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News :: Politics
US Defaults On 40% Of Its Trillion Dollar Foreign Debt
by Andre Gunder Frank
09 Jan 2005
THE NAKED HEGEMON
[Plus several other articles below]
Part 1: Why the emperor has no clothes
Uncle Sam has reneged and defaulted on up to 40% of its trillion-dollar foreign debt, and nobody has said a word except for a line in The Economist. In plain English that means Uncle Sam runs a worldwide confidence racket with his self-made dollar based on the confidence that he has elicited and received from others around the world, and he is a also a deadbeat in that he does not honor and return the money he has received.
How much of our dollar stake we have lost depends on how much we originally paid for it. Uncle Sam let his dollar fall, or rather through his deliberate political economic policies drove it down, by 40%, from 80 cents to the euro to 133 cents. The dollar is down by a similar factor against the yen, yuan and other currencies. And it is still declining, indeed is apt to plummet altogether.
There was also a spate of competitive devaluations in the 1930s, called the "beggar thy neighbor policy" of shifting the costs for the neighbors to bear. True, as the dollar has declined, so has the real value that foreigners pay to service their debt to Uncle Sam. But that works only if they can themselves earn in currencies that have increased in value against the dollar. Otherwise, foreigners earn and pay in the same devalued dollars, and even then with some loss from devaluation between the time they got their dollars and the time they repay them to Uncle Sam. China and other East Asian nations do earn in dollars, to which they have pegged their currencies, so they have already lost a substantial portion of their dollar stake, by far the world's largest.
And they, like all others, will also lose the rest. For Uncle Sam's debt to the rest of the world already amounts to more than a third of his annual domestic production and is still growing. That alone already makes his debt economically and politically never repayable, even if he wanted to, which he does not. Uncle Sam's domestic, eg credit-card, debt is almost 100% of gross domestic product (GDP) and consumption, including that from China. Uncle Sam's federal debt is now US$7.5 trillion, of which all but $1 trillion was built up in the past three decades, the last $2 trillion in the past eight years, and the last $1 trillion in the past two years. Alas, that costs more than $300 billion a year in interest, compared with, for example, the $15 billion spent annually on the National Aeronautics and Space Administration (NASA). But no worries: Congress just raised the debt ceiling to $8.2 trillion. To help us visualize, $1 trillion tightly packed up in $1,000 bills would create a pile 100km high.
But nearly half is owed to foreigners. All Uncle Sam's debt, including private household consumer credit-card, mortgage etc debt of about $10 trillion, plus corporate and financial, with options, derivatives and the like, and state and local government debt comes to an unvisualizable, indeed unimaginable, $37 trillion, which is nearly four times Uncle Sam's GDP. Only some of that can be managed domestically, but with dangerous limitations for Uncle Sam noted below. That is only one reason I want you to meet Uncle Sam, the deadbeat confidence man, who may remind you of the film Meet Joe Black; for as we get to know him better below, we will find that he is also a Shylock, and a corrupt one at that.
The United States is the world's most privileged nation for having the monopoly privilege of printing the world's reserve currency at will and at a cost of nothing but the paper and ink it is printed on. Moreover, by doing so, Uncle Sam can export abroad the inflation he generates by the extra dollars he prints, of which there are already at least three times as many floating around the world as at Uncle Sam's home. Additionally, his is also the only country whose "foreign" debt is mostly denominated in his own world-currency dollars that he can print at will; while most foreigners' debt is also denominated in the same dollar, but they have to buy it from Uncle Sam with their own currency and real goods. So he simply pays the Chinese and others in essence with these dollars that already to begin with have no real worth beyond their paper and ink. So especially poor China gives away for nothing at all to rich Uncle Sam hundreds of billions of dollars' worth of real goods produced at home and consumed by Uncle Sam. Then China turns around and trades these same paper dollar bills in for more of Uncle Sam's paper called Treasury Certificate bonds, which are even more worthless, except that they pay a percent of interest. For as we already noted, they will never be able to be cashed in and redeemed in full or even in part, and anyway have the lost much of their value to Uncle Sam already.
In an earlier essay, I argued that Uncle Sam's power rests on two pillars only, the paper dollar and the Pentagon. Each supports the other, but the vulnerability of each is also an Achilles' heel that threatens the viability of the other. Since then, Iraq, not to mention Afghanistan, has shown confidence in the Pentagon not to be what it was cracked up to be; and with the in-part-consequent decline in the dollar, so has confidence in it and Uncle Sam's ability to use it to finance his Pentagon's foreign adventures (See Coup d'Etat and Paper Tiger in Washington, Fiery Dragon in the Pacific, which also conjures up the productive growth of China). Additionally we must realize that Uncle Sam's numbers above and below are also all literally relative. So far relations with other countries, in particular with China, still favor Uncle Sam, but they also help maintain an image that is deceptive. Consider the following:
A $2 toy leaving a US-owned factory in China is a $3 shipment arriving at San Diego. By the time a US consumer buys it for $10 at Wal-Mart, the US economy registers $10 in final sales, less $3 import cost, for a $7 addition to the US GDP. (Blaming 'undervalued' yuan wins votes, Asia Times Online, February 26, 2004)
Moreover, ever-clever Uncle Sam has arranged matters so as to earn 9% from his economic and financial holdings abroad, while foreigners earn only 3% on theirs, and among them on their Treasury Certificates only 1% real return. Note that this difference of 6 percentage points is already double what Uncle Sam pays out, and his total 9% take is triple the 3% he gives back. Therefore, although foreign holdings and Uncle Sam's are now about equal, Uncle Sam is still the big net interested winner, just like any Shylock, but no other ever did so grand a business.
But Uncle Sam also earns quite well, thank you, from other holdings abroad, eg from service payments by mostly poor foreign debtors. The sums involved are not peanuts or even small potatoes. For from his direct investments in foreign property alone, Uncle Sam's profits now equal 50%, and including his receipts from other holdings abroad now are a full 100% of profits derived from all of his own domestic activities combined. These foreign receipts add more than 4% to Uncle Sam's national domestic product. That helps nicely to compensate for the failure of domestic profits as yet to recover even their 1972 level, because Uncle Sam has failed to boost productivity sufficiently at home.
The productivity hype of president Bill Clinton's "new economy" in the 1990s was limited to computers and information technology (IT), and even that proved to be a sham when the dot-com bubble burst. Also, not only the apparent increase in "profits" but also that of "productivity" were, at the bottom, on the backs of shop-floor, office and sales-floor workers working harder and longer hours and, at the top, the result of innovative accounting shams by Enron and the like. Such factors still compensate for and permit much of Uncle Sam's $600-billion-and-still-rising trade deficit from excess home consumption over what he himself produces. That is what has resulted in the multitrillion-dollar debt. Exactly how large that debt is Uncle Sam is reluctant to reveal, but what is sure is that it is by far the world's largest, even as net debt to foreigners, after their debt to him is deducted.
How has all this come about?
The simple answer is that Uncle Sam, who is increasingly hooked on consumption, not to mention harder drugs, saves no more than 0.2% of his own income. The Federal Reserve's guru and now you see it, now you don't doctor of magic, Alan Greenspan, recently observed that this is so because the richest 20% of Americans, who are the only ones who do save, have reduced their savings to 2%. Yet even these measly savings (other, poorer countries save and even invest 20%, 30%, even 40% of their income) are more than counterbalanced by the 6% deficit spending of the government. That is what brings the average saving rate to 0.2%. To maintain that $400-plus-billion budget deficit (more than 3% of national domestic product), which is really more the $600 billion if we count, as we should, the more than $200 billion Uncle Sam "borrows" from the temporary surplus in his own Federal Social Security fund, which he is also bankrupting. (But never mind, President George W Bush just promised to privatize much of that and let people buy their own old-age "security" in the ever-insecure market).
So with this $600-billion-plus budget deficit and the above-mentioned related $600-billion-plus deficit, rich Uncle Sam, and primarily his highest earners and biggest consumers, as well as of course the Big Uncle himself, live off the fat of the rest of the world's land. Uncle Sam absorbs the savings of others who themselves are often much poorer, particularly when their central banks put many of their reserves in world-currency dollars and hence into the hands of Uncle Sam in Washington, and some also in dollars at home. Their private investors send dollars to or buy dollar assets on Wall Street, all with the confidence that they are putting their wherewithal in the world's safest haven (and that, of course, is part of the above-mentioned confidence racket). From the central banks alone, we are looking at yearly sums of more than $100 billion from Europe, more than $100 billion from poor China, $140 billion from super-saver Japan, and many 10s of billions from many others around the globe, including the Third World. But in addition, Uncle Sam obliges them, through the good offices of their own states, to send their thus literally forced savings to Uncle Sam as well in the form of their "service" of their predominantly dollar debt to him.
His treasury secretary and his International Monetary Fund (IMF) handmaiden blithely continue to strut around the world insisting that the Third - and ex-Second, now also Third - World of course continue to service their foreign debts, especially to him. No matter that with interest rates multiplied several times over by Uncle Sam himself after the Fed's Paul Volcker's coup in October 1979, most have already paid off their original borrowings three to five times over. For to pay at all at interest rates that Volcker boosted to 20%, they had to borrow still more at still higher rates until thereby their outstanding foreign debt doubled and tripled, not to mention their domestic debt from which part of the foreign payments were raised, particularly in Brazil. Privatization is the name of the game there and elsewhere, except for the debt. The debt was socialized after it had been incurred mostly by private business, but only the state had enough power to squeeze the greatest bulk of back payments out of the hides of its poor and middle-class people and transfer them as "invisible service payments" to Uncle Sam.
When Mexicans were told to tighten their belts still further, they answered that they couldn't because they had already had to eat their belts. Only Argentina and for a while Russia declared an effective moratorium on debt "service", and that only after political economic policies had destroyed their societies, thanks to Uncle Sam's advisers and his IMF strong arm. Since then, Uncle Sam himself has been blithely defaulting on his own foreign debt, as he already had several times before in the 19th century.
Speaking of that, it may be well to recall at least two pieces of advice from that time: Lord Cromer, who administered Egypt for then-dominant British imperial interests, said his most important instrument for doing so was Egypt's debts to Britain. These had just multiplied when Egypt was obliged to sell its Suez Canal shares to Britain in order to pay off earlier debts and British prime minister Benjamin Disraeli explained and justified his purchase of the same on the grounds that it would strengthen British imperial interests. Today, that is called "debt-for-equity swaps", which is one of Uncle Sam's latter-day favorite policies to use the debt to acquire profitable and/or strategically important real resources, as of course also was the canal as the way to the jewel of the British Empire, India.
Another piece of practical advice came from the premier military strategist Carl von Clausewitz: make the lands you conquer pay for their own conquest and administration. That is of course exactly what Britain did in and with India through the infamous "Home Charges" remitted to London in payment for Britain administering India, which even the British themselves recognized as "tribute" and responsible for much of "The Drain" from India to Britain. How much more efficient yet to let foreign countries' own states administer themselves but by rules set and imposed by Uncle Sam's IMF and then effect a drain of debt service anyway. Actually, the British therein also set the 19th-century precedent of relying on the "imperialism of free trade" with "independent" states as far and as long as possible, using gunboat diplomacy to make it work (which Uncle Sam had already learned to copy by early in the 20th century); and if that was not enough, simply to invade, and if necessary to occupy - and then rely on the Clausewitz rule.
We shall note several recent instances thereof, and especially the Iraqi one, in the second article in this series.
Last but not least, oil producers also put their savings in Uncle Sam. With the "shock" of oil that restored its real price after the dollar valuation had fallen in 1973, ever-cleverer-by-half Henry Kissinger made a deal with the world's largest oil exporter, Saudi Arabia, that it would continue to price oil in dollars, and these earnings would be deposited with Uncle Sam and partly compensated by military hardware. That deal de facto extended to all of the Organization of Petroleum Exporting Countries (OPEC) and still stands, except that before the war against Iraq that country suddenly opted out by switching to pricing its oil in euros, and Iran threatened do the same. North Korea, the third member of the "axis of evil", has no oil but trades entirely in euros. (Venezuela is a major oil supplier to Uncle Sam and also supplies some at preferential rates as non-dollar trade swaps to poor countries such as Cuba. So Uncle Sam sponsored and financed military commandos from its Plan Colombia next door, promoted an illegal coup and, when that failed, pushed a referendum in his attempt at yet another "regime change"; and now along with Brazil all three are being baptized as yet another "axis of evil").
To return to the main issue and call a spade a huge spade, all of the above is part and parcel of the world's biggest-ever Ponzi-scheme confidence racket. Like all others, its most essential characteristic is that it can only continue to pay off dollars and be maintained at the top as long as it continues to receive new dollars at the bottom, voluntarily through confidence if possible and by force if not. (Of course, the Clausewitz and Cromer formulas result in the poorest paying the most, since they are also the most defenseless: so that the ones sitting on/above them pass much of the cost and pain down to them.)
What if confidence in the dollar runs out?
Things are already getting shakier in the House of Uncle Sam. The declining dollar reduces the necessary dollar inflows, so Greenspan needs to raise interest rates to maintain some attraction for the foreign dollars he needs to fill the trade gap. As a quid pro quo for being reappointed by President George W Bush, he promised to do that only after the election. That time has now arrived, but doing so threatens to collapse the housing bubble that was built on low interest and mortgage - and remortgage - rates.
But it is in their house values that most Americans have their savings, if they have any at all. They and this imaginary wealth effect supported over-consumption and the nearly as-high-as-GDP household debt, and a collapse of the housing price bubble with increased interest and mortgage rates would not only drastically undercut house prices, it would thereby have a domino effect on their owners' enormous second and third remortgages and credit-card and other debt, their consumption, corporate debt and profit, and investment. In fact, these factors would be enough to plummet Uncle Sam into a deep recession, if not depression, and another Big Bear deflation on stock and de facto on other prices, rendering debt service even more onerous. (If the dollar declines, even domestic price inflation is de facto deflationary against other currencies, which Russians and Latin Americans discovered to their peril, and which we observe below.)
Still lower real US investment would reduce its industrial productivity and competitiveness even more - probably to a degree lower than can compensated for by further devaluing the dollar and making US exports cheaper, as is the confident hope of many, probably including the good Doctor. Until now, the apparent inflation of prices abroad in rubles and pesos and their consequent devaluations have been a de facto deflation in terms of the dollar world currency. Uncle Sam then printed dollars to buy up at bargain-basement fire-sale prices natural resources in Russia (whose economy was then run on $100 bills), and companies and even banks, as in South Korea. True, now Greenspan and Uncle Sam are trying again to get other central banks to raise their own interest rates and otherwise plunge their own people into even deeper depression.
But even if he can, thereby also canceling out the relative attractiveness of his own interest-rate hike, how could that save Uncle Sam? What remains the great unknown and perhaps still unknowable is how a more wounded, Ponzi-less Uncle Sam would react with more "Patriotic" acts at home and abroad with the weapons - including the now almost ready "small" nukes - he would still have, even if his foreign victims no longer paid for new ones. So, to compensate for less bread and civil rights at home, an even more patriotic, nay chauvinist, circus at the cost of others abroad is the real danger of the current policies to "defend freedom and civilization".
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This work is in the public domain