Moon of Alabama Brecht quote
December 05, 2004

Offshoring, the falling dollar and desindustrialisation

jj kindly provided a link to The China price about the threat to the US's manufacturing capacity from China's ability to be 30-50% cheaper.

Meanwhile, articles such as this NYT piece (A Field Guide to the Falling Dollar) are becoming daily occurences, all warning about the dollar's likely decline and basically saying that the only uncertainty is whether this decline will be rapid (bad) or slow (better).

These issues are inextricably linked and, as I have a little bit of time, I'd like to provide my view on the subject. Some of you here may find these controversial, so remember that I am a finance guy, with no actual links to the real world, and may thus be mistaken - but I am willing to listen and learn otherwise!

What these two things have in common is that they are the simple reflection of the real underlying cause of all the current unbalances in the world economy - the USA consume more than they produce, and they rely on the rest of the world to provide the difference.

The USA have the amazing privilege of having their currency serve as the main currency of international trade and reserve - which means that others are willing to hold dollars even if they do not intend to use them to buy things from the US (which is usually the main reason for buying someone else's currency). This reflects America's economic pre-eminence, as well (and this is often forgotten) as a general trust in the US institutions which means that foreigners expect their dollars to keep their value. This has allowed Americans to borrow money from abroad in pretty much unlimited amounts and at really good terms. This has in turn, mechanically fueled imports (if you have more money than you can spend locally, you spend it elsewhere).

So two first items to remember:
- the USA get a really good deal from the rest of the world
- US industry is not necessarily uncompetitive; it is structurally too small to fulfill all US needs

The rest of the world has been happy with this deal for various reasons:
- for a good part of the world, wracked by inflation, nasty regimes and poor financial institutions, it is simply more convenient, safer and a better deal to keep your savings in dollars than locally;
- for everybody, it is really helpful to have a common currency to set prices and trade internationally, knowing that everybody else also accepts it. This has been compounded by the growing use of (mostly US-created) financial instruments backing commercial transactions that all require a common currency to provide liquidity.

The problem is that the USA have abused the system, and the sheer scale of the unbalances are now threatening to bring down the whole thing.

- one myth is that foreigners get better returns in the US than elsewhere, thus ensuring that they do want to invest there. This is simply false. The US actually generate more income from their foreign investments than foreigners from their US investments, despite these now being significantly larger. Foreigners now own a growing proportion of T-Bills, which pay little, whereas US investors own good productive assets outside the US (which quite often provide for US demand). These low returns on US purchases are not a problem in normal times, but they do not provide an "objective" reason for further investment in the US economy;

- another myth is that it's Europe's "fault" if there are such unbalances, because Europe's economies are too sclerotic, Soviet, rigid, obsolete, etc and thus cannot grow and cannot "pull their weight" (i.e. importing more and "sharing the burden" with the US). Europe is barely a net exporter, but not very far from balance; Europeans live within their means and there is no rational reason to behave differently, so salvation will not come from here. (btw, it's quite a (framing) trick to have managed to call imports a burden, when it really means that others work and you enjoy their labor);

- meanwhile, the Asian economies, having built their prosperity on piggybacking the US economy, and developping their economic base by providing for the US needs and imports, are now stuck in the same vicious circle as the US - as they have a mercantilist approach, they keep their currencies pegged to the US dollar to stay competitive, and the way to do that when you have a large surplus of dollars is to either invest in the US or stock them. Obviously, the Asians do not seem to be interested in investing in the US (being busy investing at home - or in China - as quickly as they can), and they recycle these dollars in low-remuneration T-Bonds (rather than cash). With the current deficits, the pile of T-Bonds they own is becoming precariously high;

In any other country in the world, such a situation would have triggered a currency run and a default, Argentine-style, with the IMF and other such institutions coming to the rescue... The only reason this has not happened (other than the main foreign investors almost everywhere are Americans, and they are obviously not going to treat their own country the same as some godless foreign land) is that the Dollar retains its role as a trading currency, and the US has accumulated such a capital of trust in its currency that it can spend a lot of it before it has spent too much.

The difference now is that, for the first time, there is a credible alternative currency for both international trade and reserve: the Euro. It is backed by an economy and trading partner just as big as the US, and by institutions, despite all the criticism and nitpicking from the business press, that are fundamentally sound (rule of law, sound banking regulation, hawkish central bank, balanced trade, reasonable debt position).
At the same time, the US has gone on an amazing spending binge, fuelled by the dot-com bubble, then the real estate bubble and the Bush deficits. The binge has been made possible by Greespan's astonishingly loose monetary policy (and everybody's joyful embrace of debt) and a lot of it has been wasted in military spending which does not profit many and is certainly not recycled into the economy (the economic equivalent of armies and weapons building is to have the people involved dig holes in the sand and refill them - it does not create any value and it ties up a lot of people that could do better things. Up to a point, you can argue of its value as an insurance policy against trouble from the outside, but it is fair to say that the US are far beyond that point).

So there you have it
- longstanding overconsumption, a good chunk of it unproductive;
- a credible alternative
and you have the result: 4 dollars bought 5 euros in 2001; now they buy 3 euros only.

The ONLY way to solve this crisis is for the US to stop consuming more than it produces. This can come in many ways, of which the falling dollar is only a very indirect one.

A falling dollar, when the US imports twice as much as it exports (yes, double) has initially the following consequences:

- increase the cost of imports, expressed in dollars and decrease the cost, in other currencies of exports for foreigners (which is obvious), which leads to an increased trade deficit as the monetary impact is immediate, as imports are immediately more expensive, but cannot be immediately replaced (and in some cases, like oil or many products not manufactured in the US, cannot be replaced at all). And any change in the value of imports has double the impact of a change in exports, as they are twice as big to start with;

- create potential losses for foreigners holding assets expressed in dollars. If these assets are productive (US factories or companies) this may not be so important, but if these are paper, liquid, assets (stocks and bonds, especially T-bonds), the investors will start worrying about the return on their investment. If they expect a continuing drop in the value of the US dollars, they may sell to cut their losses, thus creating a self-fulfilling peophecy (remember, you don't just need foreigners to hold on to their T-Bonds, you currently need them to buy an extra 2-billion-dollars worth of them EVERY DAY). A devaluation of the dollar is a default by stealth - you take away a portion of the value for all non-US based investors. A default, even if by stealth, is not trust-inducing, and we have seen that trust is the last thing holding the dollar now;

- the likely way to avoid a full scale run on the dollar is then to significantly increase interest rates in the US. This has several effects: (i) it compensates foreigners for the additional risk (from their perspective) of the falling dollar value, (ii) it dampens domestic consumption by making debt more expensive, thus limiting imports and the deficit, thus possibly recreating trust that the US is taking a more sustainable financial path, but (iii) it will have an immediate impact on the real estate market, by making variable-interest mortgages more expensive thus strangling some borrowers (more sellers, including distressed ones) and at the same time reducing the price people are able to pay for houses (less buyers). Real estate being the main source of wealth for most US households, this will have a direct impact on all - no refinancing of your credit card debt by drawing house equity, reduced consumption, more bankruptcies, etc... It will not be pretty.

And when that takes place, the positive effect of a weaker currency will not have had time to kick in, because it takes time to build capacity for export or import substitution, especially if such capacity does not exist at all.

Meanwhile, your weaker currency has the following long term effects:

- oil producers, who currently get paid in dollars, are not happy with the continued erosion of the purchasing power of the dollars they get. They spend most of them in Europe, and thus need Euros. They thus expect their oil to at least keep its purchasing power in euros, which means that, if expressed in dollars, the price must go up as the dollar falls. The Europeans don't really care, because the price for them will stay constant in euros. Americans, who have big gas-guzzlers and do not have heavy taxes that could cushion these movements, will feel the increase very directly at the pump; as an absolutely non substitutable import, this will only increase the deficit with no chance of a reduction other than serious reduction in consumption, which will be a consequence of economic hardship rather than going for substitutes (public transport), which are totally unavailable for most Americans.

- holders of T-Bonds will need to be convinced to hold on to them - and to keep on buying more of them. The thing is that they are so little diversified tday that any move to change the balance of their reserves (inevitably towards the euro) has an immediate impact for the dollar, as we currently see - and for the interest rates required to keep them happy. Asian central banks may want to hold on longer than others, as they have the incentive of protecting their exports, but others (especially the oil producers of the Middle East and Russia) have growing incentives to bolt out before it gets worse. And Asians may decide on day that enough is enough, and you could have a real meltdown.

To avoid such meltdown, they will want to see the following:

- a commitment by the US to live within their means (this needs not mean zero deficit, but at least shrinking ones). This applies both to the government (the federal budget deficit - which need to be cut seriously) and to consumers (an orderly slowdown in consumption - which requires increased interest rates, again). This is purely domestic stuff - foreigners can do nothing to change that.

This gets me back to outsourcing and offshoring. Offshoring is just a new way to import more - except that it's imports of services instead of imports of goods. It was inevitable that the USA's insatiable demand - a growing portion of which is services - would require foreign input. Tradeable services naturally come into this mix (as opposed to non tradeable ones, such as getting a haircut or cleaning your pool). This movement is not a sign that US workers are uncompetitive as a whole, it simply means - again - that they consume more than they produce. Of course, some sectors may see real job destruction and upheaval due to foreign competition, but others are growing and hiring - tradeable services (banking, insurance, IT) is actually one of the few areas where the US has a trade surplus.

A falling dollar will not "solve" outsourcing if it does not lead to a rebalancing of domestic demand/production, and that will come only through massive changes in domestic consumption patterns.

So, the US can go on blaming foreigners all it wants, it's useless and counter productive. Foreigners have fed the massive overconsumption of the Americans over the past years; the smartest of them have managed to use that fact to build their economies, but they have not created it and they have certainly not repaed as many benefits as the Americans have. America has abused the privileges granted by the status of the dollar as the lone world currency beyond all reasonable repair; now it's time to pay back.

Europe will only marginally suffer, as they have balanced trade, limited exposure to the US market relative to their overall size, and a specialisation in high-quality goods that are not so price-sensitive (German exports worldwide increased by 14% this year despite the falling dollar).

non-China Asia will benefit from the increasing size of the Chinese economy (to which they are a massive net exporter) and will hopefully learn to develop more their domestic markets;

China is the most interesting case; they are likely to bear the brunt of falling US imports; on the other hand, a slowdown is probably eaxactly what they need after the overheating of the past few years; It may relieve the tensions on commodity markets that have seen stupendous increases in Chinese demand in a short time - and the corresponding price increases. The balance may not be so easy to find, but one must not forget that Chinese trade is pretty much balanced (exports to the Us being compensated by massive imports from the rest of Asia) and the country itself is not on an unsustainable export-only growth path as it busily develops its internal market and demand.

Again, the adjustment will fall mostly where it has to - US consumers. And again, this says nothing about the competitivity of US workers - only that when consumption is the priority, production cannot be - but this may well change soon...

Posted by Jérôme à Paris on December 5, 2004 at 15:01 UTC | Permalink


Psst - I have posted this on daily kos. Please recommend it if you like it! I haven't had a diary make it to the recommended list yet...

Posted by: Jérôme | Dec 5 2004 15:09 utc | 1

Well, I think you made it to the top of the recommended list in record time, deservedly so. Great piece.

I want to mull it over and ask you a couple of things later.

Posted by: SusanG | Dec 5 2004 16:04 utc | 2

Good piece Jérôme

May I add: The US consuming too much and having to consume less is a pretty wide accusation. The US has, like most other societies, classes.

The difference between top income owner and lower income owner is pretty big and widening. I believe many people struggle to make their means at a not so high standard of living and especially education. In a longer term this will hurt competivness in technology markets and will further the demise of the US. (China has some 800,000 engineering graduates per year!)

So besides the external problem of unbalanced trade/current account there is an internal balance problem with dire consequences.

The solution to this is not Dollar devaluation and the creation of infaltion which goes with this. The solution is to increase taxes for the upper classes of capital owners and for upper incomes and with that money decrease the government deficit and finance education.

Unfortunatly the US people have just voted for a President who does the exact opposite. Decrease taxes on wealth ("death tax") and dividends, abolish the income tax, steel money from Social Security. i.e. the not-so-rich, decrease budget for the National Science Foundation.

The just had their choice and expressed their preference - so be it.

Posted by: b | Dec 5 2004 16:48 utc | 3

b - that's an excellent point indeed.

The strange thing though is that the Bush tax cuts are widely blamed on the left for not being targetted to those that would provide the "right" kind of consumption. I wonder who will be hurt most by the crisis I describe? Who consumes too much if the middle and lower classes already consume less than they could have...?

Do you mind if I copy your post over at Kos? - it should trigger an interesting debate as well...

Posted by: Jérôme | Dec 5 2004 17:21 utc | 4

Surely, devaluation in the u.s. will include declining wage-rates? In this case, the debt crisis, further exacerbated by elite tax-cuts, can be viewed as a kind of strategic attack on labor. Right?

Posted by: slothrop | Dec 5 2004 17:32 utc | 5

thanks for these discussions. very helpful.

Posted by: slothrop | Dec 5 2004 17:33 utc | 6

This is not OT and I apologize, but I am not sure where else to put it, and I suspect that there are many here who would want to read this. I am also pressed for time and cannot edit and comment on it, but I think this first hand account by an American soldier who was in Falluja has a lot to offer those who ponder both the American military, the resistance, and how the military perceive the resistance.


THE FOLLOWING letter from a U.S. soldier stationed in Iraq, known as hEkLe,powerfully conveys the terror of the U.S. assault on Falluja. It was
published in GI Special, a daily Internet newsletter that gathers news and information helpful to soldiers and military families. You can find an archive of the GI Special updated with each new issue at
<> hEkLe and several fellow soldiers have a Web log that they regularly update with essays at

- - - - - - - - - - - - - - - -
THESE ARE ugly times for the U.S. military in Iraq. It seems everywhere you turn, more and more troops are being killed and maimed in vicious
encounters with determined rebel fighters.

The insurgency is mounting incredibly in such places as Baghdad, Mosul and Baquba, using more advanced techniques and weaponry associated with a
well-organized guerilla campaign. Even in the massively destroyed city of Falluja, rebel forces are starting to reappear with a callous determination to win or die trying. Many critics and political pundits are starting to realize that this war is, in many aspects, un-winnable.

And why should anyone think that a complete victory is possible? Conventionally, our U.S. forces win territory here or there, killing a
plethora of civilians as well as insurgents with each new boundary conquered. However, such as the recent case in Falluja, the rebel fighters have returned like a swarm of angry hornets, attacking with a vicious frenzy.

I was in Falluja during the last two days of the final assault. My mission was much different from that of the brave and weary infantry and Marines involved in the major fighting. I was on an escort mission, accompanied by a squad whose task it was to protect a high brass figure in the combat zone.
This particularly arrogant officer went to the last battle in the same spirit of an impartial spectator checking out the fourth quarter of a high school football game. Once we got to the Marine-occupied Camp Falluja and saw artillery being fired into town, the man suddenly became desperate to play an active role in the battle that would render Falluja to ashes. It was already rumored that all he really wanted was his trigger time, perhaps to prove that he is the toughest cowboy west of the Euphrates. Guys like him are a dime a dozen in the army: a career soldier who spent the first 20 years of his service patrolling the Berlin Wall or guarding the DMZ between North and South Korea. This sort of brass may have been
lucky to serve in the first Gulf War, but in all actuality spent very little time shooting rag heads.

For these trigger-happy tough guys, the last two decades of Cold War hostilities built into a war frenzy of stark emptiness, fizzling out almost
completely with the Clinton administration. But this is the New War, a never-ending, action-packed "Red Scare" in which the communist threat of yesteryear was simply replaced with the white
knuckled tension of today's "war on terrorism."

The younger soldiers who grew up in relatively peaceful times interpret the mentality of the careerists as one of making up for lost opportunities. To the elder generation of trigger pullers, this is the real deal; the chance to use all the cool toys and high speed training that has been stored away since the '70s for something tangibly useful...and it's about goddamn time.

- - - - - - - - - - - - - - - -
HOWEVER, UPON reaching the front lines, a safety standard was in effect stating that the urban combat was extremely intense. The lightest armored
vehicles allowed in sector were Bradley tanks.
Taking a glance at our armored humvees, this commander insisted that our section would be fine. Even though the armored humvees are very stout and
nearly impenetrable against small-arms fire, they usually don't hold up well against rocket attacks and roadside bombs, like a heavily armored tank
will. The reports from within the war zone indicated heavy rocket attacks, with an armed insurgent waiting on every corner for a soft target such as trucks. In the end, the overzealous officer was urged not to infiltrate into sector
with only three trucks, for it would be a death wish during those dangerous twilight hours. It was suggested that in the morning, after the air strikes were complete, he could move in and "inspect the damage."

Even as the sun was setting over the hazy orange horizon, artillery was
pounding away at the remaining 12 percent of the already devastated Falluja. Many units were pulled out for the evening in preparation of a full-scale
air strike that was scheduled to last for up to 12 hours. Our squad was sitting on top of our parked humvees, manning the crew-served machine guns and scanning the urban landscape for enemy activity. This was supposed to be a secured forward operating area, right on the edge of the combat zone. However, with no barbed wire perimeter set up and only a few scattered tanks serving as protection, one was under the assumption that if
someone missed a minor detail while on guard, some serious shit could go down. One soldier informed me that only two nights prior, an insurgent was caught sneaking around the bullet-ridden houses to our immediate west. He was armed with a rocket-propelled grenade and was laying low on his advance towards the perimeter. One of the tanks spotted him through its night vision and hastily shot him into three pieces. Indeed, though it was safe enough to smoke a cigarette and relax, one had to remain diligently aware of his surroundings if he planned on making it through the night.

As the evening wore on and the artillery continued, a new gruesome roar filled the sky. The fighter jets were right on time and made their grand appearance with a series of massive air strikes. Between the pernicious bombs and fierce
artillery, the sky seemed as though it were on fire for several minutes at a time. First, you would see a blaze of light in the horizon, like
lightning hitting a dynamite warehouse, and then hear the massive explosion that would turn your stomach, rattle your eyeballs and compress itself deep within your lungs. Although these massive bombs were being dropped no further than five kilometers away, it felt like it was happening right in front of your face.

At first, it was impossible not to flinch with each unexpected boom, but after scores of intense explosions, your senses became aware and complacent towards them.

At times, the jets would scream menacingly low over the city and open fire with smaller missiles meant for extreme accuracy. This is what Top Gun, in all its glory and silver screen acclaim, seemed to be lacking in the movie's high budget sound effects.

These air-deployed missiles make a banshee-like squeal, sort of like bottle rocket fueled with plutonium, and then suddenly would become inaudible. Seconds later, the colossal explosion would rip the sky open and hammer devastatingly into the ground, sending flames and debris pummeling into the air.

And as always, the artillery--some rounds were high explosive, some were illumination rounds, some were reported as being white phosphorus (the
modern-day napalm).

Occasionally, on the outskirts of the isolated impact area, you could hear tanks firing machine guns and blazing their cannons. It was amazing that anything could survive this deadly onslaught. Suddenly, a transmission came over the radio approving the request for "bunker-busters." Apparently, there were a handful of insurgent compounds that were impenetrable by artillery. At the time, I was unaware when these bunker-busters were deployed, but I was told later that the incredibly massive explosions were a direct result of these "final solution"-type missiles.

I continued to watch the final assault on Falluja throughout the night from atop my humvee.

It was interesting to scan the vast skies above with night-vision goggles. Circling continuously overhead throughout the battle was an array of attack helicopters. The most devastating were the Cobras and Apaches with their chain-gun missile launchers.

Through the night vision, I could see them hovering around the carnage, scanning the ground with an infrared spotlight that seemed to reach for miles. Once a target was identified, a rapid series of hollow blasts would echo through the skies, and from the ground came a "rat-a-tatting" of explosions, like a daisy chain of supercharged black cats during a Fourth of July barbeque.

More artillery, more tanks, more machine gun fire, ominous death-dealing fighter planes terminating whole city blocks at a time...this wasn't a war,
it was a massacre!

- - - - - - - - - - - - - - - -
AS I look back on the air strikes that lasted well into the next morning, I cannot help but be both amazed by our modern technology and disgusted by
its means.

It occurred to me many times during the siege that while the Falluja resistance was boldly fighting us with archaic weapons from the Cold War, we were soaring far above their heads, dropping Thor's fury with a destructive power and precision that may as well been nuclear. It was like the Iraqis were bringing a knife to a tank fight.

And yet, the resistance toiled on, many fighting until their deaths. What determination!

Some soldiers call them stupid for even thinking they have a chance in hell to defeat the strongest military in the world, but I call them brave. It's
not about fighting to win an immediate victory. And what is a conventional victory in a non-conventional war?

It seems overwhelmingly obvious that this is no longer within the United States hands.

We reduced Falluja to rubble. We claimed victory and told the world we held Falluja under total and complete control. Our military claimed very few
civilian casualties and listed thousands of insurgents dead. CNN and Fox News harped and cheered on the television that the battle of Falluja would go down in history as a complete success, and a testament to the United States' supremacy on the modern battlefield.

However, after the dust settled, and generals sat in cozy offices smoking their victory cigars, the front lines in Falluja exploded again with
indomitable mortar, rocket, and small-arm attacks on U.S. and coalition forces.

Recent reports indicate that many insurgents have resurfaced in the devastated city of Falluja. We had already claimed the situation under control and were starting to turn our attention to the other problem city of Mosul. Suddenly, we were backtracking our attention to Falluja. Did the
Department of Defense and the national press lie to the public and claim another preemptive victory?

Not necessarily so. Conventionally, we won the battle--how could anyone argue that? We destroyed an entire city and killed thousands of its
occupants. But the main issue that both the military and public forget to analyze is that this war, beyond any shadow of a doubt, is completely

Sometimes I wonder if the West Point-graduated officers have ever studied the intricate simplicity and effectiveness of guerrilla warfare.

During the course of this war, I have occasionally asked a random lieutenant or a captain if he at any time has even browsed through Che Guevara's Guerrilla Warfare. Almost half of them admit that they have not. This I find to be amazing! Here we have many years of guerrilla warfare ahead of us, and our military's leadership seems dangerously unaware of what it all means!

Anyone can tell you that a guerrilla fighter is one who uses hit-and-run techniques to attempt a breakdown of a stronger conventional force.

However, what is more important to a guerrilla campaign are the political forces that drive it. Throughout history, many guerrilla armies have been successful; our own country and its fight for independence cannot be excluded.

We should have learned a lesson in guerrilla fighting with the Vietnam War only 30 years ago, but history has a funny way of repeating itself. The Vietnam War was a perfect example of how quick, deadly assaults on conventional troops over a long period of time can lead to an unpopular
public view of the war, thus ending it.

Che Guevara stressed in his book Guerrilla Warfare that the most important factor in a guerrilla campaign is popular support. With that, victory is
almost completely assured.

The Iraqis already have many of the main ingredients of a successful insurrection. Not only do they have a seemingly endless supply of munitions and weapons, they have the advantage to blend into their environment, whether that environment is a crowded marketplace or a thickly vegetated palm grove.

The Iraqi insurgent has utilized these advantages to the fullest, but his most important and relevant advantage is the popular support from his own countrymen.

What our military and government needs to realize is that every mistake we make is an advantage to the Iraqi insurrection. Every time an innocent man, woman or child is murdered in a military act, deliberate or not, the insurgent grows stronger.

Even if an innocent civilian is slain at the hands of his or her own freedom fighter, that fighter is still viewed as a warrior of the people, while the occupying force will ultimately be blamed as the responsible perpetrator.

Everything about this war is political...every ambush, every bombing, every death. When a coalition worker or soldier is abducted and executed, this only adds encouragement and justice to the dissident fervor of the Iraq public, while angering and demoralizing the occupier.

Our own media will prove to be our downfall as well. Every time an atrocity is revealed through our news outlets, our grasp on this once secular nation slips away. As America grows increasingly disturbed by the images of carnage and violent death of her own sons in arms, its government loses the justification to continue the bloody debacle.

Since all these traits are the conventional power's unavoidable mistakes, the guerrilla campaign will surely succeed.

In Iraq's case, complete destruction of the United States military is impossible, but through perseverance, the insurgency will drive us out.
This will prove to be the inevitable outcome of the war.

- - - - - - - - - - - - - - - -
WE LOST many soldiers in the final battle for Falluja, and many more were seriously wounded. It seems unfair that even after the devastation we
wreaked on this city just to contain it, many more troops will die in vain to keep it that way.

I saw the look in the eyes of a reconnaissance scout while I talked to him after the battle. His stories of gore and violent death were unnerving. The sacrifices that he and his whole platoon had made were infinite. They fought every day with little or no sleep, very few breaks and no hot meals.

For obvious reasons, they never could manage to find time to e-mail their mothers to let them know that everything turned out okay.

Some of the members of his platoon will never get the chance to reassure their mothers, because now, those soldiers are dead.

The look in his eyes as he told some of the stories were deep and weary, even perturbed. He described in accurate detail how some enemy combatants were blown to pieces by army-issued bazookas, some had their heads shot off by a 50 caliber bullet, others were run over by tanks as they stood defiantly in the narrow streets, firing an AK-47.

The soldier told me how one of his favorite sergeants died right in front of him. He was taking cover behind an alley wall, and as he emerged to fire his M4 rifle, he was shot through the abdomen with a rocket-propelled grenade.

The grenade itself exploded and sent shrapnel into the narrator's leg. He showed me where a chunk of burned flesh was torn from his left thigh.

He ended his conversation saying that he was just a dumb kid from California who never thought joining the army would send him straight to
hell. He told me he was tired as fuck and wanted a shower. Then he slowly walked away, cradling a rifle under his arm.

Posted by: conchita | Dec 5 2004 18:05 utc | 7

Couldn't agree more.
Bernhard's addition also means that those who have really caused the problems are not tied to the US. If that country goes down the drain, they will probably have secured their assets elsewhere, and they will go where it is still pleasant. Capital is not patriotic, and worrying about the people who have been hit will be for losers. Let your children learn Mandarin and complain about the lowering standards in Asian top hotels.

Posted by: teuton | Dec 5 2004 18:05 utc | 8

ok, I'll boldly answer my question. Going back to the imperialism thread, one of the reasons for capitalists to turn to aggressive external investments is to find ways to employ the surfeit of capital. Another way to ease the crisis of overaccumulation is expenditure on domestic projects and social spending. As I understand the problem, there is great resistance to the second 'solution' because it raises labor's wage-rates and expectations.

Rather than redistribute wealth internally, overaccumulation is solved by war and the massive expenditure on projects in peripheral countries who of course internalize the costs of such expenditure through loans.

Maybe China will continue, or do a better job, to redistribute surplasses internally. I don't have any idea.

Posted by: slothrop | Dec 5 2004 18:08 utc | 9

thanks teuton. little over my head, but I'll get it soon enough.

Posted by: slothrop | Dec 5 2004 18:10 utc | 10

All good stuff but once again I would say it's time to reframe the issues. An economy whose health depends on ever increasing consumption, whether through domestic production or imports, is what is wrong. Whether an American buys a Hummer or a Range Rover is moot.

Anyone remember luxury taxes on cars and boats >$30K?

Since most, if not all, wealth comes from labor, those who control it care little whether it comes from domestic or overseas plants or offices. Playing the outsourcing game contributes more to keeping down US labor costs than it does to reducing end pricing. Outsourcers just charge 5X base wages rather than 3X for domestic.

Posted by: biklett | Dec 5 2004 18:33 utc | 11

america reaps what it sows

Posted by: remembereringgiap | Dec 5 2004 18:35 utc | 12

well, the problem of overaccumulation is part of the 'logic of capital' and not in any sense peculiar to the way America 'sows' its exploitations and fortunes through time and space. Again, Europe is hardly exempted from this general problem of overaccumulation. The problem is domestic expenditure decreases competitiveness. Thus, the solution of imperialism is pursued.

Again, how China escapes this dialectic is anybody's guess. One might expect the reallignment of hegemony to succeed after a confrontation between capitalists as happened in the two world wars.

These are huge questions.


Posted by: slothrop | Dec 5 2004 19:18 utc | 13

"workers of the world unite"

Who can say this is not more true now than ever?

Posted by: slothrop | Dec 5 2004 19:20 utc | 14

Nowhere is the extraordinarily determinative power of the logic of capital more obvious than in the Chinese/asian subsidization of U.S. imperialism--made all the more extraordinary by the fact the principle U.S. interest in the ME is to control the world oil spigot and reduce the threat of Chinese economic hegemony!

Fucking totally crazy.

Posted by: slothrop | Dec 5 2004 19:35 utc | 15

Rosa Luxemburg on this logic:

One concerns the commodity market and the place where surplus value is produced-the factory, the mine, the agricultural estate. Regarded in this light accumulation is a purely economic process, with its most important phase a transaction between the capitalist and the wage labourer.... Here, in form at any rate, peace, property and equality prevail, and the keen dialectics of scientific analysis were required to reveal how the right of ownership changes in the course of accumulation into appropriation of other people's property, how commodity exchange turns into exploitation, and equality becomes class rule. The other aspect of the accumulation of capital concerns the relations between capitalism and the non-capitalist modes of production which start making their appearance on the international stage. Its predominant methods are colonial policy, an international loan system-a policy of spheres of interest-and war. Force, fraud, oppression, looting are openly displayed without any attempt at concealment, and it requires an effort to discover within this tangle of political violence and contests of power the stern laws of the economic process.

Posted by: slothrop | Dec 5 2004 19:55 utc | 16

What happened to the middle class?

Posted by: | Dec 5 2004 23:52 utc | 17



Posted by: anna missed | Dec 6 2004 0:29 utc | 18

Great post Jerome,

I must say though, our consumption society was created on purpose. In order to use American leadership, the masses had to be quelled. The sixties and seventies scared the elites and our current state of consumption is the fix. Read Holly Sklars book "Trilateralism." Happy sheep are quite sheep.

Also, I posted a address for an article the other day.

If you all don't believe elites conspire to create situations, I own the Mackinaw Bridge and have it for sale.

Posted by: jdp | Dec 6 2004 0:57 utc | 19

I believe, in the next five years huge problems in China. Probably a Civil War and a division in perhaps
5 or 7 new countries.
If the 1300 o more millions of chinese ( who are like us) want to solve his problems , that is his future.

Posted by: curious | Dec 6 2004 1:00 utc | 20

Great post and comments. Couple of thoughts. The U.S. Government will find it difficult to reduce its deficit spending with the current Administration and Congressional leadership. Most of the annual budget deficit is related to so-called mandatory spending (social security, medicare and medicaid, farm subsidies, etc.) and to defense spending. Either spending reductions need to be made in these areas (not likely), or revenues need to increase. We know that the present leadership will not increase revenues through tax increases, and in fact would like to cut taxes further. So revenue increases could only occur through greatly expanded economic activity. That does not seem too likely either. So as far as the government reducing its over-consumption, that is not likely to happen anytime soon.

On the private side of over-consumption, too many lower and middle income people are too far in debt. This is strongly encouraged by the dominant forces in the U.S. When interest rates are forced up rapidly the people with a lot of debt will have the rug pulled out from under them. Consumption will decline, a host of social pathologies will increase.

Somehow the "live within your means" and "small is beautiful" types of thinking that flowered in the '60s were mostly snuffed out by mainstream interests in the U.S., as somewhat upthread mentioned. I've never fully grasped how we let that happen to us.

Posted by: maxcrat | Dec 6 2004 1:31 utc | 21

Great writing Jerome.

Gave me a headache, but I learned something.

B's caveat about economic class and consumption rounds the rough edges off.

Also, I don't know any nation in history that went to the economic scrap heap by investing in education.

Kevin Philllips has written a very interesting book on the life cycle that a capitalist world power goes through. I was struck by how closely the British economic choices in the late 19th century resemble the choices the US has made in the late 20th. Finance capitalism predominant; services, esp. financial and tecnological, all the rage; lagging investment in education as compared to comparably placed nations; and outsourcing all over the place.

@teuton: Hell, it's a capitalist moveable feast, but I doubt these "patriotic" types venture much east of London or Paris. MBA minions will make sure the sneaker factories etc, in Viet Nam, etc, are running smoothly. And the Peachums and Dravots of our time will make sure that the rabble east and south of Suez behaves itself.


"The problem is domestic expenditure decreases competitiveness. Thus, the solution of imperialism is pursued."

Rather broad statement slothrop. Are we to accept it sola fides?

Posted by: FlashHarry | Dec 6 2004 2:34 utc | 22


yes. that is the classic imperialism thesis as I understand it.

you'll notice my proviso: I'm no expert. I'm eager to be corrected.

Posted by: slothrop | Dec 6 2004 2:54 utc | 23


That is, imperialism, rather than domestic expenditure, is the other solution to overaccumulation.

I'm aware this thesis seems overly reductive, but by definition, macroecon is reductive. Truth is, admixture of domestic spending and imperialism is the 'solution.'

Posted by: slothrop | Dec 6 2004 3:11 utc | 24

When you say "decreases competitiveness",

do you understand it to mean internally or internationally.

Do you(they) mean just on labor, or on education, infrastructure, health care?

I'm trying to understand, here.

Posted by: FlashHarry | Dec 6 2004 3:18 utc | 25

domestic wage rates are too high to be competitive.

Posted by: slothrop | Dec 6 2004 3:25 utc | 26


Got you. We are on the same page.

We should continue our discussion on an open thread, perhaps tomorrow.

Got to cook supper.

Posted by: FlashHarry | Dec 6 2004 3:46 utc | 27

Is money supply a consideration here? We read about countries being "awash" in dollars; could they also become, as it were, "awash" in euros overnight? I don't see why they couldn't, since buying and selling currency is just an electronic exchange....Still and all, there must be problems of scale here that haven't entered into the discussion.... Also, in 1971, the US uncoupled the dollar from the price of gold--under pressure from OPEC, if memory serves. Did the US also, in the process, aopen up the possibility of "coupling" the value of the dollar to oil in some way? Something like a movement from the "gold standard" to an "oil standard" was surely in the works in the "oil shocks" of '73 and '77 (and I can remember a banker-friend laughing at me for using the term "oil shock," since he regarded the whole affair as a rational process of adjusting the value of the dollar downward in the face of our profligate ways).

Posted by: alabama | Dec 6 2004 4:48 utc | 28

domestic wage rates are too high to be competitive.

Which brings us back to the old debate about a 'race to the bottom'.

Even although most industrial jobs have long since vanished in Australia, the minimum wage is over USD10 per hour. (With social housing, free medical and other benefits - it affords a higher standard of living for the (former) working-class than in the USA. If you have a family, you can't afford to work for the minimum wage anyway. Dole payments do not "run out".)

It's still not enough. The "middle class" of both USA and Australia are using credit and accumulated savings (housing equity) in an attempt to maintain their standard of living. This is just possible if you are not bothered about coming out the other end with nothing to show for it.

Wage rates being too high is the timeless howl of the owners and managers in the "anglo style" economic model. If the shareholders of companies were not pathologically committed to ever-increasing returns on their investment in the short-term, then there would be a opportunity to re-invest more in their respective businesses, and to forge a partnership with labor and increase productivity, rather than consider the workforce as just another commodity input.

If we are just going to look for cheap labor - then we are all up shit creek without a paddle.

Posted by: DM | Dec 6 2004 5:52 utc | 29

NYT OPEC Nations Seen Cutting Worldwide Deposits in Dollars

Member nations of the Organization of the Petroleum Exporting Countries have cut the proportion of their deposits denominated in dollars by more than 13 percentage points in the past three years, mainly to the advantage of the euro, the Bank for International Settlements said Sunday.

In its latest quarterly report, the Bank for International Settlements - a forum for world central banks - attributed the trend partly to United States interest rates having fallen below euro-zone levels.

The report said dollar-denominated deposits fell to 61.5 percent of total deposits by members OPEC in the second quarter of 2004, from 75 percent in the third quarter of 2001

Posted by: b | Dec 6 2004 6:49 utc | 30

Economist The disappearing dollar

THE dollar has been the leading international currency for as long as most people can remember. But its dominant role can no longer be taken for granted. If America keeps on spending and borrowing at its present pace, the dollar will eventually lose its mighty status in international finance. And that would hurt: the privilege of being able to print the world's reserve currency, a privilege which is now at risk, allows America to borrow cheaply, and thus to spend much more than it earns, on far better terms than are available to others. Imagine you could write cheques that were accepted as payment but never cashed. That is what it amounts to. If you had been granted that ability, you might take care to hang on to it. America is taking no such care, and may come to regret it.

Posted by: b | Dec 6 2004 7:22 utc | 31

So, b, it's an inexorable, orderly conversion--tempo andante.

Posted by: alabama | Dec 6 2004 8:43 utc | 32

Good post Jérôme!

I would like to recommend two articles, which are a little bit wider in scope but very relevant:

1)Immanuel Wallerstein: Geopolitical Cleavages of the 21st Century: What Future for the World?

2)Peter Gowan: Triumphing toward International Disaster: The Impasse in American Grand Strategy

Posted by: Greco | Dec 6 2004 21:02 utc | 33

Japan Threatens Huge Dollar Sell Off

Posted by: fauxreal | Dec 6 2004 23:10 utc | 34

Financial Times via NYT Opec sharply reduces dollar exposure

Oil exporters have sharply reduced their exposure to the US dollar over the past three years, according to data from the Bank for International Settlements.

Members of the Organisation of Petroleum Exporting Countries have cut the proportion of deposits held in dollars from 75 per cent in the third quarter of 2001 to 61.5 per cent.

Middle Eastern central banks have reportedly switched reserves from dollars to euros and sterling to avoid incurring losses as the dollar has fallen and prepare for a shift away from pricing oil exports in dollars alone.


Private Middle East investors are believed to be worried about the prospect of US-held assets being frozen as part of the war on terror, leading to accelerated dollar-selling after the re-election of President George W. Bush.

The BIS data, in the organisation's quarterly review, state that Opec countries' stock of dollar-denominated deposits has fallen by 4 per cent in cash terms since 2002 in spite of Opec revenues' surging to record levels this year.

The last one may please shut off the light.

Looks like the Japanes will get screwed. The have the biggest US$ reserves and look to be the last one to sell them. I bet all other countries are reducing their holdings without telling anyone.

Posted by: b | Dec 7 2004 6:49 utc | 35


I am not convinced that the american economy is not uncompetitive. This article of the Economist includes a graph with the title "the american peso". This graph clearly shows that the history of the dollar since the '70s, is a history of continuing devaluation against the yen and the d-mark/euro. If the american economy is, or could be, competitive, why the dollar has been losing value for 35 years?

Posted by: Greco | Dec 7 2004 14:02 utc | 36

Extra Credit Question:

Does Gresham's Law apply to the current currency crises?

Compare and contrast

Posted by: biklett | Dec 7 2004 17:24 utc | 37

Even The New Yorker weighs in and the author does get the real issue: Trust in Bush GOING DOWN

Last week, Li Ruogu, the deputy governor of the People’s Bank of China, told the Financial Times, “China’s custom is that we never blame others for our own problem. The United States has the reverse attitude. Whenever they have a problem they blame others.”

Ultimately, the value of a currency is an international verdict on the honesty and competence of the government that issued it. President Bush may have recovered in the domestic polls, but in the currency markets his ratings are still falling. And, with his Administration determined to pursue further tax cuts and costly Social Security privatization, his numbers don’t seem likely to turn around soon.

Posted by: b | Dec 7 2004 20:24 utc | 38

The Dollar jumped today while foreign central banks bought 65% of todays treasury issue.

Only in about three month we will know who was doing this. Could be the European CB but my bet is on the Japanese.
I expect some more of this in the coming days and then some chopping into next year. Mid January currencies should get interesting again.

Posted by: b | Dec 8 2004 19:15 utc | 39

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