My basic idea a decade ago was that with the deregulation of banking begun by the conservative revolution, there is ever-expanding gap between financial flows, as measured by financial turnover of various financial instruments, and the activity of the real, physical economy. For example, I compared foreign trade on one hand with foreign exchange trading on the other, from 1956 to 1990. The results were shocking. Measuring U.S. foreign trade as the value of exports, plus imports, plus international transactions (for services such as air flights, consulting, etc.), I found that total foreign trade was about 73% of total foreign exchange trading, which amounted to an estimated $41.0 billion 1956. This figure of around 75% remained stable for each of the years that the Federal Reserve did its tri-annual study of foreign exchange, up until 1980, when total mercantile trade fell to just under 10% of total foreign exchange trading. In other words, the amount of foreign exchange trading was pretty closely related to actual trade in physical goods and services, until 1980, when foreign exchange trading was suddenly
ten times larger than actual trade in physical goods and services.
What had happened? Well, what is generally known is that Nixon took the U.S. dollar off the gold standard in 1971. What is less well known is that Nixon's hand was forced by a quite unanticipated threat of gold redemption by the British. In mid-August 1971, the British ambassador quite literally walked into the U.S. Treasury Department to request that $3 billion be converted into gold. It has been over a decade since I assembled and wrote this material, so I am fuzzy on the particulars, but I do remember being shocked and mystified at the prominent role played by the British in this drama. The important point I want to make here is that after the financial and monetary debacles of the early 1970s, the U.S. economy was thrown wide open for all sorts of financial looting schemes and corporate takeovers. It is the beginning of the end, in effect, of the economic and financial sovereignty of the United States. This is the background you should always keep in mind as you whine and wail about the corporate-controlled mass media. What I now believe, is that the U.S. media would never have devolved as painfully as it has were it not for the likes of Rupert Murdoch, and the likes of Rupert Murdoch would never have been able to do what they did if it were not for the deregulation of the U.S. economy, and the U.S. banking and financial systems in particular.
Now, Stirling Newberry has written about the political and financial implications of the U.S. becoming what he calls "a giant "paper-for-oil" deal." How the cycle of deficits has kept the right in power in America.
To prevent investors in these countries from gaining control, the developed world, and particularly the US, is forced down a particular path: it must cut taxes on our wealthy, so that they match the taxes on the wealthy of Saudi Arabia.
Newberry is generally on target, though the data I gathered in the past few days suggests that at this point, we can stop worrying about foreign investors gaining control of the U.S. economy.
Essentially, the U.S. economy is a charade, increasingly incapable of physically meeting its own needs -- for cars, for steel, for electronics, for shirts, for pants, for shoes, even for food. The charade is financed by the rest of the world, most notably Japan and China, which produce goods for the U.S. market, and take in return U.S. dollar-denominated paper. These are essentially IOUs, whether they be commercial paper, corporate bonds, or U.S. government securities. The fact that most of the world's trade and finances is denominated in U.S. dollars has greatly assisted the U.S. in playing this shell game much, much longer than almost all observers thought it could.
On the face of it, this is not a bad shell game - if you're an American. You can ignore the uncomfortable economic realties of a shrinking industrial base and sorely under-funded physical infrastructure, and live high on the hog at the expense of them "furr-a-neers." But no charade can last forever, and the evidence is mounting that we are approaching end-game. Two weeks ago, Henry C K Liu Of debt, deflation and rotten apples wrote on AsiaTimes.com that the U.S. is about to experience the same deflationary disaster Japan has suffered for the past few years.
At some point, even paper debts cannot be repaid by printing more paper because of the exponentially ballooning interest spiral. Paying interest on unpaid interest will soon accelerate the debt crisis. Debt, if not repaid by gold, must be repaid by work; and the Fed, by printing more paper money, actually destroys what little real productive work is still available in the US economy. In fact the financial-services sector, a euphemism for the debt-manipulation sector, is producing most of the new jobs in the United States. Such jobs create financial value by pushing paper around at increasing speed....
What happened to Japan was that even with the world's largest holding of dollar reserves, the country was unable to ward off a protracted deflationary financial crisis caused structurally by exporting wealth for paper [i.e., dollar denominated IOUs: financial securities] that is useless in Japan....
The notion that a strong dollar is in the US national interest no matter who owns it is at best controversial and increasingly foolhardy. It is where the dollars are based that determines whether a strong dollar is good for the US national interest. A strong dollar in a global dollar economy is only good for offshore dollar owners, not US residents....
The real factor is that dollars are not spendable outside of the global dollar economy, thus are useless for domestic development in non-dollar economies. The dollar is not even fully useful in the US domestic economy because of low yields in the domestic US market....
Deflation is a problem that cannot be cured by monetary measures alone, as Japan has found out and as the United States is about to. Global deflation can only be cured by reforming the international finance architecture to allow international trade to be replaced by domestic development as the engine for growth....
The market favors trade over development because the market treats development cost as an externality. When someone other than the recipient of a benefit bears the costs for its production, for example education and environmental protection, the costs of the benefit are external to its enjoyment. Economists call these external costs negative "externalities". These externalities amount to a market failure to distribute costs and benefits fairly and efficiently within the economy. Globalization is basically a game of negative externalities. Inhuman wages and working conditions, together with neglected environmental protection and cleanup, are other negative externalities that protect corporate profit. It is by ignoring the need for development and by externalizing its cost that the market can deliver profitability to corporate shareholders. Development can only be done with a revival of national banking in support of a new national purpose of balance growth the will benefit all equitably, rather than the systemic transfer of wealth from the general public to a minority owners of capital, mistaken as growth.
I simply LOVE the part about having to shift from trade to national development, because that means having to address some real problems, such as giving 4 billion people working sanitation systems and access to clean water. That means nation building which was the big stone the neo-cons stumbled over in the planning for the Iraq war. You see, neo-cons do not like real economic activity, such as building sewage plants and laying water pipes. Neo-cons much prefer making a quick buck through one speculative financial scheme or another. And deregulation opened the door to legions of speculative financial schemes that never existed before. Of course, they can't sell deregulation as tilting the playing field in favor of speculators at the expense of producers. They sold deregulation as "improving the efficiency of markets." Any tendency toward re-imposing regulation is quickly and viciously slapped down as "socialism" or even "communism."
Now, if you're still with me, let's take a look at what I found. First, I found that the Bond Market Association has a very nifty table entitled Holders of Treasury Securities: Estimated Ownership of U.S. Public Debt Securities, which shows that foreign ownership of U.S. government debt has climbed from 17.0% of total holdings of $886.1 billion in 1982, to an estimated 49.8% of $4,063.8 billion ($4.06 trillion) in 2005. In the same period, ownership by individual Americans fell from 11.4%, to 5.4%. Particularly interesting is what happens to the percentage owned by American banking institutions: 18.2% in 1982, to 1.7% last year. That is one point seven percent. One and seven tenths percent. You have to wonder: What do the banks know that the rest of us don't? You really need to look at the Bond Market Association table, so go ahead, click on the link, we'll be here when you're ready to come back.
The major question is: how much longer will U.S. creditors be willing to accept dollar-denominated paper? So, it was off to the website of the Bank for International Settlements I went, to get the latest statistics on international credit. I suspect that most of you are not very familiar with the Bank for International Settlements, which can be described as the central bank for the world's central banks.
The interesting statistics I found in the most recent Statistical Annex of the BIS confirms a trend that will likely prove extremely troubling, if not downright disastrous, for the Bush administration in the next three years. Table 13B, entitled International Bonds and Notes (in billions of US dollars), by currency shows that of the $13.588 trillion total of financial securities counted by the BIS's reporting central banks (which did NOT include China) at the end of 2004, 37.0% were denominated in U.S. dollars, while 46.8% were denominated in Euros. This is a dramatic reversal from when Bush took office. At the end of 2000, the BIS counted $5.883 trillion in financial securities, of which 49.6% were dominated in dollars, and 30.1% in Euros.
In other words, there is already a move away from dollar-denominated paper; in fact, it has been going on for a few years now. The one caveat is that the BIS statistics do not include the People's Republic of China; being so large a trading partner with the U.S., including China may significantly alter these numbers. But, I believe that the trend away from dollar-denominated paper would remain intact.
Talking point against the Republicans: Why are they so eager to use military forces to defend what they say are vital U.S. interests, but are so blind to the immense damage being done to the U.S. economy and financial system?
One final point I found interesting in the BIS data, if I may digress. As I stated at the beginning, much of the financial flows in the world today have little or nothing to do with real economic activity. Most of it is speculation, pure and simple. And a lot of it is dirty or hot money. Table 9A, Consolidated Claims of Reporting Banks on Individual Countries is interesting in that it includes the statistical outliers of Switzerland, Luxembourg, Jersey (not New Jersey, mind you, but that little speck of land off the coast of England) and, ta daa, the Cayman Islands.
Jersey, the largest of the Channel islands in the English Channel, had an estimated 2005 population of 90,800. Its foreign claims were $109.5 billion. But the favorite hiding place for hot money is the Cayman Islands, population 43,100, with foreign claims of $612.280 billion. Now, these are foreign claims ON these locations, not BY these locations. In other words, this is an indication of how much in financial assets has been secreted away in these locations. I have included a few other countries, and their populations, that you can compare so you can see for yourself just how distorted the world's financial system has become.
The per capita numbers really make the hot money havens stand out.
