Sat Sep 8th, 2007 at 07:51:04 PM EST
With his permission I am publishing below the approved summary of a paper being written by Professor Michael Hudson for the Berlin heterodox economics meeting on "Finance and Capitalism" on Oct. 27.
Michael and I are both members of the "Gang 8" Yahoo Group, although I think we both believe the "Creditary Economics" central to the group is incomplete.
Michael wrote an absolutely first rate book:
Super Imperialism: The Origins and Fundamentals of U.S. World Dominance - Pluto Press
a review of which is here
Super Imperialism Review
I think that what follows is entirely relevant to much recent debate on ET, and I'm hoping Michael will have time to make a "Guest Appearance" to join any discussion.
The balance-of-payments dimension of today's bubble economy
Foreign savers have so much faith in the U.S. economy that they send their savings there - enough to finance the U.S. trade and payments deficit.
The U.S. Treasury-bill standard of international finance leaves foreign central banks with little choice but to accept dollars ad infinitum, now that they no longer have an alternative such as gold. Foreign "capital outflows" to the United States thus are not really voluntary. It exports IOUs, other countries export products and sell their assets to U.S. buyers.
Balance-of-payments constraints have been the limiting factor most responsible for bringing business expansions to an end in decades past. Typical booms create a demand for imports, while exports become less competitive as wages and prices rise. Outside of the United States, this obliges central banks to raise their interest rate to stabilize the currency, applying a "stop-go" policy that slows economic upswings. At least, this was the pattern before economies began to be swamped with dollars.
The United States has been uniquely free of the balance-of-payments constraint, thanks to its status as a key-currency nation since it stopped gold convertibility of the dollar in 1971. This immunity from the balance-of-payments constraint means that global financialization is inherently a U.S.-centered phenomenon. Not only has U.S. domestic demand expanded in the face of historically unparalleled trade deficits, but capital outflows from the U.S. economy have been a major force inflating financial bubbles abroad as its investors have bought up foreign assets.
This has shifted the international financial system away from financing trade (im)balances to financing "capital" transfers, increasingly short-term credit flows (including the "errors and omissions" line in balance-of-payments statistics). When U.S. officials depict these U.S. payments outflows as the "engine of world growth," they mean that U.S. import demand, capital outflows and overseas military spending is pumping dollars abroad. Surplus dollars end up in central banks, which have little alternative but to recycle them to the United States in the form of U.S. Treasury securities.
In effect, the U.S. payments deficit finances the domestic government budget deficit, thereby "freeing" Americans themselves from having to use their savings or credit to do this. As foreigners finance the deficit, the U.S. Treasury has been able to cut taxes on property and finance, thereby freeing yet more income to be pledged to banks as debt service, whose proceeds are lent out to inflate the bubble economy all the more. (What the tax collector relinquishes is available to be paid to bankers for loans - whose effect is to bid up property prices.)
The U.S. financial bubble thus becomes self-financing, in the form of a "Ponzi scheme" in which foreigners provide the money to pay interest on the rising foreign debt. The effect is rising U.S. asset price inflation. With regard to these central bank savings in the form of U.S. Treasury obligations in particular, the words "security" and "bond" have lost their literal meaning.
Nobody is able to create a plausible scenario for just how America's foreign official debt ever is to be repaid, or even serviced except by just adding the interest charge onto the principal each year in an eternally soaring compound-interest curve.
While the domestic economy shifts its focus from earning income (wages and profits) to economic rent-seeking and asset-price gains, the international balance of payments sees exchange rates respond to relative national asset prices, not commodity prices, churning in a pattern much like what a seismograph traces out during earthquakes.
By inflating the real estate bubble, "financialization" has made housing expenditure an increasingly dominant factor in international wage comparisons, and hence international commodity prices. Housing now plays the role that food did in Ricardo's day, accounting for as much as 40 percent of household expenditure for many U.S. wage-earners.
Today's Sunday Telegraph
is right to the point.
A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.
Data released by the New York Federal Reserve shows
that foreign central banks have cut their stash of US
Treasuries by $48bn since late July, with falls of $32bn in the last two weeks alone.
"This comes as a big surprise and it is definitely worrying," said Hans Redeker, currency chief at BNP Paribas.
"We won't know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don't seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance at 500 euros," he said.
While the greenback has been resilient over recent weeks - even regaining something of a 'safe-haven' role as banks scrambled to buy the currency to cover dollar debts - most experts believe that America's $850bn current account deficit will eventually cause the dollar to resume its relentless slide.
An imminent rate cut by the Fed is hardly likely to attract more overseas funding is it?
It seems to me that we have the long awaited "Perfect Storm" brewing here....