debt is still sitting there.

When Bush jr became President the Internet bubble bust, and he demanded his tax cuts. Bush jr thus returned us to the days of his father with a year. The debt ballooned. The US under Clinton had had terrible trade balances, but at least you had the stock market for those foreign countries to invest in. With Bush in and his policies clear, more and more foreign investors (and American Investors) abandoned the American economy. Foreign Central banks to keep their own people employed, started to invest their money into the US to keep their currency stable compared to the US Dollar. This is possible for the US is NO longer 50% of the world economy, thus it is possible for other countries to subsidize the US Dollar. Why are such countries doing this subsidies? If the US dollar goes down Japan and China (and the other Asia Tigers) could export less to the US. If these countries export less, they will have massive layoffs, which will lead to social Unrest. Given their fear of Social Unrest these Countries prefer to risk bankrupting themselves rather than face revolution.

Thus the great economic miracle you have today. The Asia Tigers (including Chain, Japan and Korea) are buying US Treasury Bonds so to keep their own currency constant with the US Dollar. These same countries are exporting items to the US and receiving those Dollars Back. This money is than taken by the Central Bank (Through internal borrowing or taxes) and is used to buy more US t-bonds. This can only go on so long. Sooner or later people will fear the lost of their "savings" (now in US T-bonds) more than the lost of trade. This may come with the refusal of local banks from taking US T-bonds from their Central Bank, demanding their own currency instead, it may come with an inability to raise enough tax money to buy the US t-bonds, but sooner or later it will happen. Once it happens you will see one country just lift all controls on its own currency while dumping US T-bonds on the World Market. I expect this to be one of the smaller countries first, Malaysia is my bet. This will be followed by Indonesia, Thailand, and the rest of the second tier of the Eastern Pacific. The Big four (Japan, China, Taiwan and Korea) will be at the end, with Korea and Taiwan going before China and Japan (This is provided the move is forced on these countries by the Market instead of one of the Countries being pro-active and dumping their T-bonds first).

I lean to the market forcing the issue for the internal problems of these nations are to frightening for their leadership to risk internal unrest just to minimize a lost in US t-bonds investment.

Thus the problem is NOT how it will happen but when and what will cause it? A riot in the US may panic investors in Malaysia, a oil shortage may cause the needed panic. I can not foresee what will cause the panic but once it set in the Market forces released by that Panic will force ALL of the Asian Tigers to give up their T-Bills. The Dollar will drop like a rock.

Now what about Europe? Europe is still trying to get the Euro to work. Germany and France are subsidizing the rest of the Euro zone to make the currency work. Europe's present weak growth is tied in with this commitment to the Euro. Germany and France could make their economy boom if their give up their commitment to keep the Euro Stable throughout Europe. That being the case why are Germany and France still committed to the Euro? The reason is if the Euro replace the Dollar as the world's reserve Currency, Germany and France as the nations who control the Euro will wake all the benefits of their currency being the one used in international Trade. Presently the US has this advantage, but is losing that function by scaring investors with the US huge trade and spending Deficits. The key is what will care investors from the Dollar to the Euro? It will be the same thing that will cause one of the Asian Tigers to give up holding their own currency constant to the US Dollar. Thus do not look for Europe for what will happen to the Dollar look to Asia. Europe will benefit the most but the Panic that caused the fall of the US Dollar will first affect the Asian Tigers.

Please note this prediction is based on the Belief that Bush will NOT ask Congress to pull out of Iraq, cut Military spending by 90% and thus balancing the US Budget. If Bush did that he would save the Dollar as the world Reserve Currency, but he is to reckless and his whole administration do not understand cause and effect, only the good old boys network they having been a member of since before Collage.

[umass1993]

3. T-Bonds aren't for sale

The Asia Tigers (including Chain, Japan and Korea) are buying US Treasury Bonds so to keep their own currency constant with the US Dollar.

I believe. T-bills and T-notes are for sale. The bonds have been discontinued. There is a difference, and the fact that the people responsible for this article do not know it, hurts the articles credibility.

[54anickel]

4. I don't know about that. I've read articles by anaylsts that still refer

to Treasuries being purchased by Asia as US Treasury Bonds. I certainly do not agree that it hurts the credibility of the poster or their post (which I assume is what you are referring to since I did not see your quote in the original article).

[happyslug]

5. Thanks for the Support

Anyway the point I was trying to make (and as I re-read my thread I missed) is that while the US represented HALF of the world economy in 1945, the US Share of the GNP today is less than the Euro Zone and less than the emerging Asia Tiger Zone (Japan. China, Taiwan, Korea, Malaysia, Thailand, Hong Kong, Singapore Indonesia etc).

By 1999 the US share of the World's GDP was only 20.8%, with the Euro Zone at 20.2 %, Japan at 8% and the rest of the world at 51% (Almost the same number the US had in 1945). Since that time the Euro Zone and China had expanded its percentage of world wealth while the US and Japan's shares had decline.

Simply put the US is NOT the dominate Country the US was in 1945. What the US could get away with in 1945, the US can NOT even think doing today. Anyway you are looking at three regions with about the same percentage of World Wealth (The US, The Euro Zone and the Asian Tigers) These three areas represent about 20% each of world wide GNP. That leaves less than 40 for the rest of the World (Eastern Europe, Russia, OPEC, non-OPEC Muslims countries, Africa, Central and South America). This decline in the relative strength of the US compared to Europe and the rest of the world is cause of the US problems. The US is still acting like the US had over half of the world's GNP and even if the rest of the world would gain up on the US the US could still defeat them. While that was true in 1945 it has not been true since Vietnam and differently not true today.

Today the US can NOT survive without support from the rest of the world. The Euro Zone (20% of the world GNP) has NOT helped America, Japan and the Asian Tigers have help (By buying US debt instruments).
OPEC has helped by keeping the oil flowing.

The problem facing the US is what will happen when one of the Asian Tigers decide it has more to lose do to an American Meltdown than internal problems? Once this starts on one Country it can spread rapidly. Europe has no reason to stop it, the US can not (where would Bush get the Money?) and unlike 1945 the US can be overwhelmed by the rest of the world (In fact can be overwhelmed even if the Euro Zone stays Neutral given it alleged limited holdings of Dollars).

That was the point of my rant, the Dollar can not be defended if the Asian Tigers decide (or are force to by the Market) to abandon buying Dollars. If OPEC is also to abandon the Dollar by the same market forces that will force the Asian Tigers (The most Likely scenario) the drop may be done in days (if not a day).


For information on 1999 World Wide GNP Percentages, if you have a better site please feel free to post:
http://www.aug.edu/~sbajmb/paper-pkp-1999.pdf#search='US%20Share%20of%20WORLD%20GDP'

[54anickel]

6. Your welcome. I understood where you were coming from and

I tend to agree with much of your analysis. I've been following this off and on since the mid-nineties. No offense to anyone here on DU, but Clinton and Rubin were no angels when it came to the currency markets back then either. I'd have to spend time digging thru old posts to offer up any links or articles.

I was hoping your detractor would add a bit more depth to the discussion than what he posted regarding your use of the phrase US Treasury Bonds. We are headed into unchartered waters and I like to read up on as may opinions as to what's going on as I can find. Thought maybe the poster might have had a bit more insight than what was offered. :shrug:

I found the articles regarding speculation on China revaluing the renminbi this past week or so (heading into the G7) quite interesting. Even Malaysia got in on the game trying to shake the speculators off of the scent.

Here's an article from the other day that you might find interesting. It relates to your comment about the US not being able to survive without support from the rest of the world.

I'll edit to add the thread once I find it.

How the U.S. Became the World's Dispensable Nation

http://www.informationclearinghouse.info/article7838.htm

edit to add:
Here's where I posted it with a couple of other somewhat related articles.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=1184994&mesg_id=1193366

[happyslug]

9. I agree with you on Rubin and Clinton

Classic Keynesian Economics said you have to rein in the economy when it over heats (and pay off any governmental Debt). The problem with America since the 1960s has been we are Keynesian during recessions and than go supply side/ Austrian School of economics during booms. I.e. The Government borrows money during recessions to get the economy going (Keynesian economics) and than when the Economy starts to boom the US does NOT Increase taxes to pay the debt incurred during the last recession. You have to be consistent and the US has not been since Reagan became President. The basic reason is Keynesian economics works but unpopular with people with money.

Remember most economists are hired by bankers or other wealthy investors and the last things such investors want to hear is that it is better to tax the wealthy and give benefits to the poor. Thus the only economist that tend to be hired are Supply siders or Austrian school for such economist tell their employers what their employers want to hear. The worse part the failures over the last 25 years (i.e. Since Reagan's first election) has been the failure of the American People to continue to accept that these economist with their record of Failure. Keynesian Economists are attacks when their "priming" the economy don't work, but Supply siders and Austrian School economists are NOT attacked when their policies lead to disasters.

Anyway in my opinion Rubin and Clinton should have restrained the economy (i.e. Raise taxes). I know why it was not done the GOP would have had a field day riping into Clinton and Rubin for Raising taxes to reduce the Debt. But remember the polls at that time indicated the American People SUPPORTED using the Surplus to booster Social Security AND pay off the debt. Thus raising taxes in 1998 to reduce the boom was a risk worth taking. I know why it was not done, but lets blame the GOP for that for the GOP were the ones who forced Clinton and Rubin to do nothing.

[oecher3]

13. I know little about Rubin...

...I have his biography on nightstand-list-of-things-to-read, but he has fallen behind Krugman's "The great unraveling" and Landsburg's "Fair Play." But unfortunately, I haven't been in this country for less than 8years so I have to read up on everything that happened here before I gained conscience. And I was under the impression the Clinton administration was doing a good job with popularity around the world and by economists' standards. Although I have to agree that there is some conflict of interest between working in business and being an independent economist, i.e. look how the rw side is now trying to frame Paul Krugman as the insane idiot, once praised now losing his mind.

In other words, I am really interested in this and enjoy reading everybody's comments on this.

And I apologize, I am one of those who claims to have some more knowledge of the monetary field and I still throw out the term Treasury Bond as a lose fit for government issued debt.

[umass1993]

7. Correction:

this was the posters interpretation. I misspoke, when I said that it hurts the articles credibility, I should have said the posters credibility.

Not that the overall message is untrue. I agree with much said.

But it is important to get details right. That goes for me as well. That is why I posted this correction. :-)

[54anickel]

8. Thank you for the clarification of your stance on the topic in your

statement:

"I agree with much said". ;-)

May I ask what your thoughts are on the original article posted?

[umass1993]

10. I am familiar with most of the points made...

But I think until some consequences of this profligacy are felt, nothing will change.

To most people it will remain just a political battle of words.

Cheney said "Deficits don't matter." And he was right, until something shows the American people that they do matter.

The credit bubble has been predicted to pop for a while now, but it still going.

A lot of questions, not a lot of answers.

[54anickel]

12. Thank you, and yes there certainly seems to be a lot of questions - with

the answers being anybody's guess. Also, thank you for the link in your second reply. Looks very interesting. I've bookmarked it for future review when I have a bit more time to devote to it.

[umass1993]

11. I've read books by

Michael Klare, "Blood and Oil"
Eamman Fingleton, "In Praise of Hard Industries"
James Kunstler, "The Geography of Nowhere"
David Goodstein, "Running Out of Gas"


Fingleton's book is quite prescient. I reccommend it to anyone. He also has a website www.unsustainable.org . he is the only one with a track record of making predictions that come true. So I give his opinion the most weight.

[oecher3]

14. good link,

though at times he seems a bit bashing and less fact oriented.

He argues:

"Unfair trade tactics come in countless forms.
Virtually every country is guilty to some extent and
even the United States is not completely blameless.
But on balance, the United States has been by far the
biggest victim of such tactics. As unfair trade has
snuffed out American jobs, the United States has lost
the capacity to make many types of goods in which it
was once the world's leading supplier. This, of
course, means that America is becoming ever more
dependent on foreign suppliers. In other words there
is a ratchet effect here. "

And I am not quite sure that is true that the US is the victim here.
In my eyes it has been rather the opposite, bullying the rest of the world in recent history.
But again, I am happy to be corrected!

[idlisambar]

15. It is possible to be both bully and victim

First, Fingleton himself is Irish not American -- his assessment (for what it's worth) is not motivated by nationalism.

Second, there are a lot of reasons why the casting the U.S. as victim is not as ridiculous as it may seem. The word "victim" is a loaded word, but I think in this context it has no moral connotations and it mostly just refers to the degree of pain felt -- a quick glance at the U.S. trade deficit figures will show that the case is well supported.

I would argue that ultimately most of the U.S.'s wounds are self-inflicted. At the root of it is the pervasive laissez-faire market fundamentalism that has guided our economic and trade policies in the last 30 years. Essentially our economic policies have been written by Wall Street, and the worldview that best serves its interests -- neoliberalism -- is now dominant.

[PROGRESSIVE1]

16. ....