[Marxism] Why is world economy more dollar-centered despite huge trade, govt deficits (and euro)

Fred Feldman ffeldman at bellatlantic.net
Fri Dec 1 07:09:03 MST 2006

I notice on the left-liberal websites another wave of panic/hope re the huge
holdings of US dollars by Japan/China, and the latest decline of dollar on
the speculation markets.  Surely they will soon pull the plug. The failure
of these seeming or real weaknesses to produce a crash tends to simply lead
to putting off the catastrophe to the next round of selling?  Are the
Japanese and Chinese holdings really a weakness of US imperialism, or do
they reflect a strength? 

I have tended toward the latter view for quite a while, reinforced by Peter
Gowan’s overly monetarist but otherwise well-supported interpretation.  I,
of course, am no expert on economic questions, despite my readings in Volume
III of Capital which, while incomplete, have been very helpful to me.

At any rate, I find this a very useful article on this question. My issue is
this: why does it seem that more and more of the world’s surplus value flows
to the US DESPITE the evident weaknesses (I don’t think they are an
illusion) of US imperialism, for that clearly seems to be the situation and
seems to underly the so-far successful management of the deficits? I think
they reflect domination, not dependency, but I admit this is hardly an
expert opinion.

Fred Feldman

Fred Feldman






Americans have long been warned that running large, continuous deficits
courts disaster. ‘We are living on borrowed money and borrowed time’, was
the way Walter Mondale put it to the 1984 Democratic Convention, when the us
government’s cumulative deficit was some $7 trillion less than it is today.
Three years later, a spate of cartoons and op-eds would depict the 1987
stock-market crash as a vicious hangover; the just deserts of a wastrel
nation. The ever-accumulating deficits so frightened the first President
Bush that he famously reneged on his ‘read my lips’ promise not to raise
taxes. In 1992, Ross Perot launched the most successful third-party
presidential candidacy since Eugene Debs by making the rivers of red ink his
central campaign issue. Clinton’s great boast was that he managed
temporarily to close the government deficit, although the trade deficit
continued to grow during his administration.

It was not supposed to work that way; the government deficit had long been
understood as a prime cause of the trade deficit. But before the puzzle
resolved itself, George W. Bush arrived in Washington and, with his tax
cuts, wars and lavish spending directed at his electoral base, ripped open
the sutures that the Clinton administration had stitched between us
government spending and tax revenues. Both the government and trade deficits
soon reached levels that would have been regarded as inconceivable by most
economists a few years before. Doomsayers extended far beyond the ranks of
Democrats and old-school fiscal conservatives; at the beginning of 2005
Warren Buffett announced that he was so scared by the deficit trends that he
was largely going to quit buying stocks or bonds denominated in dollars. [1]
<http://www.newleftreview.net/?page=article&view=2625#_edn1#_edn1>  At the
Davos Forum that year, C. Fred Bergsten of the Institute for International
Economics warned of a dollar crisis ‘within weeks’. [2]
<http://www.newleftreview.net/?page=article&view=2625#_edn2#_edn2>  In a
widely reported speech at Stanford a month later, Paul Volcker, former
chairman of the Federal Reserve, spoke of an economy ‘skating on thin ice’.
[3] <http://www.newleftreview.net/?page=article&view=2625#_edn3#_edn3>  With
beleaguered Republicans dependent on low taxes and government largesse to
remain in power, and Democrats unelectable on an explicit programme of
higher taxes and spending cuts, these men saw no plausible scenario other
than a dollar crash for any reversal in the ever-growing-deficit trends. At
some point, the foreigners who help finance the two deficits would surely
refuse to throw more good money after bad. They would dump their dollar
holdings, leading to a crash in the dollar that would finally force
Americans to live within their means.

But none of this has happened. The markets reacted to the doom-saying with
the insouciance of a dog shaking itself dry. By the end of 2005 the dollar
stood 15 per cent higher against the euro, 13 per cent higher against the
yen, than it had in January; and this during a year when both government and
trade deficits continued to set new records practically every month. Hence
the conundrum: the savviest observers pronounce the trend lines of the
deficits to be unsustainable; no realistic scenario can be imagined under
which those trends will be reversed through political action, leaving only a
dollar crash to do the job; yet the dollar crash stubbornly refuses to
occur. Keynes once compared the stock market to a beauty contest in which
the winnings went to whoever could pick the contestant thought by the other
judges to be the most beautiful. If this is true of stocks, it is
emphatically the case for currency markets. The day is long gone when the
ebb and flow of international trade determined the value of currencies.
Daily volume on the world’s foreign-exchange markets runs in the trillions
of dollars, with the us dollar bought or sold in roughly 85 per cent of all
currency trades—most of them speculative. If enough people believe that
enough others will hang on to the dollar come what may, then the dollar will
not fall, whatever happens to the us deficits.

There is no secret about the identity of the biggest dollar holders. They
are the central banks and other financial institutions of Japan, China,
South Korea, Taiwan, Hong Kong, Saudi Arabia and the Gulf Emirates. If the
dollar is going to crash, one or more of these places is going to have to
change its stance towards the American currency. They display such a
seemingly reflexive commitment to accumulating and retaining dollars that
some commentators have described the current global financial order as
‘Bretton Woods ii’—a continuation by other means of the dollar-centred
international order that prevailed in the postwar decades. The label does
not itself explain why these states behave as they do. But it suggests that,
for whatever reason, they have motives other than maximizing returns on
their foreign-currency holdings; that they have a vested interest in the
continuation of a us-led financial system.

A voluntary order 

The Bretton Woods system conceived by Keynes and Harry Dexter White in 1944
was more than a simple recognition of the reality that the United States
would emerge from the Second World War in a position of overwhelming
economic strength and that any workable global financial regime had to start
from that premise. It mandated specific institutional action and imf
approval to reset the exchange value of any currency in the system vis-à-vis
the dollar. Most importantly, it required that the us maintain both the will
and the ability to sell gold at $35 an ounce to foreign central banks on
request, which meant that Washington had to take action whenever trade
deficits threatened a precipitous loss of gold. When in 1971 the Nixon
administration suspended the gold sales, did not use economic tightening to
reverse the structural trade deficits, and could neither persuade nor
browbeat its trading partners—notably Japan—to undertake compensating
adjustments, the system collapsed. But despite a decade that saw the
exchange value of the dollar plummet, the financial world continued to
revolve around the dollar and does so to this day. 

There is every reason for the us to be happy with Bretton Woods ii since
Americans reap vast benefits from the arrangement, most importantly in the
ability to finance trade deficits with impunity—what French economist
Jacques Rueff famously labelled ‘deficits without tears’. Among other
things, that allows Washington to project military power around the world at
little real financial cost, since the necessary money is first created by
the Federal Reserve, then exchanged for goods and services from foreigners,
and borrowed back by the us Treasury. [4]
(Technically, it does not matter in what form foreigners hold dollars,
whether us government debt, corporate debt, equities or anything else with a
$ sign. As long as the securities are denominated in dollars they remain
within the American banking system, where they serve to create credit in the

But if the benefits to the us in Bretton Woods ii may be obvious, the
benefits to those who prop it up are much less so. Indeed, the system is
curious in at least two ways: unlike Bretton Woods i, there is no formal
institutional requirement on anyone to support it; and adjustment burdens
have generally been shouldered not by the system’s primary beneficiary—the
us—but by its creditors. To be sure, Volcker put the American economy
through a recessionary wringer in 1979, bringing inflation down and thereby
slowing the precipitous decline in the purchasing power of the dollar that
had set in after the collapse of Bretton Woods i. The first Bush
administration raised taxes, while the Clinton administration succeeded in
producing a balanced Federal budget. But the us would have needed to take
these sorts of measures anyway. Washington was not acting disinterestedly to
save a global system, but rather to head off runaway inflation and
economy-crushing interest rates. On the other hand, Japan’s support for the
dollar was a major cause of the 15 years of deflation and low growth it
endured after 1990, while lower-income China used savings extracted from its
impoverished citizens to finance American consumption. 

Initially it was the opec nations, led by Saudi Arabia, that did most to
prop up a dollar-centred international order after the collapse of Bretton
Woods i. Their swollen revenues were put on deposit in London; where they
were recycled by leading commercial banks in the form of loans to
non-petroleum developing countries, financing the latter’s import bills.
True, several opec nations briefly flirted with the idea of charging their
customers in a currency other than dollars, but for a mixture of practical
and geopolitical reasons (at the time, no other currency circulated in
sufficient quantities and the Saudi regime depended on us military
protection), they stuck with dollars.

But since 1977, when Japan became the first developed nation to recover from
the worldwide mid-70s recession, it has played the starring role in dollar
support operations. It was Japan that unleashed the floodgates of its
burgeoning financial wealth in the early 1980s to finance the so-called
Reagan Revolution—America’s first experiment in steep tax cuts without
concomitant spending reductions. It was Japan that pumped credit into the
international system in the weeks after Black Monday—19 October 1987—when
the us stock market lost one quarter of its value in a few hours. It was
Japan that largely financed the first Gulf War, sold billions of yen for
dollars in the wake of the Mexican peso crisis of 1995, and kept buying
dollar securities right through the Asian financial crisis, 9-11 and the
invasions of Afghanistan and Iraq. In the last ten years China has joined
Japan as a primary supporter of Bretton Woods ii; its official dollar
reserves may even exceed the $880 billion Japan reported in May 2005. But
when the vast dollar holdings of Japan’s private sector banks and companies
are added to that official figure, it becomes clear that Japan continues to
play the central role it has for 25 years now in supporting the global value
of the dollar—and by extension, us hegemony.

Weight of the past 

Why? What for? In strictly economic terms, Japan would seem to have only one
compelling reason for its dollar support operations: as the world’s largest
holder of dollars, Japan stands to lose the most in any general dollar crash
(other than perhaps the us itself). Japan finds itself in the position of a
market player who has cornered so much of what is being traded that he
cannot liquidate his position without destroying its value—and in the
meantime, has to pony up more and more to support it. But economic
calculations can illuminate only part of a picture that includes fifteen
years during which the Japanese financial system seemed to outsiders on the
verge of a collapse that stubbornly refused to happen. It includes a
political elite, groping with realities they had never anticipated and for
which neither their own history nor examples from abroad offered much
guidance. It includes a political system that suffers from an institutional
flaw rooted deep in its past, and a series of elaborate disguises used by
the elite to conceal the sources of its power. And finally, the picture
includes a long history of active support for the dominant foreign country
of the day, one aim of which is to forestall any threat to domestic power



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