Beijing’s new moves bring the US Debt cataclysm nearer
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 analyses why this is.
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”?
We can only hope…but not hold our collective breath.