COMMENT: DESPITE PROBLEMS IN THE EUROZONE AND GENERAL SLOWING GLOBAL ECONOMY IN THE SHORT TERM, THE DAYS OF US ECONOMIC DOMINANCE ARE NUMBERED OVER THE LONGER TERM. HAVING DOMINATED THE WORLD ECONOMY SINCE 1944, SIGNS ARE EMERGING THAT THE FORCES BEHIND THAT DOMINANCE ARE BEGINNING TO WANE. THE FOLLOWING IS A BRIEF ANALYSIS OF THOSE FORCES AND THEIR NEW LONG RUN TRAJECTORY OF DECLINE.
From 1944 to 1973 the U.S. maintained economic hegemony in the global economy. The U.S. dollar was the prime currency for trading and reserve purposes. This dominance was challenged in the post-1973 period briefly, however, as the U.S. economy experienced an economic crisis at that time. The institutional arrangements by which the U.S. retained dominance from 1944 to 1973 were restructured and rearranged. The U.S. economy and its world dominance was restored in a new set of arrangements and relationships with other states and economies starting in the 1980s. The U.S. led a drive to end controls on international money capital flows and the rest of the world followed. That event made possible in turn free trade, rapid growth of U.S. foreign direct investment offshore, globalization and the financialization of the U.S. economy. The symbol of that economic dominance, the U.S. dollar, after having seriously weakened in the 1970s was restored again to unchallenged status as the global currency in the 1980s and after.
Another consequence of these new structures, relationships, and arrangements was the rise of the U.S. twin deficits—the trade deficit and the U.S. budget deficit. Beginning from the early 1980s, under Reagan and subsequently every president thereafter, the U.S. ran growing trade deficits. These trade deficits made possible and enabled corresponding chronic and ever growing domestic budget deficits. The trade deficits meant U.S. dollars flowed out of the U.S. economy at an accelerating rate. But new arrangements meant the dollars would flow back to the U.S., as foreign economies and governments recycled the dollars back to the U.S. to purchase U.S. government bonds. First European and Petro-economy allies. Then Japan. Then via North American free trade agreements with Canada, Mexico and others, and not least, after 1999, increasingly China as well.
The growing trade deficits financed the U.S. budget deficit in the following manner: because the new post-1980 arrangements between the U.S. and other economies meant the dollars from the trade deficit that accumulated offshore would be consistently recycled back to the U.S., policy makers could now count on spending those dollars above spending based only on U.S. tax revenues. The recycling grew and was so large by the 1990s and after, that the deficit-recycled dollars permitted massive tax cutting for businesses and investors and the funding of wars in the middle east since 2001 without paying for them through taxation. $3.4 trillion in tax cuts after 2001 were passed, 80 percent of which accrued to the wealthy and corporations. And $2.1 trillion in excess war spending was paid for out of deficits—the first time in U.S. economic history wars were financed only by deficits.
The restructuring of the global economy in the 1980s, led by the United States (and a junior partner the UK) has now run its course. Once the unchallenged global currency, the U.S. dollar is once again facing challenge as the dominant global currency. The focal point of that challenge, today and in the years ahead, is China and its currency, the Yuan.
Already China’s share of global manufacturing is at least equivalent to the United States, about 25 percent each. China has currency reserves approaching $3 trillion and is matching the U.S. in foreign direct investment around the world. The Yuan is becoming a de facto global trading and reserves currency. Initially, it is doing so with its main economic partners, Russia, India, Brazil, and South Africa (i.e. the BRICS), but will soon do so with Europe as well. China is also slowly but steadily extricating itself from the twin deficits and recycling dollars to the U.S. arrangements. It is recycling fewer and fewer dollars back to buy U.S. government bonds. As that arrangement declines, the U.S. economy will not be able to deficit spend on as massive a scale as it has been over the past decade. It will have to either cut social spending or defense spending on a massive scale or retract the equally massive multi-trillion tax cuts for the wealthy, investors, and their corporations. Corporate America and its investors are intent upon cutting social spending, including entitlements, to avoid having to give up their tax cuts of the past three decades. That is the fundamental, driving force behind emerging austerity proposals in the U.S. today.
Jack Rasmus, copyright 2012