Global trade imbalanced and destabilised by dollar domination – Ron Morrison
Why is it that the U.S. seems to be able to afford anything its Government wants to do? The rest of us are never finished being told that we must become more efficient, tighten our belts, modernise and cut-back, because there’s no money. If American industry were indeed so wonderful that the rest of the world is in serious debt to it, then perhaps this would be one explanation.
But the converse is the case — the U.S. balance of payments is the most atrocious in the world. The rest of us must maintain a balance of payments between exports and imports or the IMF will apply penal ‘Adjustments’. But not the U.S., they consistently maintain a huge deficit — the U.S. is the biggest debtor country in the world! How on earth do they get away with this?
At the beginning of 2002 foreign holdings of U.S. Treasury Bonds totalled just over $1.25 trillion. A Treasury Bond is an IOU issued directly by the Federal Reserve Bank, usually to a foreign government and treated by the recipient as ‘Foreign Exchange Reserves’. Treasury Bonds are dollar denominated, and have replaced gold — the dollar being a reserve currency, that is, readily convertible to any other currency.
At current levels, foreign investors own 36.7% of outstanding marketable US Treasury securities. Foreign investors also held $745.6 billion of U.S. government agency issues — which are also IOUs but are marketable securities, like ‘Gilts’ in the U.K. — making a total of around $2 trillion.
One might wonder therefore why the U.S. is the wealthiest country in the world when its Profit and Loss Account and Balance Sheet are in such condition. Why for instance don’t the foreign creditors use their surplus dollars to buy up US industry and assets?
That’s because these dollar IOUs are held by the exporters’ Central Banks and they, as government agencies, are simply not able to use these to buy up assets. This is why there is no point in an exporting country running a balance of payments surplus — exporting more than you import — because a net surplus means that you have exported real wealth in exchange for paper.
This is more readily understood if we reduce the process of earning foreign currency to its basic elements. For instance, a Chinese exporter might sell a boatload of televisions to the U.S. He is paid in dollars, which he pays into his bank. As his business accounts are denominated in Yuans, the foreign exchange department of his bank, which also works in Yuans, sends the dollars to the Chinese Central Bank, which exchanges these for a credit in Yuans. The exporter is now happy, his clearing bank is happy, no ‘new’ money has been created because the ‘new’ Yuans are balanced by the incoming dollar credit.
From an accountancy aspect the double entries are balanced and complete. America now has a boatload of televisions. However, the U.S. Central Bank (the Federal Reserve) which guarantees the U.S. dollar, is now indebted to the Chinese Central Bank — in the sense that a dollar is a “promise to pay” to the value of.
Prior to 1971 when the U.S. was forced off the gold standard, the Chinese government would have asked the U,S, government to transfer gold bullion to settle the debt, but post-1971 the U.S. dollar was accepted as being ‘as good as gold’, and the best option in the circumstances to keep world trade moving. Now, whilst businesses and individuals possessing dollars can buy US stocks and properties, other governments may not do so.
A government’s only option is to buy U.S. Treasury Bonds with the dollars they have acquired, and to try to encourage their entrepreneurs and importers to start importing additional U.S. goods and services to try and run down the government’s surplus dollars. But this latter option is not so easy.
Let us imagine that a prospective Chinese entrepreneur visits the U.S. to see what importing opportunities he can find. He will find most U.S. goods expensive because labour and other costs are much higher there. It will be difficult to find anything which he can import profitably and sell in direct competition to Chinese home production.
He will, therefore, start looking at goods which are not yet produced in China but for which he believes there might be a demand. His choice will be narrow — some high tech electronic software (which the U.S. government may well embargo to China), and very many luxury items which most Chinese people couldn’t afford. Items like sophisticated medical equipment and civil aircraft, yes, but they are already regularly exported to China.
He could seek opportunities in other countries but the problem is twofold. Firstly, China is building up a major domestic economy and fast becoming independent of many imports and, secondly, the bulk of the population is too poor to qualify as a lucrative consumer market.
So, to summarise this situation: The U.S. is paying for its imports in dollars for which the exporter often has little use, other than to purchase Treasury Bonds, which are just pieces of paper promising a return of more dollars, at some future date. The dollars the exporting country receives are only of value if used to purchase imports — either from the U.S. or from some other nation which will accept them as payment, but this is not always practical. Citizens of the U.S. also suffer from such imports.
A similar surplus of dollars exists in OPEC countries. Some years ago the Saudi Authorities suggested that they might apply their dollar reserves to buy up American corporations and properties. The U.S. Congress told them that this would be regarded as ‘a hostile act’ and we know what that means. The Saudis were doing pretty well anyway and decided not to upset the oil barrel. Other oil producers will be well advised to take note of recent events in Central Asia and the Middle East!
Much U.S. debt is incurred by the huge expenditure on its military and diplomatic ‘presence’ in areas it wishes to influence. It is perhaps not surprising therefore that sophisticated European nations have also built up virtually unusable dollar surpluses. The U.K. is the second largest holder of U.S. debt certificates at $150bn. China holds some $125bn and Japan is the biggest at $450bn.
As the world’s largest net importer, the U.S. gains much wealth from this arrangement. Already powerful through its own successful domestic economy, it has become even more dominant by absorbing the economic strength of others. It uses this power to continually compound its influence.
Power is exercised in two ways, firstly by military persuasion — no matter how good the argument for alternatives, like implementing a ‘neutral’ currency expressly to maintain a balance in international trade — if the result is seen as reducing America’s influence then it will be regarded as ‘a hostile act’.
Secondly, financial pressure exerts much power. In short, if you owe the Bank $100,000 you have a problem. If you owe the Bank $2 trillion the whole world has a problem, which you can manipulate.
What can be done?
Economic theory is quite incapable of dealing with such matters. Any attempt to construct mathematical models upon such unquantifiable criteria creates nothing but confusion – which can be encouraged by the beneficiaries of the present system. Unfortunately most politicians go with the flow and have neither the time nor inclination to question the status quo.
The solution could lie with an updated United Nations – although as long as it resides in New York and depends upon the U.S. for its financing, it will remain a toothless dragon.
It could be re-evaluating the International Currency system first mooted by Keynes at Bretton Woods in 1948 (see Prosperity May 2003). It could be trumpeting the stability this could introduce not only to genuine world trade, but to a U.S. facing a deepening identity crisis both inside and outside its borders.
The problem is not the American people who are as democratic in outlook as any people – and who suffer themselves from cheap imports. The problem lies in the hi-jacking of their government by self-seeking individuals and groups bent upon using democracy as a euphemism for plutocracy – government by those who have most wealth.
The solution lies with the American people. They can choose to fight the rest of the world at terrible cost to us all, or they can lead with statesmanship and probity as defined by the Founding Fathers. But they will have to listen to the other 95% of the world’s population, and they will need to use their vote.
Source: This article appeared in Prosperity (UK), November 2003