Re: [TNF] US Dollar is sliding

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Re. the following:

As a social science, economics must first
> and foremost understand the institutions that comprise the real
> world.

> It is often said that the US needs to borrow from abroad to
> support its deficit spending.  That puts the cart before the
> horse.

Comment:

The collapse of the Bretton Woords System in the early 1970s represented a
sea-change in the "institutional" framework within which the U.S. economy
interacted with Rest of the World's economy.  Here is how my fellow Gang8
member Michael Hudson summarized the state of affairs immediately before and
after the sea-change in a revised (2003) edition of his 1972 book 'Super
Imperialism - The Origin and Fundamentals of U.S. World Dominance':

"On March 31, 1968, millions of Americans heard Lyndon Johnson announce on
television that he would not run again for the presidency, and that he would
not substantially escalate the Vietnam War despite the Tet offensive.
Unperceived by the public at large, the point finally had been reached at
which depletion of U.S. gold holdings abruptly altered the country's
military policy.  As one expert noted: "The European financiers are forcing
peace on us.  For the first time in American history, our European creditors
have forced the resignation of an American president." [Quoted in the Wall
Street Journal, April 4, 1968]

"The tide, it seemed, had turned against the United States.  Its position of
preeminence in the world had required total success in the functioning of
the world monetary system it had created.  That system was now basically
jeopardized.  Oddly, this was not because gold had drained from the system,
but because it had become translocated within the system.  The international
monetary order had not really been an international order, but a national
system that managed to extend itself over the entire globe.  As it grew more
international in character with the redistribution of gold reserves, it grew
more fragile, for the U.S. dollar and gold had become synonymous, in law as
well as in fact.  When factually they ceased to be synonymous, when  the
gold cover of other currencies began to exceed that of the dollar, the legal
equivalence between gold and the dollar became dubious.

"Yet it remained a legal fiction.  In 1971 the United States formally
repudiated gold claims on its monetary reserves.  But the world was not yet
ready to repudiate in turn the IMF and the rest of the American creations
that had grown to represent the world order.  Yet all constraints were
removed on U.S. economic profligacy.  The U.S. budget deficit for the fiscal
year ending June 30, 1972 was calmly forecast by the Treasury at close to
$39 billion.  By September 1971, U.S. liquid liabilities to foreign official
institutions had grown to about $43 billion, an increase of about $25
billion in less than a year.  Liquid liabilities to all foreigners, public
and private, had risen to almost $61 billion, an increase of $33 billion or
so since the Vietnam War build-up had begun in early 1965.

"Effectively speaking, not only had the United States compelled the other
nations of the West to pay for the overseas costs of the U.S. war in Asia,
it had accomplished something of far greater significance.  Those overseas
military costs were now the central banking assets of the non-U.S. members
of the IMF.  Whatever they might desire, the central banks of Europe had no
choice but to continue to accept the paper dollar equivalents annually
created as the domestic and overseas deficits of the United States
increased.  Otherwise the whole shaky structure of the world monetary system
would collapse into rubble.  America had succeeded in forcing other
countries to pay for its wars regardless of their choice in the matter.
This was something never before accomplished by any nation in history."
(Pluto Press, London, 2003, pp. 307-308)

In other words, the ACTUAL chain of causality ran from U.S. deficits to
build-up of claims on the U.S. by its Rest-of-the-World creditors.

In this respect, I agree with what Leigh Harkness wrote the other day---

I do not accept the Marshall-Lerner conditions.  The the trade balance, or
more specifically, the current account balance is not driven by the exchange
rate.  The current account deficit is a caused by excess demand (that is
total demand in the economy) and excess demand is not a function of the
exchange rate and it has nothing to do with elasticities.

---namely, that a country's external current account deficit is driven by
what used to be termed its Absorption of Goods and Services relative to its
Production.

In turn, Total Absorption = (f) Effective Aggregate Demand = (f) U.S.
Monetary and Fiscal Policies.

Gunnar


----- Original Message -----
From: "William F Hummel" <wfhummel@xxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Saturday, May 03, 2003 2:24 PM
Subject: Re: [TNF] US Dollar is sliding


> Hugh Winfrey wrote:
>
> >William Hummel notes:
> >
> >> >> But seriously, what happens if OPEC starts taking
> >> >> payment in euros instead
> >> >> of dollars?
> >> >
> >> >It's not the one they 'take' but the one they/others
> >> >desire to accumulate that counts.
> >> >
> >> >warren
> >>
> >> And as long as other nations in the aggregate seek a current
> >> account surplus (mainly trade surplus) with the US, they will
> >> necessarily increase their ownership of dollar-denominated
> >> assets, including dollar reserves.  It/s unlikely, at least in
> >> the foreseeable future, that this policy will change, given that
> >> most governments view a trade surplus as a net benefit to their
> >> own economies.
> >
> >Whoah there. A "trade surplus" ??? A basic definition and
> >perspective from which it is being applied please. This doesn't
> >add up. A 'trade surplus' ought to refer to the case in which you
> >import more than you export. Not vice-versa.
>
> The US runs a large trade deficit.  The corollary must be that
> other nations in the aggregate are running trade surpluses with
> the US.  Is there something unclear about that?
> >
> >If the assertion is indeed that "most governments" view
> >producing a bunch of stuff and shipping it abroad in return
> >for paper tokens issued by the US as being a net benefit
> >to their own economy, then I have to call a spade a spade
> >and point out that something is very fundamentally wrong
> >with any 'system' that could make such an assertion with
> >a straight face.
>
> Governments are for the most part not directly involved in
> producing stuff to be shipped abroad.  However most governments
> establish rules and restrictions that favor the export over the
> import of goods in the private sector.  That should be obvious
> from the way trade agreements evolve.   The government's
> objective is not to accumulate paper tokens but to support the
> domestic economy in terms of employment, a politically a popular
> thing to do.
> >
> >There is no legitimate "net benefit" in working hard and giving
> >the fruits of one's labour to a third party - excepting perhaps
> >dire cases of charity and particularly strong-armed 'protection'
> >rackets. And even in such cases I don't see where it is legitimate
> >to account for the outflow as an asset instead of an expense.
>
> I did not say there is a net benefit in running a trade surplus.
> I said most governments _view_ it as a net benefit, mainly
> because it supports a higher level of employment than otherwise.
> Other things equal, a net benefit in real terms occurs when a
> nation imports more than it exports.
> >
> >Minimising expenses creates profits, not giving stuff away for free
> >and moving intangible assets onto your books to compensate.
> >Sheesh. (And what pray tell is the difference between capitalism and
> >communism then if the more capitalistic we get, the better we
> >supposedly get at giving away more and more of our production
> >to those who are blessed with the status of being 'needy' ???? )
> >
> >This sort of nonsense is precisely why economics has ceased to
> >be a science and has become an ideology instead - which is fine
> >with me, excepting when I'm supposed to excuse the lack of
> >scientific rigor that even basic arithmetic would impose in a
> >case such as this in order to still partake in the crackpot delusion
> >that it is still a science.
> >
> >Sorry for the rant, but sometimes this stuff just has to be said.
> >
> Economics has never been anything but a social science,
> notwithstanding the attempts of academia to make it a
> mathematical science.  As a social science, economics must first
> and foremost understand the institutions that comprise the real
> world.
>
> So I'll reiterate my thesis:  The trade surpluses that other
> nations are able to maintain with the US is the direct cause of
> their increasing ownership of dollar-denominated assets,
> including dollar reserves.  This is not accidental, but rather
> the result of their respective policies.  As long as those
> policies prevail, the US trade deficit will continue and its
> foreign debts will grow.
>
> It is often said that the US needs to borrow from abroad to
> support its deficit spending.  That puts the cart before the
> horse.
>
> William F Hummel
>
>