[Marxism] Dollar's Decline Is Reverberating

Louis Proyect lnp3 at panix.com
Tue Nov 16 10:02:43 MST 2004

Mike Friedman wrote:
> Dollar's Decline Is Reverberating
> Sun Nov 14, 7:55 AM ET
> By David Streitfeld Times Staff Writer
> During a routine sale of U.S. Treasury bonds in early September, one of the
> essential pillars holding up the economy suddenly disappeared.
> Foreigners have been regularly buying nearly half of all debt issued by the
> U.S. government. On Sept. 9, for the first time that anyone could remember,
> they stayed home.



Counterpunch, November 16, 2004
The Coming Currency Shock
Declining Superpower Act


China's currency peg to the US dollar prevents correction of the US 
trade imbalace and imperils the US dollar's role as reserve currency.

In the post World War II period, the dollar took over the reserve 
currency role from the British pound, because the supremacy of US 
manufacturing guaranteed US trade surpluses. The British pound lost its 
role due to debts of two world wars, loss of empire, a run down 
industrial base, and socialist attack on UK business.

The reserve currency conveys unique advantages on the favored country. 
As the reserve currency, the US dollar is guaranteed a high level of 
demand. Foreign central banks hold their reserves in dollars, and 
countries are billed in dollars for their oil imports, which requires 
other countries to buy dollars with their currencies.

As a reserve currency fulfills world needs in addition to the functions 
of a domestic currency, the favored country can hemorrhage debt for a 
protracted period on a scale that would promptly wreck any other 
country's currency.

This advantage is a two-edged sword, because it permits the reserve 
country to behave irresponsibly by running large trade and budget 
deficits. When the tide turns against the reserve currency, its exchange 
value collapses.

The reason for the collapse is the huge stock of reserve currency held 
by foreigners. When other countries conclude that their hoards of 
dollars represent claims that the US cannot meet, dollar dumping begins. 
Financing for US debt dries up; interest rates rise; imported goods 
become unaffordable and living standards fall.

Flight from the dollar is already underway. During the past two years, 
the US dollar has declined 52% against the new European currency, the 
Euro. This decline is striking in view of the sluggish European economy 
and the fact that many analysts regard the Euro as merely a political 

Indeed, the dollar is declining against all currencies that have any 
international standing: the British pound, the Canadian dollar, the 
Australian dollar, and even against the Japanese yen despite Tokyo's 
intervention to support the dollar.

Overcome by hubris and superpower delusion, US policymakers are unaware 
of America's peril. Economists and pundits are equally in the dark.

Economists believe that decline in the dollar's exchange value will 
correct the US trade deficit by reducing imports and increasing exports. 
Once upon a time a case could be argued for this logic. But that was a 
time before US corporations took to outsourcing jobs and locating 
production for US markets offshore.

US imports of goods and services rise each time a US factory moves 
offshore or a US job is outsourced. Goods and services produced offshore 
by US corporations for US customers count as imports and worsen the 
trade deficit. The US cannot reduce its trade deficit by increasing 
sales to China of goods made by US firms in China. As Charles McMillion, 
president of MBG Information Services, concisely summarizes: 
"Outsourcing is export substitution."

It is amazing that US policymakers and economists do not understand that 
dollar devaluation is meaningless as long as China keeps its currency 
pegged to the dollar.

America's greatest trade imbalance is with China. In 2000 the US 
merchandise trade deficit with China became larger than the chronic US 
trade deficit with Japan. By 2003 the US trade deficit with China was 
almost twice as large as the US deficit with Japan: $124 billion versus 
$66 billion. This year the US trade deficit with China is expected to be 
$160, a 29% increase from last year.

This imbalance cannot be corrected as long as China maintains the peg. 
As the dollar falls against the Euro and other currencies, the Chinese 
currency falls with it, thus maintaining China's advantage over US goods 
in world markets.

Both the Clinton and Bush administrations are guilty of permitting China 
to maintain a grossly undervalued currency that sucks productive 
capacity out of the US. The combination of cheap Chinese labor and an 
undervalued currency are destroying US middle class living standards.

As America's industrial base erodes, so does its competitiveness and 
ability to close its trade deficit through exports.

Currency markets cannot correct the undervalued Chinese currency, 
because China does not permit its currency to be traded and there are 
insufficient stocks of Chinese currency in foreign hands with which to 
form a currency market.

Sooner or later the peg will come to an end--perhaps when China fulfills 
its WTO obligation to let its currency float. When the peg ends, it will 
deliver a severe shock to US living standards. Suddenly, Chinese 
manufactured goods--including advanced technology products--on which the 
US is now dependent will cost much more. Overnight, shopping at Wal-Mart 
will be like shopping in high-end department stores.

China accounts for a quarter of the US trade deficit and for one-third 
of the US deficit in manufactured goods, is the second largest source of 
US imports after Canada, and is America's third largest trading partner 
as conventionally measured. Despite these facts, the US government does 
not publish full current account data for China, instead lumping China 
in with "Other Countries in Asia and Africa." This keeps the magnitude 
of the problem out of sight.

Canada and Mexico rank as the US's two largest "trading partners" 
because of double counting in the measure of imports and exports. For 
example, the full value of auto bodies shipped across the borders to 
Canada and Mexico for assembly operations are counted as "exports" when 
they leave the US and as "imports" when they return.

In contrast US "trade" with China involves almost no double counting of 
component parts.

Recently, Goodyear Tire and Rubber Company declared its intention to 
close all US plants and to manufacture offshore for US markets. Each 
time the US loses an industry, America's export potential declines and 
America's imports rise. This scenario guarantees a rising trade deficit 
and the end of the dollar's reserve currency role.

Dr. Paul Craig Roberts was Assistant Secretary of the Treasury for 
Economic Policy during 1981-82.


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