Interview: Flying High
Unions: TUF on Toll
Industrial: Forward to the Past
Economics: Debt and the Economy
Obituary: The Charlatanry of Milton Friedman
Environment: Low Voltage
Legal: The Fair Deal
Review: A Little History
Seven Year Itch
Boss With a Heart
Debt and the Economy
The US economy is seen as the engine for growth. Do we need this growth and what if its build on a house of cards? It is built on debt, that is the Japanese and increasing Chinese financiers and industrialists who have been buying US dollars for many years which has propped up the US system. What if they call it in? The economic and thus political impact would be catastrophic.
Many senior conservative economists, plus large dealers like Warren Buffet have long been warning of the problems. Buffet even announced that his firm Berkshire Hathaway was largely going to stop buying stock denominated in American dollars (in January 2005). From the left Robert Brenner in New Left Review has written powerfully of impeding crisis for the same sorts of reasons. Monthly Review, venerable publication of the US left has run articles for years pointing the contradictions of the way the US economy was sustained. Fred Magdoff in the current issue (November 2006) repeats the warnings and refers to many articles by Harry Magdoff, Paul Baran and Paul Sweezy from the previous 20 years that have been examining the same trends.
The trouble with all the crying of wolf has been that nothing has really happened. As R. Taggart Murphy noted in New Left Review (no 40, July 2006) the US dollar actually rose against the Euro and the Yen when this disaster was supposedly looming. This is an example of the lack of contact between the financial markets and the real world but is not a new phenomenon, as Taggart Murphy points out. He quotes Keynes a savvy investor and also insightful commentator who compared "the stock market to a beauty contest in which the winnings went to whoever could pick the contestant thought by the other judges to be the most beautiful."...The daily volume of foreign exchange transactions dwarfs trade in real world goods, running to trillions of dollars and 85% of them are denominated in US dollars. So if enough people believe that others will hang on to them, come what may, then the dollar will not fall, whatever happens to US trade deficits.
Japan, China, South Korea Taiwan, Hong Kong and increasingly Saudi Arabia and the Gulf Emirates are the biggest buyers and holders of US dollar. Mike Davis points out that the current high price of oil has caused an estimated transfer of $1.2 trillion more from oil consuming to oil producing countries in the years 2004-05 than in 2003. The surreal but real development of Dubai is the most visible manifestation of this wealth transfer. Hotels within a building that is almost a kilometre high (two Empire State Buildings stacked on end) with atriums taller than the Statue of Liberty).
According to Taggart-Murphy Japan remains the lynchpin for the dollar. It has propped up the world economy ever since it was the first to emerge from the oil crisis induced recession of the 1970s, dragging Reagan through eight years of mismanagement, then financing the first Gulf War, the Mexican peso collapse of 1995, 9-11, and the Afghan and Iraq wars. China has now well and truly joined the fray with its official dollar reserves exceeding Japan's $880 billion (in 2005). Taggart-Murphy asks WHY?
His explanation for Japan's role takes him back to the opening of Japan to the West from 1868 when a new elite seized power. This new group re-organised Japan politically and economically, and developed its military might over the next fifty years along with developing a strong international financial role through the London financial markets, which then and now were central to world trade. Japan's gold reserves lying in London vaults ensured the maintenance of the gold stand and thus British hegemony over many smaller nations and colonies.
The rise of the military and its defeat in the first Pacific War (or WWII) did not fundamentally change Japanese power structures and since then the country has largely been governed by only one democratic party and the strongest opposition does not get a look in.
The 1980s land boom in Japan generated the dollar growth but, as Taggart Murphy says, the Japanese manufacturing and technology sectors have been overtaken by the US because of cost factors. Restructuring has been occurring since the early 1990s and pressure from the US has lead to greater access to Japan from US companies. There has been some financial deregulation but the Japanese elite were not silly enough to allow the loss of control of that sector. Koizumi's reelection in 2005 saw the privatization of the treasure trove that is Japan's post office savings accounts, but the funds remained by law firmly under the control of the finance ministry for at least another ten years and that ministry has long called the shots in Japan.
Taggart Murphy then extends his gaze across the sea to China. The rise in Japanese manufacturing cost structures had been exacerbated by a rise in the value of the Yen in the 1980s and a rise in real wages. Traditional manufacturers (Nissan for example) suffered takeovers by US firms in the washouts of the 1990s but this was a blip in Japans economic strength. Costs were lowered by moves to other Asian nations but the rise of China has been a great benefit so far. It has become a huge market for Japanese capital goods as well as capital and has lowered consumer costs in the major western nations (Europe and the USA).
Japan has maintained a skill and manufacturing base at home by exporting to the US in particular high valued added products -cars, machine tools and aerospace components whilst China has become the centre of the world's working class in making household items and toys. This has affected us all and the decline in secure employment has been partially alleviated by the lowered cost of these goods. Can it last?
Everyone is paying in US dollars for the floods of Chinese products. China has, as noted a vast pool of US dollars with which it s so far buying more and accepting more, thus keeping the US economy staggering along. Why is that happening. Partially because it maintains stability. The Chinese economy is part of the world system and the government and financiers need to maintain the flows to prevent instability at home. An estimated 10 million jobs need to be crated every year to keep those million of young men employed. Political repression, prison labour, expulsions from rural lands to low wage (but at least some wage) jobs in Shanghai or elsewhere are keeping things in balance for the moment.
The current account surplus keeps buying US securities. The problem as Taggart-Murphy sees it, is the sheer size of China. Japan is a huge economy but the weight of China's billions of people and trillions of dollars is a burden. Can China do as Dubai is doing, build vast fantasylands as the world crumbles to soak up the cash? Flows of foreign investment into those very companies in Japan and the US that are basing their manufacturing in China is also one way of using the money.
Japan and China might be deciding that the imbalance has become too great and that they can now do without the US. If this is so the reckoning that has been predicted for 20 years will be upon us.
If Japan did decide to stop purchasing US government securities their economy would suffer a huge write off of funds and the value of the yen would soar. But it may be that they will decide that the deflationary effects of financing the US economy (that has kept Japanese interest rates at negative levels) are not worth the candle and they will seek to make the Yen a super-currency, increasing Japanese household purchasing power and thus stimulating their relatively stagnant economy by encouraging domestic demand as opposed to their traditional strategy of export led growth.
The US would find it increasingly difficult to maintain its military reach were this to happen as its finances would be wrecked. What role for Japan then? Already Koizumi has raised hackles at home and particularly in China with some of his antics honouring the military activities of the 1930s. The Koreans are also feeling slighted by Koizumi around similar issues and east Asian tensions, with a withdrawal of a stricken US military will create new alliances. Taggart-Murphy sees that the price will be too high for Japan to abandon its traditional role in propping up the dollar but the possibility is real.
Add the huge consequences of the actions taken or not on climate change, the rise of India and Hubberts Peak (in oil production) and the global turbulence we have seen so far will be a low tide.
R Taggart-Murphy (2006) East Asia's Dollars. New Left Review no 40, July-August pp39-64
Fred Magdoff (2006). The Explosion of Debt and Speculation. Monthly Review; vol. 56 no. 6, November pp1-23
For Robert Brenner's work see (1998) The Economics of Global Turbulence
New Left Review I/229, May-June whole issue
For the oil dollars of the Dubai fantasia and its impact plus the rise of worker unrest there see the brilliant article by Mike Davis (2006) Fear and Money in Dubai. New Left Review 41, September October; pp47-68
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