US Economy: Rudderless and Reeling From Direct Hits
A raid on
Paul Craig Roberts
We were promised a “New Economy” of high-tech tradable services
to take the place of the offshore manufacturing economy.
Wondering what had become of the “New Economy,” Duke
University’s Offshoring Research Network searched for it and
located it offshore. Yes, the activities of the “New Economy”
are also outsourced offshore.
Call centers, IT operations, back-office operations, and
manufacturing have long been moved offshore. Now
high-value-added proprietary activities such as research and
development, engineering, product development, and analytical
services are being sent offshore. All that’s left is finance,
and it is crumbling before our eyes.
Independent broker-dealers are disappearing: Merrill Lynch, Bear
Stearns, Lehman Brothers. These venerable institutions were too
thinly capitalized for the risks that they took. Merrill Lynch
is now part of the Bank of America, and Lehman Brothers is
Ill-advised financial deregulation led to financial
concentration and not to more efficient markets. Independent
local banks, which focused on financing local businesses, and
Saving and Loan Associations, which knew the local housing
market, have been replaced with large institutions that package
unanalyzed risks and sell them worldwide.
Regulation over-reached. The pendulum swung. Deregulation became
an ideology and a facilitator of greed.
Deregulating electric power gave us Enron.
Deregulating the airlines destroyed famous American brand names
such as Pan Am, shrank the number of companies, and caused a
decline in service. When airlines were regulated, they could
afford standby equipment, and cancelled flights were rare.
Today, the bottom line prohibits standby equipment, and
mechanical problems result in cancelled flights. When economists
calculated the benefits of deregulation, they left out many of
There are no longer any blue chip companies, which means that
investing for retirement has become a crapshoot. People realize
this; thus, the privatization of Social Security has no support.
If we look realistically at the US economy, we see that what is
not moved offshore is being bailed out. Last year, the US
Department of Energy was authorized to make $25 billion in loans
to auto manufacturing firms and suppliers of automotive parts.
Last week the Secretary of the Treasury took $5 trillion dollars
in Fannie Mae and Freddie Mac home mortgages under its wing.
The Congressional Budget Office says this action by the Treasury
means “that the operations of Fannie Mae and Freddie Mac should
be directly incorporated into the federal budget.”
Their revenues would be treated as federal revenues, and their
expenditures as federal expenditures. If the former were greater
than the latter, there would be no reason for the takeover.
The open question is: what do these new liabilities do to the
Treasury’s own credit standing?
For now, this question is submerged. The traditional practice of
fleeing to the US dollar and US Treasury bonds during periods of
financial stress and uncertainty has boosted the dollar and kept
interest rates low. But sooner or later the large US budget
deficit, worsened by recession and bailouts, and the large trade
deficit, which requires constant recycling of dollars held by
foreigners into US financial and real assets, will result in
renewed effort on the part of foreigners to lighten their dollar
When this time arrives, US interest rates will have to rise in
order for the government to be able to continue to rely on
foreigners to recycle the dollars acquired in trade to finance
the US government’s annual budget deficit.
The current financial problems have pushed into the background
the larger problems of the US budget and trade deficits. Goods
and services for American markets that US corporations outsource
offshore return as imports, which widen the US trade deficit.
Moving production offshore reduces US GDP and employment and
increases foreign GDP and employment. Moving production offshore
reduces the export capacity of the US economy while raising the
Therefore, how is the trade deficit to be closed? One way is
through the dollar’s loss in exchange value, which would reduce
American consumers’ real incomes and leave them too poor to
purchase the offshore goods and services.
How is the budget deficit to be closed when jobs are
disappearing and GDP (tax base) is being relocated offshore?
Not by higher taxes. Higher taxes are problematic for a
recessionary economy in which unemployment, properly measured,
is already in double digits (
Some people have speculated that the budget deficit will be
closed by dismantling entitlement programs such as Medicare.
However, considering the cost of medical insurance, this would
be catastrophic for tens of millions of older Americans.
The more likely avenue will be a raid on private pensions. The
Clinton administration’s appointee, Alicia Munnell, as Assistant
Secretary of the Treasury for Economic Policy argued that
private pensions should face a capital levy to make up for the
fact that their accumulation was tax free. I expect that the
federal government, faced with its own bankruptcy, will
resurrect this argument, as it will be preferable to printing
money like a banana republic or Weimar Germany.
In the 21st century, the US economy has been kept going by debt
expansion, not by real income growth. Economists have hyped US
productivity growth, but there is no sign that increased
productivity has raised family incomes, an indication that there
is a problem with the productivity statistics. With consumers
overloaded with debt and the value of their most important
asset--housing--falling, the American consumer will not be
leading a recovery.
A country that had intelligent leaders would recognize its dire
straits, stop its gratuitous wars, and slash its massive
military budget, which exceeds that of the rest of the world
combined. But a country whose foreign policy goal is world
hegemony will continue on the path to destruction until the rest
of the world ceases to finance its existence.
Most Americans, including the presidential candidates and the
media, are unaware that the US government today, now at this
minute, is unable to finance its day to operations and must rely
on foreigners to purchase its bonds. The government pays the
interest to foreigners by selling more bonds, and when the bonds
come due, the government redeems the bonds by selling new bonds.
The day the foreigners do not buy is the day the American people
and their government are brought to reality.
This is not the financial position of a superpower.
Will what happened to Lehman Brothers today be America’s fate
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