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Part 1: Why the emperor has no clothes

 

Uncle Sam has reneged and defaulted on up to 40% of its trillion-dollar foreign debt, and nobody has said a word except for a line in The Economist. In plain English that means Uncle Sam runs a worldwide confidence racket with his self-made dollar based on the confidence that he has elicited and received from others around the world, and he is a also a deadbeat in that he does not honor and return the money he has received.

How much of our dollar stake we have lost depends on how much we originally paid for it. Uncle Sam let his dollar fall, or rather through his deliberate political economic policies drove it down, by 40%, from 80 cents to the euro to 133 cents. The dollar is down by a similar factor against the Yen, Yuan and other currencies. And it is still declining, indeed is apt to plummet altogether.

There was also a spate of competitive devaluations in the 1930s, called the "beggar thy neighbor policy" of shifting the costs for the neighbors to bear. True, as the dollar has declined, so has the real value that foreigners pay to service their debt to Uncle Sam. But that works only if they can themselves earn in currencies that have increased in value against the dollar. Otherwise, foreigners earn and pay in the same devalued dollars, and even then with some loss from devaluation between the time they got their dollars and the time they repay them to Uncle Sam. China and other East Asian nations do earn in dollars, to which they have pegged their currencies, so they have already lost a substantial portion of their dollar stake, by far the world’s largest.

And they, like all others, will also lose the rest. For Uncle Sam’s debt to the rest of the world already amounts to more than a third of his annual domestic production and is still growing. That alone already makes his debt economically and politically never repayable, even if he wanted to, which he does not. Uncle Sam’s domestic, eg credit-card, debt is almost 100% of gross domestic product (GDP) and consumption, including that from China. Uncle Sam’s federal debt is now US$7.5 trillion, of which all but $1 trillion was built up in the past three decades, the last $2 trillion in the past eight years, and the last $1 trillion in the past two years. Alas, that costs more than $300 billion a year in interest, compared with, for example, the $15 billion spent annually on the National Aeronautics and Space Administration (NASA). But no worries: Congress just raised the debt ceiling to $8.2 trillion. To help us visualize, $1 trillion tightly packed up in $1,000 bills would create a pile 100km high.

But nearly half is owed to foreigners. All Uncle Sam’s debt, including private household consumer credit-card, mortgage etc debt of about $10 trillion, plus corporate and financial, with options, derivatives and the like, and state and local government debt comes to an unvisualizable, indeed unimaginable, $37 trillion, which is nearly four times Uncle Sam’s GDP. Only some of that can be managed domestically, but with dangerous limitations for Uncle Sam noted below. That is only one reason I want you to meet Uncle Sam, the deadbeat confidence man, who may remind you of the film Meet Joe Black; for as we get to know him better below, we will find that he is also a Shylock, and a corrupt one at that.



The United States is the world’s most privileged nation for having the monopoly privilege of printing the world’s reserve currency at will and at a cost of nothing but the paper and ink it is printed on. Moreover, by doing so, Uncle Sam can export abroad the inflation he generates by the extra dollars he prints, of which there are already at least three times as many floating around the world as at Uncle Sam’s home. Additionally, his is also the only country whose "foreign" debt is mostly denominated in his own world-currency dollars that he can print at will; while most foreigners’ debt is also denominated in the same dollar, but they have to buy it from Uncle Sam with their own currency and real goods. So he simply pays the Chinese and others in essence with these dollars that already to begin with have no real worth beyond their paper and ink. So especially poor China gives away for nothing at all to rich Uncle Sam hundreds of billions of dollars’ worth of real goods produced at home and consumed by Uncle Sam. Then China turns around and trades these same paper dollar bills in for more of Uncle Sam’s paper called Treasury Certificate bonds, which are even more worthless, except that they pay a percent of interest. For as we already noted, they will never be able to be cashed in and redeemed in full or even in part, and anyway have the lost much of their value to Uncle Sam already.

In an earlier essay, I argued that Uncle Sam’s power rests on two pillars only, the paper dollar and the Pentagon. Each supports the other, but the vulnerability of each is also an Achilles’ heel that threatens the viability of the other. Since then, Iraq, not to mention Afghanistan, has shown confidence in the Pentagon not to be what it was cracked up to be; and with the in-part-consequent decline in the dollar, so has confidence in it and Uncle Sam’s ability to use it to finance his Pentagon’s foreign adventures (See Coup d’Etat and Paper Tiger in Washington, Fiery Dragon in the Pacific, which also conjures up the productive growth of China). Additionally we must realize that Uncle Sam’s numbers above and below are also all literally relative. So far relations with other countries, in particular with China, still favor Uncle Sam, but they also help maintain an image that is deceptive. Consider the following:

A $2 toy leaving a US-owned factory in China is a $3 shipment arriving at San Diego. By the time a US consumer buys it for $10 at Wal-Mart, the US economy registers $10 in final sales, less $3 import cost, for a $7 addition to the US GDP. (Blaming ‘undervalued’ Yuan wins votes, Asia Times Online, February 26, 2004)

Moreover, ever-clever Uncle Sam has arranged matters so as to earn 9% from his economic and financial holdings abroad, while foreigners earn only 3% on theirs, and among them on their Treasury Certificates only 1% real return. Note that this difference of 6 percentage points is already double what Uncle Sam pays out, and his total 9% take is triple the 3% he gives back. Therefore, although foreign holdings and Uncle Sam’s are now about equal, Uncle Sam is still the big net interested winner, just like any Shylock, but no other ever did so grand a business.

But Uncle Sam also earns quite well, thank you, from other holdings abroad, e.g. from service payments by mostly poor foreign debtors. The sums involved are not peanuts or even small potatoes. For from his direct investments in foreign property alone, Uncle Sam’s profits now equal 50%, and including his receipts from other holdings abroad now are a full 100% of profits derived from all of his own domestic activities combined. These foreign receipts add more than 4% to Uncle Sam’s national domestic product. That helps nicely to compensate for the failure of domestic profits as yet to recover even their 1972 level, because Uncle Sam has failed to boost productivity sufficiently at home.

The productivity hype of president Bill Clinton’s "new economy" in the 1990s was limited to computers and information technology (IT), and even that proved to be a sham when the dot-com bubble burst. Also, not only the apparent increase in "profits" but also that of "productivity" were, at the bottom, on the backs of shop-floor, office and sales-floor workers working harder and longer hours and, at the top, the result of innovative accounting shams by Enron and the like. Such factors still compensate for and permit much of Uncle Sam’s $600-billion-and-still-rising trade deficit from excess home consumption over what he himself produces. That is what has resulted in the multitrillion-dollar debt. Exactly how large that debt is Uncle Sam is reluctant to reveal, but what is sure is that it is by far the world’s largest, even as net debt to foreigners, after their debt to him is deducted.


Date: 2015-12-11; view: 738


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