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Impending Destruction Of The US Economy

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    Impending Destruction Of The US Economy By Paul Craig Roberts 29 November, 2007 http://www.countercurrents.org/roberts291107.htm Hubris and arrogance are too
    Message 1 of 1 , Dec 3, 2007
      Impending Destruction Of The US Economy
      By Paul Craig Roberts
      29 November, 2007

      Hubris and arrogance are too ensconced in Washington for policymakers
      to be aware of the economic policy trap in which they have placed the
      US economy. If the subprime mortgage meltdown is half as bad as
      predicted, low US interest rates will be required in order to contain
      the crisis. But if the dollar's plight is half as bad as predicted,
      high US interest rates will be required if foreigners are to continue
      to hold dollars and to finance US budget and trade deficits.

      Which will Washington sacrifice, the domestic financial system and
      over-extended homeowners or its ability to finance deficits?

      The answer seems obvious. Everything will be sacrificed in order to
      protect Washington's ability to borrow abroad. Without the ability to
      borrow abroad, Washington cannot conduct its wars of aggression, and
      Americans cannot continue to consume $800 billion dollars more each
      year than the economy produces.

      A few years ago the euro was worth 85 cents. Today it is worth $1.48.
      This is an enormous decline in the exchange value of the US dollar.
      Foreigners who finance the US budget and trade deficits have
      experienced a huge drop in the value of their dollar holdings. The
      interest rate on US Treasury bonds does not come close to compensating
      foreigners for the decline in the value of the dollar against other
      traded currencies. Investment returns from real estate and equities do
      not offset the losses from the decline in the dollar's value.

      China holds over one trillion dollars, and Japan almost one trillion,
      in dollar-denominated assets. Other countries have lesser but still
      substantial amounts. As the US dollar is the reserve currency, the
      entire world's investment portfolio is over-weighted in dollars.

      No country wants to hold a depreciating asset, and no country wants to
      acquire more depreciating assets. In order to reassure itself, Wall
      Street claims that foreign countries are locked into accumulating
      dollars in order to protect the value of their existing dollar
      holdings. But this is utter nonsense. The US dollar has lost 60% of
      its value during the current administration. Obviously, countries are
      not locked into accumulating dollars.

      The reason the dollar has not completely collapsed is that there is no
      clear alternative as reserve currency. The euro is a currency without
      a country. It is the monetary unit of the European Union, but the
      countries of Europe have not surrendered their sovereignty to the EU.
      Moreover, the UK, a member of the EU, retains the British pound. The
      fact that a currency as politically exposed as the euro can rise in
      value so rapidly against the US dollar is powerful evidence of the
      weakness of the US dollar.

      Japan and China have willingly accumulated dollars as the counterpart
      of their penetration and capture of US domestic markets. Japan and
      China have viewed the productive capacity and wealth created in their
      domestic economies by the success of their exports as compensation for
      the decline in the value of their dollar holdings. However, both
      countries have seen the writing on the wall, ignored by Washington and
      American economists: By offshoring production for US markets, the US
      has no prospect of closing its trade deficit. The offshored production
      of US firms counts as imports when it returns to the US to be
      marketed. The more US production moves abroad, the less there is to
      export and the higher imports rise.

      Japan and China, indeed, the entire world, realize that they cannot
      continue forever to give Americans real goods and services in exchange
      for depreciating paper dollars. China is endeavoring to turn its
      development inward and to rely on its potentially huge domestic
      market. Japan is pinning hopes on participating in Asia's economic

      The dollar's decline has resulted from foreigners accumulating new
      dollars at a lower rate. They still accumulate dollars, but fewer. As
      new dollars are still being produced at high rates, their value has

      If foreigners were to stop accumulating new dollars, the dollar's
      value would plummet. If foreigners were to reduce their existing
      holdings of dollars, superpower America would instantly disappear.

      Foreigners have continued to accumulate dollars in the expectation
      that sooner or later Washington would address its trade and budget
      deficits. However, now these deficits seem to have passed the point of
      no return.

      The sharp decline in the dollar has not closed the trade deficit by
      increasing exports and decreasing imports. Offshoring prevents the
      possibility of exports reducing the trade deficit, and Americans are
      now dependent on imports (including offshored production) for which
      there are no longer any domestically produced alternatives. The US
      trade deficit will close when foreigners cease to finance it.

      The budget deficit cannot be closed by taxation without driving up
      unemployment and poverty. American median family incomes have
      experienced no real increase during the 21st century. Moreover, if the
      huge bonuses paid to CEOs for offshoring their corporations'
      production and to Wall Street for marketing subprime derivatives are
      removed from the income figures, Americans have experienced a decline
      in real income. Some studies, such as the Economic Mobility Project,
      find long-term declines in the real median incomes of some US
      population groups and a decline in upward mobility.

      The situation may be even more dire. Recent work by Susan Houseman
      concludes that US statistical data systems, which were set in place
      prior to the development of offshoring, are counting some foreign
      production as part of US productivity and GDP growth, thus overstating
      the actual performance of the US economy.

      The falling dollar has pushed oil to $100 a barrel, which in turn will
      drive up other prices. The falling dollar means that the imports and
      offshored production on which Americans are dependent will rise in
      price. This is not a formula to produce a rise in US real incomes.

      In the 21st century, the US economy has been driven by consumers going
      deeper in debt.

      Consumption fueled by increases in indebtedness received its greatest
      boost from Fed chairman Alan Greenspan's low interest rate policy.
      Greenspan covered up the adverse effects of offshoring on the US
      economy by engineering a housing boom. The boom created employment in
      construction and financial firms and pushed up home prices, thus
      creating equity for consumers to spend to keep consumer demand growing.

      This source of US economic growth is exhausted and imploding. The full
      consequences of the housing bust remain to be realized. American
      consumers lack discretionary income and can pay higher taxes only by
      reducing their consumption. The service industries, which have
      provided the only source of new jobs in the 21st century, are already
      experiencing falling demand. A tax increase would cause widespread

      As John Maynard Keynes and his followers made clear, a tax increase on
      a recessionary economy is a recipe for falling tax revenues as well as
      economic hardship.

      Superpower America is a ship of fools in denial of their plight. While
      offshoring kills American economic prospects, "free market economists"
      sing its praises. While war imposes enormous costs on a bankrupt
      country, neoconservatives call for more war, and Republicans and
      Democrats appropriate war funds which can only be obtained by
      borrowing abroad.

      By focusing America on war in the Middle East, the purpose of which is
      to guarantee Israel's territorial expansion, the executive and
      legislative branches, along with the media, have let slip the last
      opportunities the US had to put its financial house in order. We have
      arrived at the point where it is no longer bold to say that nothing
      now can be done. Unless the rest of the world decides to underwrite
      our economic rescue, the chips will fall where they may.

      Paul Craig Roberts was Assistant Secretary of the Treasury in the
      Reagan Administration. He is the author of Supply-Side Revolution : An
      Insider's Account of Policymaking in Washington; Alienation and the
      Soviet Economy and Meltdown: Inside the Soviet Economy, and is the
      co-author with Lawrence M. Stratton of The Tyranny of Good Intentions
      : How Prosecutors and Bureaucrats Are Trampling the Constitution in
      the Name of Justice.



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