Impending Destruction of the US Economy
Paul Craig Roberts
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 economy produces.
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.
China 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
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 imports rise.
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
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 return.
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 mobility.
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
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 incomes.
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 growing.
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.
Dr. Roberts was Assistant Secretary of the US Treasury for
Economic Policy in the Reagan administration. He is credited
with curing stagflation and eliminating “Phillips curve”
trade-offs between employment and inflation, an achievement now
on the verge of being lost by the worst economic mismanagement
in US history.
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