Impending Destruction of the US Economy
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
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.
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 administration.
Obviously, countries are not locked into accumulating
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 for the 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
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
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
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
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
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.
CREATORS SYNDICATE, INC.
Paul Craig Roberts
him] was Assistant
Secretary of the Treasury in the Reagan Administration.
He is the author of
Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington;
and the Soviet Economy and
Meltdown: Inside the Soviet Economy,
and is the co-author with Lawrence M. Stratton of
The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice. Click
here for Peter
Brimelow`s Forbes Magazine interview with Roberts
about the recent epidemic of prosecutorial misconduct.