Beijing’s new moves bring the US Debt cataclysm nearer
The Oboehner double-act….Denial & Bigot
America’s
reserve currency status may be more threatened than people realise, but
lack of faith in the Dollar is not driven by sideshows about debt
ceilings. It is dictated by the growing global belief that, as a trading
nation built on ingenuity, the US has lost the plot.
The Slog: Last June, Britain and China moved to arrange a semi-permanent
currency swap between Sterling and the Yuan. It was presented as a
‘trade facilitator’ (which indeed it is) but passed largely unnoticed.
The key thing about it was, like an earlier arrangement with the
European Central Bank, it cut the Dollar out of a major trading exchange.
Three days ago, Beijing tied up a much bigger
deal with Mario Draghi’s ECB: China and the European Central Bank have
signed a currency swap agreement worth 350bn yuan with the EU’s central
bank. It will last for three years and is easily renewable.
The previous day, the Republican Proposal had been to lift The US
Debt Ceiling for six weeks. A compromise….as The Slog and many others
predicted. But viewed in the light of the China Bank/ECB deal, the
announcement does smack of the crew playing football with bits of
iceberg on the deck of the Titanic.
For decades, the Beijing politburo has kept a tight grip on the yuan,
pegging the currency to the U.S. dollar. Now – alongside its policy of
avoiding any further US National Debt risk – the Chinese are effectively
freezing America out of more and more of the deals that make the Dollar
a Reserve Currency. This trend is only going to go one way.
“It’s a way of promoting European and Chinese trade, but not doing it
with the U.S. dollar,” said Kathleen Brooks, a research director at
FOREX.com, “It’s a bit like cutting out the middleman – all of a sudden
there’s potentially no U.S. dollar risk.”
A couple of weeks back, I pointed out
that movements in the Dollar’s value suggested a more strategic
investment strategy from some investors, rather than merely tactical
trading. This is what I wrote on September 28th:
‘Raped by the Fed’s bullying market
masters and pummelled by the cost of administering an expansive
superstate, the Dollar is now being sold long, not short: the movers are
beginning to look for an alternative to it. No longer gambling on the
Buck, investors are turning away from it….[and]….the demise of Detroit
shows how technical and marketing leadership have been lost to the greed
of bourses, and the ever-more myopic number-crunching of the
short-termist accountant….analyse what [the US is] based on – military
power, natural energy resources, technical leadership, globalised export
marketing, democratic values, financial power in general, and the
Dollar in particular – and one quickly sees that cracks in the edifice
are very obvious.’
As long ago as 2010, I wrote this:
‘Look behind the headlines at the
numbers, and it becomes clear that people are deserting the Dollar….QE2
is about to slide down the slipway….The Slog’s view remains that this
form of stimulation is more likely to go down the toilet than the
slipway. The sheer amount really required to make a difference is beyond
the US Government now – and, given the importance of Sino-American
trade and debt relations, diplomatically impossible….another bout of QE
will kill the American Dollar.’
It’s clear to me at least that this process is now accelerating.Of
course, the buck-freeze-out deals done so far represent only a fraction
of total world trade. But even looking beyond its Reserve Currency role,
the U.S. market share of world merchandise exports declined sharply
over the past decade. Thus predictions suggesting that In less than 40
years India will overtake the US as the world’s second-largest trading
nation now don’t look so much fanciful as understated.
The Black Dude and every one of his predecessors have hyped
free-trade agreements done in the last decade as likely to grow exports
and create US jobs. But all the evidence suggests that the opposite has
been the case: the U.S. International Trade Commission’s estimates about
gains from the Korean deal (KORUS) for example were miles out: USITC
said US trade would rise by £7bn, but it actually fell by almost $4bn.
It was hailed as a way to create 70,000 jobs….but pushed another 40,000
offshore. As long ago as 1994, the North American Free Trade Agreement
NAFTA was going to create 200,000 new jobs through increased exports to
Mexico. By 2010, growing trade deficits with Mexico had eliminated
682,900 U.S. jobs, with job losses in every U.S. state and congressional
district.
I don’t know what it is with the Washington econo-political ‘élite’,
but there are two basic precepts of fiscal and export theory they
forever fail to grasp. One, if your cost of goods is higher (and its
appeal only as good) as the trading partner, you will lose on the deal;
and two, creating false retail ‘booms’ – far from improving the deficit –
actually increases it because of the appeal of overseas goods in the
home market, based on cachet or price. (The UK Establishment’s brain
density on the subject of our EU relationship demonstrates the same
blind man’s bluff…with the same disastrous results).
Showing causality between US Federal expenditure and continuing
growth in the national debt has been a GOP obsession since the year dot.
But US Government expenditure is 20% of their gdp: and if there were
fewer silly foreign adventures in pursuit of yet more dead-end oil, it
would be closer to 17%.
It is idiotic to suggest that a fifth of the spending is creating all
of the deficits – while the evidence to the contrary is overwhelming:
the US simply is not competing on the world stage like it used to,
because the technological lead, raw materials, and economies of scale
price advantages it held thirty years ago no longer apply.
No: the main contributors to US debt are, in no strict order, falling
share of world trade, increased cheaper foreign imports, bailouts and
QE to support the banking system, foreign wars to maintain access to
outdated energy forms, reduced middle-class spending power brought on by
Friedmanite globalist concepts of bigness, personal/multinational
corporate tax evasion, and the triumph of marketing process over
creativity.
One can sum up the damned-if-do-or-don’t thing for America like this:
if your middle class earns 30% less than it did twelve years ago, and
the world is flooded with cheap Chinese goods, they’ll buy the cheap
stuff….and the trade gap will worsen. But if you pay them to consume
more, it’ll cost more to produce you export goods….so the trade gap will
get bigger still.
The United States needs to take a more profound look at its problems,
rather than engaging in playground stone-throwing between bankrolled
Congressional bigotry and a denialist White House. It needs to reduce
its reliance on short-term Bourse greed, and invest more in energy
development that moves well beyond the Hairies.It needs to pay its
middle class less, but invert the tax imbalance. It needs to cut back on
military ventures. It needs to get tough with corporate tax evasion,
but give massive tax breaks to everyone exporting unique products,
higher margin products, or investing in energy breakthrough products. It
needs to keep on top of its banking system’s tendency to lunacy. It
needs to end once and for all the myth of Too Big to Fail. And of
course, it needs to break the umbilical cord between Congressmen and
lobbyists…because all that produces is yet more of the econo-fiscal lies
that got America into this mess in the first place.
To do that, the very least the US will need is a Democratic White
House and an independent Congress. Which, let’s face it, they don’t have
at the moment. By 2016, they may have neither.
I wonder if, at long last, this might be wake-up time for the
American political Establishment? I wonder if, finally, the US and UK
MSM sets will now stop reporting US recession as “a temporary blip on
the road to recovery”? I wonder if Dan Hannan will now shut up about
“booming America”?
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