[Dialogue] What isn't being talked about

[george]

While we may decry Lam's speech or wish for a different future, here's 
something else to think about.  That economic side of the triangle.
For more go to:http://207.44.245.159/article7778.htm
George Holcombe


Part  1: Why the emperor has no clothes

By Andre Gunder Frank

01/20/05 "Asia Times" -- 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.