President Trumps’ histrionics over the US trade deficit seem oblivious to the fact that neocon policymakers had already chosen decades ago amongst paths to “make America great again”!
Path one followed the post Second World War scheme where the US rebuilt erstwhile belligerents Japan and Germany into capitalist competitors. It then put a floor under the global economy with an international monetary system that had the dollar as hub currency but backed up by exchangeability with gold should this or that country accumulate more dollars than it wanted.
Bretton Woods international monetary system hinged on the US remaining competitive top dog. However, when it experienced balance of payments deficits in 1971, the first time since 1891, institutions like the International Monetary Fund were purposed to dole out the necessary recovery medicine. Yet the US took being outcompeted by Japan and Germany badly and, rather than take its medicine to make its manufacturing economy great again, tore up the playing field.
Nixon’s shock to the world by unilaterally ending dollar-gold convertibility was the first move in this gambit. However it only accelerated US domestic inflationary policies which combined with growing economic stagnation to produce “stagflation”. And it encouraged major allies to contemplate replacing the dollar as hub currency as US inflation was exported across the globe.
It was into this increasingly hostile environment for the dollar that FED chair Paul Volcker struck hard and fast raising US interest rates to stratospheric heights. This changed everything. First, the inflation dragon was quickly slain. Second, the dollar rapidly appreciated in world markets. Third, it restored global confidence in the dollar as hub currency. Finally, it streamed global money to into US dollar savings instruments and dollar denominated assets.
The problem with this dream suite is that under global conditions of recession and indebtedness, with rates of interest soaring above rates of profit and the strong dollar pricing US goods out of world markets, the US industrial economy disintegrated. Yet, for neocons, this provided the perfect storm to make America great again around a new economic orientation!
Step one in this scheme was to take advantage of the high interest rate induced debt crisis that struck the third world from the early 1980s to destroy whatever pretentions its leaders had of building their own developed, manufacturing economies.
Step two was to deregulate and liberalize US financial markets and compel major advanced economy allies to deregulate theirs. After all, with global money streaming into US savings instruments and assets, and scant profitable investment opportunities in the real economy, why not empower Wall Street as the vortex through which all this booty flowed. Then, with a seamless financial world, Wall Street would become the global command centre spreading around the speculative, casino games it was hatching.
Step three is basically what we understand as globalization. Major US and other advanced economy transnational corporations disarticulated their production systems and offshored them to low wage third world countries that had been forced to deregulate and open to foreign investment as a condition of access to global credit. Japan created a template for this by organizing a network of supply companies across the East and Southeast Asian region during the 1970s and 80s. When China opened to the world Japanese corporations embraced it in their networks. By the 1990s, global transnationals of all stripes got in on the action in the region. Statistics soon showed Asia was becoming the centre of global manufacturing growth.
But manufacturing growth no longer equalled industrialization because production was sliced and diced into global value chains that took high value added knowledge and design inputs from advanced economies, added medium value added components to them in East and Southeast Asia, and then assembled the goods in China. Manufacturing, like global trade, was increasingly marked by intermediate goods or sub-products destined for low wage assembly mills.
However, let us get back to the US economy under neocon tutelage. Remember, the disintegration of the US industrial machine left the US labour force jobless or facing low paid precarious work. Paralleling this was tax cuts for businesses and the wealthy along with US military adventures which set off rounds of bloating budget deficits. Adding globalization into the mix means swelling trade deficits as consumption goods are increasingly imported. Given the fact that Americans can’t save because they’re saddled with debt, the big question arises – where’s the money running the US economy coming from?
Here we arrive at neocon step four. Dollarize the world! With the dollar as world money states must either sell more than they buy to accumulate dollar surpluses. Or they have to borrow dollars to buy. Then maintain a volatile global financial system forcing countries to hold US dollars as a significant component of their national reserves to battle back speculative attacks on their currencies. Finally, leave buying US Treasury IOUs and dollar assets the only “sure” game in town for the dollar savings of countries like China and Japan you buy most of your goods from. This makes their positive net international investment position a mirror image of your negative one.
Hence, with the dollar as world money the US gains an automatic borrowing mechanism giving it global policy autonomy denied other states. Given a current account deficit financed by savings of the world, US government spending on global militarization and other priorities can expand without “crowding out” private sector borrowing. Notwithstanding a low savings rate, domestic borrowing exercises little pressure on interest rates which hover around zero. In the end, the US spends well in excess of its domestic savings plus government tax revenues while no longer engendering price inflation.
To become great again, the US parlayed the world’s largest national debt, its trade deficit, budget deficit, capital account deficit and savings rate deficit, into a position in the global driver seat through the dollar remaining global hub currency.